The New “Normal” in Storage
The downturn in the economy and slow recovery has impacted IT spending. I’ve been thinking a lot about how this impacts storage companies and buyers and I conclude the market has undergone a permanent change where the most important buying lever is cost efficiency.
Below, I illustrate four scenarios for storage revenue/expenditure growth in the future. Line A is the one we saw prior to 2008, where storage revenue followed an upward sloping function of capacity and price that equates to revenue increases. That was the storage world over that last 10 year period (ex-some variability). However, beginning in 2008, storage revenue began to fall (B) and diverge from the upward sloping line. Respectively, lines (C), (D) and (E) represent future scenarios of (C) full recovery to pre-September 2008 pricing and demand, (D) recovery after reset and (E) a permanent decline and slower future growth.
I think we are entering a long-term period of slower revenue/expenditure growth for storage represented by (E).
Here’s why:
- Buying behavior has forever changed. We met with a large energy company recently. They were discussing a Q1 2010 buy (that may slip a quarter or two), but mentioned they had eliminated 100% of storage purchases in 2009 – they only spent for maintenance and support. By shutting down purchasing they forced their organization to push up utilization. We have heard a lot of this recently. Do the math, if on average an organization’s storage is 60% utilized (and information is growing at 40%), by simply saying “no” they can put off new purchases for 18 months and then if they eliminate the redundant information (See Hu Yoshida’s thoughtful post) and other inefficiencies they can push purchases off another 18 months. That means many organizations don’t need more storage for 3 years. Buyers change behaviors reluctantly and slowly. Call it inertia or elasticity, I think we are witnessing a permanent behavioral change to higher storage utilization and decreased consumption by enterprises.
- Pricing behavior has changed. Storage prices plummeted over the last year. To counter the pull-back by enterprises, storage companies slashed pricing and sold at cost or below cost to gain deals and maintain footprint. Customers are savvy and pricing elasticity is sticky downward (erosion is permanent). In fact, Gartner predicts sub-$1/GB pricing in 2010 for NAS – this is in world where primary disk cost $40/GB just two years ago. For the 6 year period of 2008-2013, Gartner points to demand growth (CAGR) of 11% and pricing decline (CAGR) of -28% – pointing to a period of negative growth in the market.
- Cost efficiency innovation is coming of age. Customers are looking for lower TCO and expansion stage storage vendors are supplying it. Market share is being gained by companies who are leading the way with compression, deduplication (see dedupe2.com), thin or no provisioning/virtualization and clustering/scale out. Look at the following table. The public companies that are leading the charge with cost efficient technologies are outspending entrenched players in R&D (as a percentage of revenue) and they are gaining share because they offer a compelling value proposition.
- Cloud shifts power to buyers. By consolidating demand, Cloud providers can wring margin out of storage and assemble best of breed, guaranteed solutions for more businesses. This is great for enterprise buyers because they will get the best solutions and they can buy like the largest organizations to drive their storage costs down. This isn’t great news for storage companies, however. They will have gained a new channel, but it will be concentrated and a very price sensitive one for sure.
This is great for the enterprise buyer. They now have more storage choices and are shifting purchases to the lower cost solutions.
So, what does this mean? I conclude the effective price of storage will decrease almost as rapidly as demand grows. It means the New “Normal” is about marginal growth in storage investment and much greater cost efficiency.
In my next two posts, I will talk about how the “New Normal” impacts the enterprise and storage companies and how they can adapt to prosper in the new environment.
