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Storage vendors take lumps in recession, but see signs of hope

EMC’s latest earnings report illustrates the trouble experienced in the storage market this year, but some analysts are hopeful data storage vendors will make a comeback by the end of 2009.

EMC’s second-quarter net income fell 43% year-over-year, and revenue fell 11%, the company reported this week. Seagate Technology, meanwhile, reported a net loss of $81 million in its most recent quarter.

A year ago, the storage market seemed to be thriving in a down economy, with analysts saying the pressing need for disk space was overriding IT spending concerns. But times have changed for the storage market, just as they have for the rest of the IT industry.

“When we went into the year, we probably couldn’t have and wouldn’t have predicted the first half to be as negative as it has been,” IDC analyst Benjamin Woo says.

IDC reported in June that worldwide factory revenue for disk storage systems has dropped 18.2% in a year, even though the total capacity of shipped disk storage systems grew 14.8%.

“The disk storage system vendors are really seeing the impact of the global economic downturn in the first quarter revenues,” Steve Scully, IDC’s enterprise storage research manager said at the time.

Storage could actually be seen as a bright spot compared to the server market, in which first quarter revenues were 24.5% lower than the previous year.

“When you compare storage to the rest of the ICT [information and communication technology] area, I think you’ll find that storage weathered the whole downturn better than many other sectors,” Woo says. There is still pent-up demand for storage technologies among IT shops, says Woo, who predicted that revenue will bounce back later in 2009. Further down the road, Woo expects the emergence of Fibre Channel over Ethernet to fuel new purchases in 2010 and 2011.

EMC remains confident because IT spending seems to be stabilizing, and its acquisition of Data Domain could help the company win more customers in the de-duplication and backup markets. While EMC suffered large year-over-year declines, its second quarter numbers were slightly better than its first quarter revenue and income. EMC rival NetApp’s next earnings announcement is scheduled for Aug. 19.

Enterprise Strategy Group analyst Steve Duplessie expressed concern over Seagate’s numbers but said EMC’s earnings were “pretty strong” considering the circumstances.

“In general it’s a down global economy right now and it’s impossible to think any one industry is not going to suffer,” Duplessie says. “There’s always a worse side. We could be the automotive industry, or housing.”

In a way, the storage industry is plagued by its own success. The cost of disk capacity on a per-terabyte basis is dropping quickly, which is good for customers but can tear into vendor profits.

“Capacity demand hasn’t abated,” Duplessie notes. “The capital cost associated to capacity is dropping faster than the industry is able to make up for shipment wise.”

All the top storage vendors – including EMC, HP, IBM, Dell, Hitachi and Netapp – are posting lower revenue numbers this year than they did in 2008. But the companies’ respective market shares have remained relatively stable.

Obviously, these vendors are competing for a smaller pool of dollars than they were last year, Duplessie notes. “When the whole pie is smaller you need a bigger piece to stay neutral or grow,” he says. “Somebody is going to have to lose for someone else to win.”

Going forward, customers will be most interested in technologies that make storage more efficient, and minimize wasted disk space, Duplessie notes. That’s one reason EMC was willing to shell out $2.1 billion for Data Domain’s expertise in space-saving de-duplication.

“It ain’t about a disk drive anymore, it really isn’t,” Duplessie says.

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