The storage outsourcing industry has emerged with varying service models, a competitive market, and numerous choices for enterprise customers.
BY GLENN HANUS AND RICHARD KUGELE
Organizations providing data storage-related services are prospering in a fertile environment created by many unique factors. As the volume of business-critical data explodes, many organizations struggle to cope with increasingly complex and expensive storage infrastructures along with management costs that often exceed the infrastructure acquisition costs.
Typically, data storage is not a core competency of most organizations. Emerging Internet-related businesses encounter the most difficult challenges, given their skyrocketing data storage requirements combined with limited capital and human resources to deploy. Even IT professionals with storage and networking expertise are increasingly expensive and difficult to recruit.
New storage and networking technologies may benefit many companies that wish to opt out of sustaining their own internal data storage infrastructure. Certainly, the increasing availability and declining cost of optical bandwidth along with new technologies such as fiber-optic networking, dense wavelength-division multiplexing, and protocols such as Fibre Channel can enable remote enterprise storage capability.
A significant factor facilitating the emergence of storage service providers (SSPs) is the proliferation of Internet Data Centers (IDCs). In addition to providing facility and/or optical bandwidth infrastructures, IDCs have access to an already captive customer base who are comfortable with outsourcing some aspect of their IT requirements. Market analysts are extremely bullish on SSPs. Witness market projections that jump from $89 million in 2000 to $7.5 billion by 2003, according to Gartner Dataquest.
Although vendor offerings vary overall, there are two basic models to storage outsourcing-off-site and on-site. Under the on-site model, storage architectures are designed and implemented at a customer's site. While typically owned by the customer, the storage can then either be managed at the customer's site or remotely via the Internet. The off-site model utilizes IDCs or collocation facilities to house data storage for multiple customers. Customers access their storage remotely via fiber-optic connections. Under both models, the storage provider assumes responsibility for data storage, management, and availability.
From a customer perspective, the off-site model provides all the inherent benefits of outsourcing: simplified cost-effective solution, greater functionality and flexibility, faster time to market, easy access to best-of-breed technologies, and reduced IT purchasing risk. On the downside, customers using off-site models must relinquish control of their data and allow it to reside outside of their firewall. Many enterprise-class customers have reservations about this aspect.
From the SSPs' perspective, the off-site model allows for a scalable business model with significant potential leverage. By building a network of IDC locations, the SSP can offer a menu of services such as backup, remote mirroring, and content delivery. The SSP can develop best practices and then replicate them across its infrastructure. IDCs present an opportunity to capitalize on a captive customer base, who have already embraced the outsourcing model. In addition, SSPs can leverage the IDCs' sales forces and storage infrastructure vendors to gain market presence.
Disadvantages of the off-site model include the significant up-front capital expenditures needed to build points of presence in multiple IDCs-the "build it and they will come" philosophy. This potentially competes with storage vendors for customers (although SSPs are also aggregators of demand) and possible price pressure as the market becomes more crowded.
Under the on-site model, customers can leave their data on-site and within a firewall while outsourcing management. If an organization already has made an investment in storage infrastructure, it is protected. Furthermore, to become accustomed to the outsourcing model, SSPs can provide a trial period.
The on-site model does not allow customers to use a more expansive network that an off-site SSP could provide. Under the on-site model, the SSP must work within the customers' existing framework. For example, if a customer does not possess the ability to replicate data across the country, the on-site provider also lacks that ability (unless it has a partner to offer such services).
From an SSP's perspective, factors related to an on-site model include a much less capital-intensive business model (the SSP does not have to build points of presence) and use the Internet to communicate with customer sites. In addition, the SSP is not perceived as a competitor to storage vendors. Rather, it is a lead-generating channel as its professional services arm can recommend storage architectures and products.
On-site SSPs face disadvantages as well. The on-site SSP cannot leverage an IDC's sales force as its own for generating leads and customer referrals. In the same vein, the on-site SSP loses access to the IDCs' captive customer base available to off-site collocated SSPs. As previously mentioned, the SSP is subject to the limitations of the customers' network. As a remedy, an on-site SSP could partner with an off-site SSP or IDC.
In the early stages of the SSP industry, it was clear who was offering off-site and on-site services. However, the industry has evolved rapidly as new entrants attempt to differentiate themselves. SSPs are now targeting enterprises reluctant to outsource mission-critical data off-site instead of targeting enterprises located at IDCs. As a result, some SSPs have responded by offering both on-site and off-site services.
In the coming years, SSPs offering the ability to push data toward the edge of the network will become more prevalent. Effective content delivery across a network such as the Internet requires remote copies of data to reside at geographically disparate locations for quicker access. As data streaming of multimedia be-comes more mission-critical, customers will look to SSPs for cost-effective solutions. This and other expanded service offerings such as data mining and remote data access should enhance opportunities for storage providers in the future.
The competitive dynamics between SSPs are just developing. The primary issue affecting all SSP industry participants is the customer adoption rate of the outsourcing model. Competitive success in the near-term will be tied closely to the dominant market player and SSP pioneer StorageNetworks' ability to gain customer traction and legitimize outsourcing. The overall SSP industry growth rate will be tied closely to StorageNetworks' level of success.
In addition to data storage provided by internal corporate resources and facilities, several categories of competitors that have entered, announced intentions to enter, or could potentially compete in the SSP arena include SSP start-ups, large systems and storage vendors that have indicated an interest in providing outsourcing services, IDC providers, telecommunications-related companies, and online service providers.
Since the outsourcing model is in an early adoption phase, the primary competition for SSPs is the "do-it-yourself" model. SSPs must convince prospective customers that outsourcing storage can provide equal or better access to data at a lower cost than could be provided internally.
Numerous SSPs have entered the market by leveraging the missionary work of StorageNetworks. Perhaps a half dozen or so have gained noticeable traction from a customer perspective. Most new entrants have attempted to differentiate their positioning and services from StorageNetworks, which has a substantial lead in terms of its infrastructure scale, extent of its customer base, and its proprietary software.
A relatively high number of new market entrants indicate that the barriers to enter the SSP arena are relatively low. Needham & Company tracked more than 20 start-ups over the past 18 months. However, the barriers to scale-defined as becoming one of the three to five market leaders-are meaningful. Such barriers include substantial capital requirements, the need for difficult-to-find storage experts, developing differentiated services based on proprietary software, and brand recognition. Rivalry among SSPs for deals is not yet particularly intense. The storage outsourcing industry is in its infancy and the primary market obstacle is convincing prospective customers to outsource. As more SSPs enter the market and begin to scale, price competition could develop. Key differentiators that will help SSPs maintain margins should include unique software-based services, scale, and brand recognition.
In order to provide a framework for relative positioning of various SSPs, Needham & Company developed a "strategic map" (see sidebar). Certainly, other parameters could be used, but "type/size of target customer" and "approach to infrastructure deployment" are useful metrics to contrast various strategies employed by leading SSPs.
The vertical axis in the strategic map refers to customer size, which is related mostly to data storage requirements rather than revenues or total assets as certain Internet-related customers might not be among the largest companies by any traditional measure. Defining customer size is somewhat murky, and certain SSPs may serve (or intend to serve) a broader range of customers or particular vertical segment. However, based on the authors' discussions with all of the industry participants in the chart, there is a delineation among players based on target customer, indicative of distinct "go-to-market" strategies.
Generally, small to mid-sized companies are defined as target customers with modest storage requirements-but with little or no need for widely dispersed data storage points of presence. Regional companies tend to fall in the small to mid-sized category. Medium-sized companies have greater storage requirements that may be rapidly expanding, need some level of continental or global presence, and relatively high data-availability guarantees. Dot-coms initially fall into the "medium" category but these companies often scale rapidly. The enterprise category, populated primarily by the Global 2000 and large dot-coms, requires continental or global presence, 99.99% to 99.999% availability, and often a breadth of services. For example, corporations such as Lycos and Merrill Lynch are considered enterprise customers.
Infrastructure investment, on the horizontal axis of the map, is more easily defined. Key metrics include the presence and nature of a data storage network, the number and size of its storage points of presence, the sophistication of its network operating system, and availability of value-added services. For example, vendors such as StorageNetworks are deploying sophisticated global data storage networks that include dark-fiber transport capacity, numerous and large storage points of presence, a sophisticated network operating system, and proprietary storage services management.
The illustration may not be quantitatively drawn to scale and is based on business plans for 2001, but it helps to separate and identify strategic positions among SSPs. It does not attempt to analyze which relative position might be preferable.
The list of the 10 SSP players describes some of the more significant pure players that the authors are aware of in the developing SSP arena.
Not just SSPs
A number of large systems vendors such as Compaq, Hewlett Packard, and IBM have announced storage outsourcing services. The large systems companies have significant storage expertise, capital, human resources, brand recognition, and customer bases. However, the OEMs are not well-focused on storage outsourcing, lack experience with such a services-based model for providing storage, and are unlikely to be agnostic from a product perspective, regardless of claims to the contrary by selected vendors.
Non-captive storage vendors such as EMC, MTI, and ADIC have thus far not indicated much interest in becoming SSPs. Instead, traditional storage systems vendors view SSPs as high-priority target customers. SSPs could be particularly strategic to a large vendor such as EMC, as SSPs could serve as storage aggregators for companies that might otherwise be missed. EMC has indicated its intention to be the "storage provider to the storage providers." If the outsourcing concept does gain traction as expected, SSP purchasing power and infrastructure design expertise could ultimately put pressure on storage system vendor margins. Therefore, storage system vendors will eventually consider entering the SSP market by acquisitions or creating partnerships with SSPs.
IDCs participate in the SSP market primarily through strategic partnerships that often include revenue-sharing relationships with SSPs. IDCs provide physical infrastructure, bandwidth, and captive customer bases. IDCs can offer additional services by using SSPs. Initiatives by IDCs to directly offer outsourcing storage services have been very limited to date. Factors that should limit IDCs' ability to participate directly in the SSP arena include their lack of storage-related expertise and reluctance on the part of prospective customers to outsource an increasingly mission-critical IT function-such as data storage-to companies with limited reputation and expertise.
Online service providers (OSPs) offer Web-based data storage as well as digital content recording and distribution, archival, and backup. Today, OSPs are customers rather than competitors of SSPs. Just as SSPs aggregate business for the storage vendors, OSPs aggregate the PC and consumer markets for SSPs. The OSPs should become a meaningful revenue source for SSPs in the future.
Similar to IDCs, telecommunications companies have significant resources, established infrastructure, and significant bandwidth. Again, these companies lack focus, storage expertise, and experience with an outsourcing model. A likely scenario is that such companies will continue to partner with SSPs rather than enter the market directly. Current initiatives include an agreement between AT&T and StorageNetworks, and a partnership of Qwest and Hewlett-Packard to provide storage services. Neither of these has made a significant impact on the storage outsourcing landscape thus far.
Other non-SSPs include IT companies such as EDS, which provides consulting, implementation, on-site management, and support. Several have announced projects to enter the SSP arena. These consulting companies have significant numbers of IT personnel and a service-based model and can be equipment vendor agnostic. However, there is some question regarding their level of storage expertise and focus.
Late last year, Comdisco announced the creation of a managed storage services division. Although traditionally known as a leasing company, Comdisco has more than a decade of experience in backing up and protecting customers' data. Built on a network of EMC equipment, Comdisco will plan, build, and manage on-site storage area network (SAN) and network-attached storage (NAS) solutions for large businesses and offer e-businesses hosted storage services at alternate locations or at one of about 42 technology service centers connected via its private high-speed network. With nearly $4 billion in revenue, an established infrastructure, and expertise in data storage services, Comdisco has the potential to be a player in the emerging SSP market.
Glenn Hanus is storage networking analyst and principal, and Richard Kugele is a research associate at Needham & Company (www.needhamco.com), a full-service investment bank with offices in New York City, Boston, Menlo Park, CA, and Portland, OR.
This article is excerpted with permission from the December 2000 report, "The Emergence of Storage Service Providers," by Glenn Hanus and Richard Kugele of Needham & Company.
SSP strategic map
The following companies were assigned a position on the accompanying strategic map. The rationale behind each company's map position is explained.
Storability: An on-site SSP primarily targeting large enterprises and remotely managing the storage from control centers. Storability uses the Internet to communicate with each customer site and therefore requires the smallest infrastructure investment of any SSP.
Centripetal: An early-stage SSP focused on providing NAS solutions to small to mid-sized companies.
Scale Eight: Largely a vertical market play, Scale Eight is an SSP providing services to medium to large corporations with significant rich media storage needs. The company intends to create a geographically mirrored network using proprietary technology.
Arsenal Digital: Billing itself as an SASP (Storage Application Service Provider), Arsenal targets medium-sized businesses and leverages IDC relationships to limit infrastructure investments.
StorageProvider: Regional SSP targeting primarily medium-sized companies initially in Texas. The company has expansion plans for New York and international locations in the coming months.
CreekPath: An SSP providing managed storage services primarily to e-businesses located at IDCs.
Managed Storage International: MSI provides a wide spectrum of services to large enterprises and e-businesses, including storage-on-demand, content management, and professional services. MSI provides both on-site and off-site services. StorageTek owns approximately 15% of the company.
WorldStor: WorldStor provides primary data storage, backup, data replication, and professional services to medium to large businesses. The company is rapidly expanding its worldwide storage area network (WWS) of regional nodes. Currently, the company has 10 nodes with 35 expected by year-end.
StorageWay: StorageWay is focused on providing managed storage services to Internet businesses, scaling from 100GB up to multiple terabytes. The company has established 14 points of presence at IDCs and plans to expand to 35 sites by the end of the first quarter of 2001.
StorageNetworks: The only publicly traded SSP, StorageNetworks provides managed storage services to large enterprises and dot-coms with significant storage requirements. The company offers primary data storage, backup and replication, remote mirroring, content delivery, as well as on-site and off-site management. It currently has 42 storage points of presence. The company has an extensive leased private fiber-optic network.