Storage service providers revamp business strategies


The long-expected storage service provider (SSP) shake-out has begun, and before it ends, only 25% of SSPs will survive, predicts market analyst firm Gartner/Dataquest. SSPs will be acquired, merge with other service providers, radically change their business model, or just run out of money. Many SSPs are already refocusing their business models on managed storage services.

Nevertheless, the SSP market is expected to grow from this year's $476 million to $6.1 billion in 2004. However, many companies are disassociating themselves from the SSP label, because the plug-in storage-on-demand model isn't as viable as once thought. Potential customers would rather spend dollars on managing their complex storage environments or on backup-and-recovery services than on "storage by the slice."

But customer preference isn't the only factor deterring SSPs from the storage utility model; venture capital funding is a huge impediment. SSPs burned through money to build storage infrastructures, and venture capital firms aren't biting a second time.

"The storage utility hasn't panned out the way these [SSP] companies and their investors had hoped. That has been a big disappointment to them," explains Adam Couture, senior analyst, IT services, at Gartner/ Dataquest.

Corporate data-center respondents said that they were very likely to purchase management services within the next two years.
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"A shake-out among SSPs is inevitable," says Couture. "As in any new market, the SSP market has attracted far more players than it can support. Additionally, they face increasing competition, not only from each other, but from Internet data centers and telcos building their own storage utility solutions. However, even knowing that the shake-out is inevitable doesn't make the process any less painful for the affected companies or their customers."

Over the past few months, SSPs began tightening their belts, resulting in layoffs and office closings, while they focused on using assets more efficiently to survive until they can turn a profit. But that wasn't enough.

This summer, for example, Texas-based SSP StorageProvider filed for bankruptcy and, before that, other companies that claimed to be in the SSP business changed their models and/or disappeared altogether. Earlier this year, Colorado-based Creek Path abandoned its SSP mission in favor of developing storage management technology.

Arsenal Digital was the first SSP to be forced to lay off a major portion of its workforce, Storability laid off employees, and StorageWay closed three offices and laid off employees, according to Gartner/Dataquest. In the first and second quarters of this year, SSP pioneer StorageNetworks lost $22 million and $18.2 million, respectively. Last month, the company also laid off 220 people, or 33% of its workforce.

StorageNetworks admits the company has evolved since its inception in 1999 when it started to tackle the universal problem of acquiring, implementing, and managing data storage-problems that its potential customers still have today and the reason it believes the market will continue to grow.

But StorageNetworks is not strictly a "pure play" SSP. Initially, the company began hooking up customers' servers to StorageNetworks' storage centers via dark fiber. Then, the company began investing in software development for managing storage.

"We invented the [SSP] space, and we invested very early in a technology layer," explains John Clavin, executive vice president of marketing at StorageNetworks. "It gave us unique opportunities and we took advantage of those opportunities by packaging our technology in a more distilled version."

For example, StorageNetworks' STOR fusion service allows other service providers and telecommunications companies to enter the SSP market. And this year, the company introduced STORmanage, another distilled version of its own software-customers own their infrastructure, but they use StorageNetworks' software and other services to manage their environments.

"We are still a storage management ser vices company, but we're more focused on the software," says Clavin, who explains that the company is still trying to solve the same problems that do-it-yourself storage customers have. Low utilization of infrastructure, backup failures, forecasting and deployment of additional storage, and interoperability are all problems storage management companies address.

After StorageNetworks opened up the SSP market in 1999, other companies quickly followed.

A Gartner/Dataquest survey concluded that backup-and-recovery services are the most likely storage utility services to be purchased by corporate data centers.
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StorageProvider originally had $4 million in financing and hit the streets marketing to Internet data-center (IDC) customers. The company intended to provide SSP services to Texas cities that lacked a major SSP presence. In a recent report, Gartner/Dataquest suggests that Storage Provider's capacity-on-demand services-a true storage utility model-contributed to its fall. Primary server/storage utility services represent only a very small segment of the services users are likely to purchase from an SSP, according to Gartner/Dataquest.

Despite the gloom, Fre mont, CA-based Storage Way recently received $42 million in equity funding to continue to expand its service offerings. The company touts itself as a pure-play SSP-a rare breed today. "We're strengthening ourselves as the SSP that is sticking to the pure-play model," says Chris Eidler, chief technology officer and vice president of engineering. "We believe the pure-play SSP model is a good model, and we're having success with it, the reason [being] our liquid architecture [technology]," he adds. The company has 18 data centers in its shared-storage utility model and plans to continue developing software that virtualizes storage infrastructure and applications.

But StorageWay is not turning a deaf ear to its SSP brethren. "We are interested in some of the managed services plays that are out there and are taking people away from the so-called pure-play SSPs," says Eidler.

Storability, a Massachusetts-based managed SSP, also recently announced a funding coup. It secured $30 million and will invest it in technology development. But the company did lay off staff in its professional services business, yet refuted any claims of refocusing the company.

"We have never been an SSP," explains Jeffrey James, marketing manager for Storability. "From the very beginning, we have realized that buying disk drives by the truckful and selling them by the bucketful was not a good business model, and I think we've been proven through that." According to James, generating storage in bulk and distributing it to various customers was not an economically sound model. "There are no economies of scale above 1/4TB."

StorageTek spin-off ManagedStorage International (MSI) never considered itself a pure-play SSP either, according to Thomas P. Sweeney III, president and CEO of MSI. The company has focused on building and then operating, remotely and on-site, large storage infrastructures for either service providers or enterprise customers. Sweeney considers MSI closer to the managed storage service provider model than to an SSP.

"I'm more enthusiastic about the marketplace for companies to buy storage services than I was one year ago," says Sweeney. "The fact is that the enterprise marketplace not only is growing faster than people predicted, but also it's the market that has the capital and the operating cash to be able to purchase the services."

The focus on managed services is merely the result of "people focusing on the market segment that has the greatest demand and the highest level of financial stability. So that's a very positive thing," Sweeney concludes.

This article was originally published on August 01, 2001