The elephant’s graveyard is a metaphor for a place where old ideas go to die. For IT it is the flipside of the consumerization of IT.
The seductive glass house
As Sun’s troubles over the last few years have emphasized, enterprise IT is a Venus flytrap market: once you get into it, it can be very difficult to get out. What makes EIT so seductive?
- High margins
- Big budgets
- Low turnover
These conditions are the reverse of the consumer market, where margins are typically half of EIT’s, budgets are small and turnover of new technologies can be quite rapid.
Let’s look at Sun Microsystems
Sun started out as a commodity workstation company. Motorola 68000 processors, Seagate disks, Berkeley Unix, somebody’s ethernet, Sun did little more than design the circuit boards and packaging that everything plugged into. By not investing in manufacturing plants, semiconductor fabs and engineering and testing proprietary products, Sun achieved a sales per employee that was the envy of the industry in the mostly proprietary ’80s.
By the early ’90s though, the PC was starting to nip at Sun’s heels. Much less powerful, but much cheaper, PCs higher volume made them much more attractive to budget-conscious buyers and to market-conscious software developers. Sun began a long climb upmarket.
The upmarket is very pleasant – as long as it lasts
So workstation sales are getting harder, and meanwhile your very best customers are asking for larger and more powerful machines, network servers, to run the software they already know. These larger machines are more profitable and allow your salesforce to concentrate on fewer accounts to generate more revenue and profit. Engineering and marketing find it easy to justify fun new technology since a 10% goodness increase on a $500,000 machine is worth $50,000, while on a $1,000 machine it is worth $100 only if the customer is knowledgeable enough to notice. Which they aren’t, thank you very much.
Life is good. Until the same forces that chased you out of your original market start nipping at your heels again. You can maybe move a little more upmarket, as Sun did with E10000 series in the late ’90s, but eventually you are standing on the top of the mountain. And there is nothing left to climb. Now you have to climb down, a much less pleasant journey than the trip up.
IBM, EMC, NetApp have all been there
IBM faced the same problem in the early ’90’s as the company cratered under John Akers. High margins are extremely addictive and IBM had the shakes, bad. IBM was propped up by the high margins on its mainframes and storage, but mainframe demand was slowing and Amdahl, EMC and other plug-compatible vendors were growing. Lou Gerstner came in, saw that IBM had created a price umbrella under which its competition prospered, and cut prices big time. The umbrella snapped shut and the PCMs started dying off. IBM’s storage group didn’t respond to the RAID revolution fast enough (see Daddy, tell me again how little EMC beat giant IBM . . .) and suffered a major market share loss.
EMC rode the big iron gravy train through the ’90s, until the dot-bomb implosion. Not only did high-end demand shrink, but hundreds of millions of dollars of like-new storage came on the market at liquidation prices. EMC’s growth reversed abruptly. Since then EMC has sought to become a software company AND has moved into the low-end of the storage market throught its Dell channel. I spoke to an EMC engineering manager who’d worked on their first $5,000 product, and he told me that while customers were enthusiastic about the new price point, they were wondering when the $2500 version was coming out. Now that you can buy a 1 TB NAS box for $600, I’m sure the pressure is only growing.
NetApp, which has been growing fast in the enterprise, unveiled last year their $5k entry-price StoreVault product line. I doubt they are selling many entry-level systems, so NetApp is still missing the low-end of the market, which I would guess is the fastest growing part. But at least they are in there pitching.
The StorageMojo take
As I look around the storage landscape today, I see many companies focused on the enterprise, solving problems that only enterprises have. This isn’t a bad thing, and Lord knows enterprise IT can use all the help it can get. Yet I don’t expect those companies to be the NetApps or Veritas’s of tomorrow. The folks who solve Internet Data Center storage problems will do well, as will the folks who grow up out of the consumer media/SOHO storage businesses. Both markets build companies that thrive with low margins and high volume. They’ll be nipping at the big guy’s heels very soon now.
Comments welcome, as always. Moderation turned on to make spammers work a little harder.