A Wealth of Data

By Eric Roston

The top executives of Veritas Software, based in Mountain View, Calif., called key members of their technology staff as soon as they learned that terrorists had attacked New York City and Washington--home to many customers, including the Pentagon, that use Veritas products to manage the storage of data on everything from customer accounts to employee benefits. The Veritas execs prayed that their clients had escaped unharmed, but in the meantime they mobilized six "SWAT teams" of technicians to be dispatched when summoned by bewildered companies trying to reclaim their data--and their future.

By Thursday, Greg Coleman, a member of a Veritas "fly-to-site" team, threw a complete library of company software into his car--there would be no flights to sites that week--and drove six hours from New Jersey to Boston. There he helped rebuild a devastated financial company that was based in the World Trade Center but has a Boston data center. The company's technical experts were lost in the disaster, but the firm was able to recover all the work to which those technicians had devoted themselves. The client, says Coleman, "did an excellent job getting the data."

Even before Sept. 11, the $40 billion-a-year data-storage industry was experiencing brisk demand for its products and services, as companies found all sorts of efficiencies through instant access to digital information on customers, suppliers, partners and employees. But the terror attacks have reminded many more companies around the U.S. and the world that, after their employees, their data are their lifeblood and should be mirrored live in at least two locations or backed up on tape and remotely stored.

While storage-industry firms' hardware and software have become more essential, however, companies have seen their stock prices dragged down with the rest of the market, amid ferocious competition. Hardware companies are moving deeper into software, and software companies are helping increase data availability and storage efficiency. This trend is likely to cause the strongest players in the storage industry to snap up the marginal players, which tend to be the technology innovators.

The best-known players in the storage industry are the ones that peddle big iron: EMC, Hitachi Data Systems, IBM and Hewlett-Packard sell global companies $100,000-per-terabyte, refrigerator-size cabinets stocked with software on whirling discs that bring order, accessibility and protection to proprietary data. Veritas sells much less expensive software packages that back up data on other companies' hardware and that companies such as IBM Global Services and SunGard use to facilitate disaster recovery.

For most of the past 10 years, data storage has been synonymous with EMC, the company based in Hopkinton, Mass., whose growth shadowed the e-commerce boom and whose market share last year reached 35%--three times greater than Compaq's. Thought by many to be untouchable, the company's stock slid through 2001, the result of new competitive pressures and a slowing economy. EMC revealed in July that its second-quarter earnings had fallen 71%. A week after the terror attacks, EMC forecasted a loss for the first time in 11 years and announced 2,400 layoffs. Still, the company--with its competitors and analysts--understands its leadership position and the advantages big firms enjoy during hard times. "The weak will fall by the wayside, and the strong, like EMC, will continue to get stronger," executive chairman Michael Ruettgers told TIME a week before the attacks.

That's a self-serving view, but it's one shared by independent analysts. The volume of digital information--transaction data, e-mail, video images--that companies collect and store continues to double every year in spite of the dotcom wipeouts. "It is the only recession-proof area from a capacity-demand perspective," says Steve Duplessie of the Enterprise Storage Group, a research firm based in Milford, Mass. "Nobody ever needs less storage."

But even as companies generate proprietary data at the rate of a Library of Congress once a month, the slumping economy has forced them to slash spending on information technology. And that pushes companies like EMC to diversify out of hardware, which has become a commodity business with less differentiation among products, and in which competition has compressed gross profit margins to about 30% to 40%. The manufacturers now see software's charm--or more specifically the charm of its 80% to 90% margins. In 1999 software composed just 10% of EMC's revenue; in the second quarter of 2001 it made up 25%, and it is expected to reach 30% in two years, compared with 50% from hardware. "EMC sets the bar," Duplessie says. "By the time others reach the bar, EMC has already moved somewhere else." Sun Microsystems, HP and IBM, however, believe they are well positioned because they already sell comprehensive packages of hardware, software and services.

EMC competes with Veritas in data replication, and the two are expected to compete even more as EMC moves into storage-management software. Veritas, which is often sold along with EMC, Sun, IBM or HP systems, runs its programs off storage hardware and the servers that make up enterprises' local-area networks. For that reason and because it does not have a vested interest in selling any hardware of its own, Veritas is compatible with many brands. EMC, on the other hand, already boasts the largest companies as its customers. EMC says its software will eventually manage others' equipment, and it now spends 75% of its $1 billion research budget on software; that proportion went to hardware a decade ago.

On Sept. 25, HP, which has a partnership with cabinetmaker Hitachi, completed its $310 million purchase of StorageApps, a company based in Bridgewater, N.J., that competes with Veritas in making tools that allow companies to pool their storage devices and access unused space. Last month EMC bought Luminate Software of Redwood City, Calif.--its seventh software acquisition in nearly two years.

Veritas and competitors such as DataCore, based in Fort Lauderdale, Fla., sell software programs that allow a customer to pool storage on devices otherwise isolated from one another. These programs, called virtualization technology, are helping raise storage-hardware utilization rates to 80% or so from their current 50% by allowing isolated storage servers to communicate with one another. That means more storage without new hardware--but given that storage needs are doubling annually, for many customers that may only mean no new hardware for six months--"and we're in the sixth month," Duplessie says. And while the hardware companies all express commitment to open storage networks, companies such as Sun (which, like HP, is partnered with Hitachi) and IBM have a vested interest in selling their entire line.

Industry businesses will continue to adapt to customers' needs. Telecoms have begun offering storage as a utility to small and midsize enterprises--Bell South and Storage Networks, a storage services and software company, are expected to announce such a partnership this month. And despite that 100-GB hard drive in your new PC, some industry players, such as Xdrive of Santa Monica, Calif., offer online storage to users of home PCs, a place to keep their personal documents, favorite videos, music--heck, just about anything but old furniture.