Storage: Disrupt This!

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The history of the data storage market has been marked by wrenching disruptions catalyzed by technological innovation.  We are in the midst of such a disruption at the device level, as the rise of portable devices and cloud applications is inducing the rapid ascent of NAND flash storage at the expense of disk drives due to its superior speed, power draw and portability and despite its higher cost.  We believe that this transition will be faster and more complete than most observers project.  At the same time, we believe that the incorporation of flash and other solid state technologies into the enterprise data center storage market will be incremental, preserving the role of system solution integrators and allowing for continued strong growth of disk technology in that market.  However, in the long term, we believe enterprises will begin to embrace cloud computing much more fully, transitioning storage-intensive applications to web-based hosts with the sophistication to design and integrate their own complex storage solutions.  Such a change would commoditize storage technologies, a serious threat to current enterprise storage market leaders

Innovation guru Clay Christensen well documented the accelerated evolution of the disk storage market in his now classic treatise “The Innovator’s Dilemma”.  On multiple occasions, new entrants to the storage market were able to apply existing technology in an innovative way for an emerging customer set not well served by the incumbent vendors, establishing new architectures that would grow to overtake the existing leaders.  Similar mechanics are driving the current change.  The rise of the iPod and smartphones, with compelling need for portability and low latency, opened an opportunity for flash memory to take the place of disk drives despite an overwhelming cost disadvantage.  This demand drove flash to a steeper cost reduction curve, has opened the door for a generation of lap-tops without hard disks, a concept unthinkable just 5 years ago

The expansion of portable devices, epitomized by the explosion of disk-less tablets, has been buttressed by simultaneous upgrades in wireless networks, the near ubiquity of latency minimizing content delivery networks, and the overwhelming popularity of Internet-based consumer cloud applications like Facebook and YouTube.  Users do not need big hard disks on board because they can quickly, easily and cheaply access seemingly unlimited storage resources on line.  This is bad for the future of PCs, doubly bad for the future demand for device-class disk storage, and good for flash memory.  The relative performance of drive makers like Seagate and Western Digital vs. flash vendors like SanDisk and STEC suggests that this dynamic is appreciated by investors

Meanwhile, enterprise demand for storage systems remains robust, as companies cope with the nearly overwhelming flow of data and the perceived value to be gained from capturing and understanding it.  Inside the enterprise, the clear trend toward server virtualization is concentrating storage resources to the data center and creating need for turn-key solutions and expert guidance from integrated storage vendors.  While we are concerned that government market weakness will be an albatross about the neck of enterprise spending going forward, the storage market appears robust enough to buck the trend

We do not believe that solid state memory technologies like flash are likely to reach the relative price points necessary to be an attractive replacement for enterprise mass storage within the investable future.  We do expect these technologies to be established as an important adjunct to disk storage for very high value applications where access latency is a critical need.  Existing vendors have already introduced hybrid storage products to add this capability, with backward compatibility a key obstacle to new entrants looking to use solid state as way into enterprise accounts.  Although no real threat to demand for disks, this phenomenon should be a significant opportunity for flash chip makers

The longer term is less favorable for value-added storage vendors like EMC, NetApp, HP or IBM.  We believe that enterprises will eventually embrace the cloud more fully, shifting the preponderance data intensive applications to web-based commercial hosts.  While this does not necessary lessen the industry wide demand for capacity, it changes the nature of the dominant customer.  Concentrating demand into the hands of a few highly sophisticated buyers, each with in-house proprietary technology for managing storage will eventually commoditize the market to the benefit of more generic disk drive producers

In the very long run, there are other options for solid state storage – phase change memory, racetrack memory, memsistors, and solid electrolyte memory at the forefront – but we believe these are too far away and too uncertain to allow meaningful conclusions.  As magnetic tape remains in wide use for archiving purposes more than 50 years after its introduction, we suspect that the death of the hard disk has been overstated in many quarters

We see NAND flash leaders such as SanDisk, STEC, Intel, Micron, Samsung, and others as obvious beneficiaries from the current trends, although we note that flash is a small business for the larger players on the list.  We see integrated storage leaders EMC, NetApp, HP, IBM and Oracle as enjoying robust demand for their products, with the same caveat that weaknesses in other businesses may outweigh strength in storage.  However, we do note that a longer term shift toward the cloud would be a negative for these companies.  On the flip side, near term demand for device hard disks has already softened, yielding weak results from vendors like Seagate and Western Digital.  Similarly, an architectural shift toward attaching storage directly to Ethernet networks rather than specialized storage specific equipment works against vendors like Emulex, Qlogic and Brocade

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