|By Tom Cook||
|May 7, 2015 12:54 PM EDT||
Some companies have gotten ahead of storage incumbents by offering new, more efficient flash storage arrays. These newcomers have raised money in quantities and valuations that would suggest they are market "disruptors." Indeed, press and analysts have been wooed by marketing campaigns to this effect. In reality, it's becoming apparent that these companies are rather "innovators" with much more modest financial prospects.
By overestimating their strategic importance, innovative array companies have raised too much money and may have already missed the window for high-value divestiture to incumbents, who are making up ground fast. Incumbents like HDS, IBM and EMC are fighting back by adding efficiency technologies to their mature product lines. They "get" cloud and are making the sustaining innovations to maintain relevance in a greatly altered storage market.
The real battle for the future of the storage market will be between Tier 1 incumbents and hyperscale cloud providers like Amazon (AWS), Microsoft (Azure), and Google (Drive) that have novel business models, address new customers, and take new cost structures into account. For this reason, they are the true industry disruptors and the ones most likely to succeed in an era of transformation.
The storage industry is in the midst of a major transformation that will forever change its economics. Lower cost, higher performance, on-premise storage and nearly free cloud-based storage are driving both innovation and disruption in the industry.
In Clayton Christensen's seminal book The Innovator's Dilemma, Christensen argues that industry newcomers, who are often perceived as disruptors, end up losing to industry incumbents when their fundamental strategy for differentiation is based on innovation that is "sustaining" rather than "disruptive" in nature.
Why is this so? Creating and selling a differentiated product to an incumbent's best customers motivates the incumbent to retaliate with similar differentiation. And, because incumbents enjoy significant business model advantages over innovators, they are able to capture the lion's share of economic benefit catalyzed by a newcomer's innovation. Christensen thus concludes that a sustaining technology strategy is not a viable way to build a new growth business.
Let's apply Christensen's theory on innovation to the storage array (spinning disk, all-flash and hybrid) space. Recent market entrants, companies like Pure and Nimble have aggressively introduced flash products that offer cost and performance advantages over those sold by Tier 1 incumbent companies (e.g., EMC, NetApp, IBM, and HDS) and have speculated that these savings will spell the end of HDD storage and storage incumbents as we know them.
By driving down the cost of performance around flash, the all-flash and hybrid startups have made "effective cost" the new metric for primary storage. The advantage AFA and hybrid startups have enjoyed however is temporary, because it is based on savings from data efficiency rather than on a new or different application of commodity flash. And, data efficiency is a sustaining rather than a disruptive innovation - centered around improving an existing product category serving an existing market.
To eliminate the startups' advantage, Tier 1 incumbents need to deliver mature arrays with superior data efficiency- something that is already available today. This will enable them to reclaim market share with all-flash and hybrid offerings that afford even higher performance at lower effective cost.
Some companies have gone directly down the path of "innovators." While they've executed well to date, as Christensen's research shows, this isn't enough to build a winning company or to be true industry disruptors in the long run. Indeed, storage incumbents aren't running from a fight with the all-flash and hybrid startups. Pushed by sustaining innovation, they are rapidly adopting data efficiency technologies. The addition of data efficiency to mature storage arrays takes the "innovators" advantage away from all-flash and hybrid startups, and returns it to the tried-and-true storage incumbents who are able to use it as a far more powerful weapon in their arsenals.
Data efficiency not only makes effective cost the defining metric for storage, it also delivers savings for storage, bandwidth, energy management, and backup. It is valuable for primary data, data at rest, over the network, and portfolio-wide, and, most importantly, it is applicable to HDD, flash, hybrid, converged and cloud offerings and for many applications from databases to Big Data. Winning companies will deploy data efficiency solutions throughout their on-premise and cloud portfolios because sales teams can't afford to offer it preferentially in one product and not another.
Permabit spent much of 2014 "arming" (HDS, EMC and NetApp, among announced partners) Tier 1 companies with data efficiency so that they can out-innovate upstart flash and hybrid arrays. If Christensen's theory bears out, I expect Tier 1 storage vendors will regain the upper hand in 2015. I'll take that a step further and predict that 2015 will be a tough year for the smaller, upstart array makers.
However, this does not mean that storage incumbents are out of the woods. There is an even bigger threat to their businesses: disruptive innovation.
In contrast to sustaining innovation, which is all about building a better mousetrap for current core customers, disruptive innovation occurs in markets where incumbent products overshoot the base requirements for many potential customers. Christensen argues that disruptive companies find their trajectory by introducing products and services that are not as good as currently available products, but offer other benefits - i.e. they are simpler, more convenient, or less expensive than incumbent product offerings.
Disruptive companies eventually improve their products and technologies enough to intersect with the needs of more demanding customers. When this happens, disruptive entrants with passable offerings ultimately crush incumbents.
The power of this construct is economic. Entering a market and competing effectively at the low end can be a very valuable asset.
As the low-end disruptor moves upmarket, much of the increment in price/margin will fall to the bottom line, and this continues as long as products can keep moving up market, eating away at the margin of the higher cost products from incumbents.
The storage market appears ripe for disruption. Hyperscale cloud providers, companies like Amazon, Microsoft, and Google are classic hybrid disruptors (new customers and low-end pricing), and they are building the fastest growing, multibillion-dollar segment in storage. Disruption favors the entrant. In the case of hyperscale cloud storage, incumbents face a very real threat, because hyperscale providers:
- Have tremendous scale and balance sheets that give them the ability to outspend and outlast incumbent storage vendors.
- Are driving the price of storage to $0.00 by investing heavily in data efficiency technologies and in "associated" revenue streams to execute this strategy.
- Are creating offerings for low-end customers and non-critical enterprise data, but are steadily enhancing the offerings with gateways, data services, and analytics to move up-market.
- Are exerting deflationary pressure throughout the storage market.
- Are changing storage to an OPEX rather than CAPEX item by making it easy to consume their storage services.
- Are attracting customers as fast as they can roll out infrastructure by the container-load!
In contrast to the innovators, disruptive hyperscale cloud providers represent a credible threat to incumbent Tier 1 storage vendors. To counter this threat, Tier 1 companies are aggressively developing and deploying data efficiency technologies portfolio-wide to massively reduce the effective cost of their storage products. This strategy has multifold benefits as it enables them to regain lost margin and share caused by innovators, to extend the life and competitiveness of legacy products vis-à-vis new entrants and hyperscale cloud competitors, and to gain competency for future third-platform,
cloud and SDS products.
Tier 1 incumbents are also adopting an "eat lunch or be lunch" product development strategy that includes funding and developing software-defined storage, converged, and third-platform products with data efficiency technologies, along with building OPEX business models that will cannibalize CAPEX product offerings.
The on-premise market share (as percentage of all storage) is certain to decline over the next ten years, while the cloud market share will increase. Incumbents can drop their effective cost with data efficiency and other tactics and relentlessly grab that on-premise storage market share to retain volumes and margins. They also have the scale to reduce operating costs (as percentage of sales) to prosper in a deflationary market, something the leaner startups cannot do.
As "innovators," the all-flash and hybrid array entrants who introduced primary data efficiency technology will be remembered for making data efficiency a mainstream product requirement, but they will disappoint shareholders and investors as the incumbent Tier 1 storage companies deliver superior data efficiency and reap the rewards of market share. Disruption favors the entrants, so the real threats are from hyperscale cloud providers as they move up market.
Clayton Christensen's Innovator's Dilemma is a near-perfect model for describing the technical, economic, and business transformation of the storage market. As the critical sustaining innovation, data efficiency will enable incumbent Tier 1s to compete by maintaining market share and margin longer, extending cash flow and product lines, and consolidating share in the shrinking on-premise storage segment.
The smarter storage incumbents, companies like HDS, EMC and IBM, are well on the way to defining and building third-platform/cloud and software-defined storage offerings with data efficiency as they gird for the battle of their lives.
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