Tulips, Dot-coms and SANs: Why the SSD Buyout Craze Won't End Well
Those who cannot remember the past are condemned to repeat it, philosopher George Santayana wrote more than a hundred years ago. It's advice that data storage vendors would do well to take to heart.
Dot-com mania wasn't the only excess of the late 1990s; storage vendors snapping up SAN startups and rivals was another. Companies such as Veritas, Sun, IBM and HP, to name just a few, spent a fortune buying up small companies that had software, hardware or just ideas for SAN systems – and many times not real products.
SAN was just coming in to the market and was expected to dominate, and the big fish did not want to lose out to other players. These SAN startups were consumed into the larger companies with big design plans, yet only a few of the buyers did much with the companies they acquired, from what I saw.
Many firms that got bought ran into the big company NIH (Not Invented Here) group of engineers and got buried. So one side of the company was buying companies and the other side of the same company was killing the products. Even if those startups were not shunned by the big company’s engineering staff, I can think of very few products that were purchased by big companies that made it to market.
Lots and lots of money was spent during this period. I remember a company called TeraStor that burned through $850 million dollars (think of that in today’s dollars) in just a few years. Storage companies, file system companies, networking companies, disk drive vendors and lots of other SAN infrastructure or companies that supposedly could be infrastructure were purchased.
I remember doing some due diligence for some of the big companies that were buying these smaller companies. It did not matter what you said about the companies they wanted reviewed, they had money to burn and were going to buy companies no matter what you said. Fast forward 16 years to today, and lots of people seem to have forgotten the 1990s. Almost all of these purchases in the 1990s worked out very poorly for the big companies that did the purchasing, wasting money that could have helped during the recessions that followed.
Today, small companies in the storage industry, especially the SSD makers, are being purchased by big companies like piranhas in a feeding frenzy. We have seen Texas Memory purchased by IBM, Whiptail by Cisco, STEC and Virident by HGST/WD. And I believe this is not even close to the end of the buying spree by big companies. Additionally, we have seen investors pouring big money into companies like Pure Storage (a record $150 million).
So the question I want to ask is: does this buying fever make any sense? My answer: it makes no sense to me, and here is why. It might not be quite up there with tulip mania, but if history is any guide, much of this takeover money would have been better spent elsewhere.
The reason is that SSDs are a commodity technology. Making an SSD storage product is an integration project, not a rocket science project like designing a new chip. Some might disagree and I’m not saying it’s not difficult, given all of the hardware and software that must be integrated, but it is far more difficult to make an 18 nanometer NAND chip – including the design, lithography, and of course the plant – than it is to take a bunch of NAND chips and turn them into a storage product.
Of course there are issues with packaging, and yes there concerns about silent correction, error recovery wear leveling, and reliability. And there also concerns about the software and firmware, and hooking into a SAS or PCIe interface (folks, the SATA interface is not enterprise no matter what anyone tells you) and lots of other stuff. But this is integration, and far different than the complexity of making NAND chips.
It is also far less costly, as a NAND plant costs billions of dollars, whereas integration of NAND products or even integration of SSDs is far less costly. Whiptail, for example, last I checked was using SSDs from Intel, which are using a SATA interface (and I do not consider them enterprise). Yet Whiptail was bought by Cisco for $415 million, which is likely a great return on the investment made by the VC community, but is it for Cisco stock holders?
Is the software technology and storage packaging worth that kind of money? Could Cisco have done the same thing? Lots of questions, I would love to ask the people in Cisco that made this decision, and some of the same questions I asked over a decade ago.
But there were other SSD companies sold in the last 18 months and even more deals in the making according to market rumors. The SSD market consolidation is far than the 1980s when we had many disk drive companies, most of which were producing their own technologies.
The companies being bought are integrating technology from the big NAND players. The big NAND players (2Q13 numbers Samsung occupied 37.1% market share, Toshiba 28.9%, Micron 13.7%, SK Hynix 12.7% and Intel 8.6%), could decide to enter the market with products of their own design, and these vendors control the NAND distribution.