Tulips, Dot-coms and SANs: Why the SSD Buyout Craze Won't End Well - Page 2


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Some of these players already make their own SSDs. It would not be much of a stretch for them to compete in the storage market. But that costs money and most of these companies are not know as vendors in the enterprise market from a direct sales point of view.

Why do the companies want to sell?

Of course there is the obvious reason for investors to get their money. But small companies selling enterprise storage products have a high cost of sales, which requires a large infrastructure, which I do not think can be sustained in many cases.

When an integrated storage vendor walks in to sell products, they have a whole myriad of products to sell, from SSDs, to appliance storage, to block storage, to archival storage – you name it, they have it. A salesperson, a pre-sales person and a number of products to sell. This is far different than a single product vendor that might have one product or even maybe even a few solutions with different sizes and configurations, but not a set of products to address many different customer requirements.

Selling products is expensive and time consuming for most companies, especially small SSD storage vendors. You must have the right sales team that understands the customer requirements and sales process. If you are selling to small businesses you likely do not need this type of sales team, but if you are selling enterprise SSDs products to large organizations you need lots of infrastructure. You will need sales, pre-sales, marketing department, benchmark groups, and you will need to attend various industry conferences and shows and events. All this costs lots and lots of money and doing it with the wrong people will not improve your market or sales position.

The cost of sales and marketing for multiple products is a small incremental cost for additional products. So, for example, going to an industry show with one product is a high cost per product, while if you have 10 products you might need a bigger booth but your fixed costs will not be much higher. So these small SSD companies must sell like large companies, given the expectations in the enterprise.

I suspect many of these companies have a very high cost of sales for their SSD products. I would have loved to look at the balance sheet for what the cost of sales was and the margins that were required to keep the company in the black (or maybe they weren’t in the black). Of course with private companies, who knows if they are in the black or in the red? Only the acquiring companies will know that information.

Alternative Approach

So I have levied a great deal of criticism. What would I do if I were IBM, Cisco, WD or the next company making a purchase? First, I would look carefully within my company to see historically what has happened to other companies that have been purchased. Were the products successful, did we get a good return on investment? Did the new products come out on time? Was the vision we had when we made the purchase successful?

If you cannot answer yes to all of these questions for a high percentage of acquisitions, you need to ask yourself: what are you going to do differently? We all know that the definition of insanity is to do the same thing over and over and expect different results. So if you’re not making significant changes so that this time will be different, then you need to run, not walk, away from buying anyone.

I think we can all look at the purchases the companies listed have made and make our on value judgments. There are many alternatives to purchasing companies. From strategic marketing and sales relationships to OEMing the product, to developing a similar product approach with commodity SSD parts. Each of the companies buying enterprise SSD vendors has some significant engineering talent that goes far beyond integration of SSD products, so these companies could certainly develop their own products.

Final Thoughts

I really think that big companies are repeating the same mistakes that were made over a decade ago and making even more aggressive mistakes. A decade ago you had companies developing boards for new SAN switches, new RAID controllers with specially designed ASICs that were needed for parity generation and validation (all of this without PCIe so they had to develop their own buses), and lots of other technology that jumpstarted the SAN market space. Significant engineering talent worked on these technologies.

Yes things are different today, as much of the market is focused around commodity x86 technology, PCIe and software to build a product. At least for now there companies engineering PCI cards (networking, SAS, and SSDs), but today you can buy PCIe interface chipsets, 10 GbE chipsets, SAS chipsets and a portion of the design can be commoditized.

So back to my point, I seriously doubt that the STEC-Inc technology will be seen in HGST/WD SSDs, nor do I think that Virident PCIe cards will be commoditized by HGST/WD to compete with LSI and others. A Whiptail system will likely be put into a Cisco rack, but it’s not like Intel and Cisco are the best corporate partners, and we will likely see other SSDs put into the product. I really do not see Cisco as a company with deep storage talent and detailed understand of the storage market. Do they know how to sell to the storage team at their customers?

It all comes down to what I see as “the buying arms race.” Company X purchased some SSD company so company Y needs to do the same or they will not be considered a player. Are the idiots on Wall Street driving companies to make purchases to be considered innovative? I sure hope not, but I fear this is the driving force, sadly.

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