You walk into Starbucks and ask for a Grande Latte. The price up top says $10, plain as day. But that seems high, so you inquire about a discount. They tell you that if you sign a long-term contract, arrange to buy 25 cups, or agree to test their upcoming brand of Canadian-grown coffee (as a beta site), you can have it for $7. Meanwhile, a rep from a rival chain like Coffee Bean taps your shoulder and offers you better coffee for $6. Starbucks responds with further discounts. You end up paying $4.75 for a Venti Latte and feel like the best negotiator in town. Then you find out the big guy in line behind you only paid $3.25.
That analogy pretty much sums up life in the storage marketplace today.
“Anybody who pays list price really ought to have his head examined,” says Mike Karp, an analyst with Enterprise Management Associates. “As there are so many players and so many choices, network storage has become extremely competitive.”
User after user reports a major discrepancy between the list price and what they end up paying. In the experience of Tony Jurgens, a storage admin with a multinational energy company, he receives anywhere from 25 percent to 50 percent off list on various storage hardware and software products. The eventual price depends on the state of the market, the clout of the customer and whatever sales targets have to be met.
“List price is just a place to start from,” says Jurgens. “When I look at list, I automatically think we can only go down from here.”
The opportunities for bargaining are heightened by the sheer competitiveness of the storage space and the rise of new technologies such as IP SANs. In addition to undercutting among Fibre Channel vendors, the introduction of IP SANs has brought extreme downward pressure on SAN
Take the case of Jeffrey Pelot, CTO of Denver Health and Medical Center, who started with FC and has since added an IP SAN. The organization intends to maintain its EMC CLARiiON/Brocade-based FC SAN, while further building out its IP SAN from LeftHand Networks.
“We found FC SANs to be expensive to implement, and they required specialized training and technicians,” says Pelot. “An IP SAN is more affordable, and implementing one is like building something with Legos.”
The Vendor View
Vendors specializing in IP SANs say we are witnessing the standardization of storage hardware, and that dropping costs are inevitable.
“List prices remain high as vendors try to justify the value of their hardware,” says Tom Major, chief strategy officer for LeftHand Networks. “But users are more educated today, know their options and are ready to negotiate.”
How far prices will eventually fall remains to be seen. It may be a long way off before storage hardware ultimately becomes a commodity item. In the interim, don’t expect the list price game to fade away. And if you put on the vendors’ shoes for a moment, you can better understand how hard it can be to fix a price in stone. James Bahn, director of software at Hitachi Data Systems (HDS), reveals that there are just too many variables and too much complexity to be able to set up one “no haggle” rate like car maker Saturn.
“Nearly every deal is different in terms of size, hardware configurations, software components and especially services,” says Bahn. “That’s why each deal is approached separately.”
If a company has the potential to be a major customer, for example, vendors will be more willing to look at the overall demand over a two- or even a three-year period to meet their sales targets. This often is used to justify a significantly lower quote for the duration of the contract.
Tony Lock, chief analyst at Bloor Research, agrees that market forces make such a scenario inevitable. “Street price paid equals list price looks like a good idea, and both sides often say that they would like such a business scenario to exist,” he says. “However, the free market and human nature makes this unlikely to become the way of IT sales for the foreseeable future.”
Another factor adding to the pricing puzzle is the myriad sales channels available. Users typically buy from several vendors for any one project. Some purchase direct from the OEM, others via the channel and smaller businesses in more of a retail manner.
Kyle Fitze, director of marketing for HP StorageWorks SAN Division, sees list prices evolving as a result of the cost of the channel, the increasingly competitive nature of the mid-range storage business and the specifics of the deal in question.
“We also see cultural differences in some regions that drive list/net pricing strategies,” says Fitze. “Some cultures expect high-list, high-discount pricing.”
The vendor culture, too, makes wheeling and dealing the norm: EMC, HP, IBM, HDS, Dell, Sun and NetApp sell most of the arrays; Brocade, McData and Cisco dominate in switches; Emulex and QLogic dominate the market for host bus adapters (HBA); and Computer Associates, Veritas and others offer management and storage application software. Much of the time, you are not dealing with just one source. There are so many arrangements, rebrandings and partnerships that it is hard sometimes to follow exactly who is working with whom.
Because most switch vendors, for example, ship product through major OEM partners, the prices vary according to particular agreements, as well as the types of warranty and services that are included in the final price. Similarly, individual customers may have negotiated their own discounts with their platform providers, depending on volume purchases and expected business over time.
“Consequently, it’s hard to get any switch vendor to advertise a set list price for a product, given the different routes to market,” said Tom Clark, director of solutions and technologies at McData.
One of McData’s primary OEMs, EMC, is higher up in the chain and so is more in control of the eventual sale. Marty Lans, EMC’s director of storage networking, explains that people buy the switches and HBAs after they decide what services, software and hardware they want from someone like EMC.
“It’s the storage sale that gets the most attention, and then the switch vendors are left to capture the rest,” says Lans. “That’s why switch prices are so cutthroat.”
In The End, You Get What You Pay For
It’s clear that for some time to come there will continue to be a discrepancy between the list price and the amount written on the PO. Some may look upon list price as a mere starting point, some as a journey and others as a state of mind. In the end, though, price really isn’t everything. Performance, interoperability, application set, company longevity and loyalty to a trusted partner are just a few factors to consider in any storage purchase. In the end, it’s about getting everything you need at the best price, and no one knows your needs better than you do.
“Storage is a strategic investment, so price alone can never be the only factor,” concludes Karp. “So if you only look at the cheap bid, then you will probably get exactly what you deserve.”