SAN Vendors Still Facing Pricing Pressures

Despite hopes for a rebound in the storage networking market, results so far in 2004 suggest that Fibre Channel vendors continue to face pricing pressures, according to the Yankee Group.

The total Fibre Channel SAN component market in the first quarter of 2004 was about $434 million, the Yankee Group estimated. While that was up from the 2003 quarterly average of $424 million, it was below the group’s forecast for a 2004 quarterly average of $475.8 million.

Most Fibre Channel SAN component vendors reported quarterly revenue at or below expectations, even as port shipments increased, the research firm said. Cisco Systems was an exception, with 20 percent sequential revenue growth for FC SANs, but even that was a slowdown from the company’s prior growth rate.

The Fibre Channel switch segment did even worse: at $120.6 million for first-quarter sales, the sector came in below its 2003 quarterly average of $145 million, hit hard by competitive price-cutting and the introduction of products aimed at small and medium businesses.

Battle Over SMBs

To penetrate the small and medium business (SMB) market, which has been resistant to complex Fibre Channel SANs, component vendors are reducing prices and partnering with storage system vendors to reduce Fibre Channel complexity, a trend evidenced by the new EMC CLARiiON AX100.

With a Brocade or McData channel switch and QLogic host bus adapters, “a customer could have an entire SAN environment for somewhere between $10,000 and $12,000,” the Yankee Group noted. The EMC/Dell system “will be as preconfigured as possible so that setup of the storage, switch and host bus adapters is completely wizard-driven.”

While that kind of partnership will boost sales, the end result could be to boost non-Fibre Channel networked storage. The AX100 supports a number of connectivity options, including direct attached, Fibre Channel SAN-attached, and NAS (through the NetWin100 gateway), and EMC also plans an iSCSI connectivity option.

The Fibre Channel director segment fared better, with $144.3 million in first-quarter sales, which was slightly above forecast and well above the 2003 quarterly average of $117.7 million. The Yankee Group attributed that success to large businesses upgrading their existing SAN infrastructure and consolidating SAN islands or multiple smaller switches with large port count directors. The trend should continue through 2005.

At $168.9 million for the first quarter, the Fibre Channel HBA segment was below forecast but higher than the 2003 quarterly average of $161.4 million, with that sector also facing pricing pressures.

Pricing Issue Could Lead To Industry Consolidation

Unless prices stabilize, the Yankee Group warned that several of the Fibre Channel component vendors could merge with competitors or be acquired within the next year or two.

“To compete in the current market, vendors must offer a broad portfolio of products, software and services,” the group said. “A consolidated company would be on better footing to compete with networking giant Cisco as IP-based storage networking increases over the next several years.”

The introduction of 4Gb Fibre Channel — which will double current speeds — could increase the industry’s troubles, since 4Gb Fibre Channel “has been driven by the vendors, not the customers. Given this fact and the intense competition, vendors will be unable to charge a premium for 4Gb Fibre Channel components. In addition, it will take customers several years to fully transition to 4Gb Fibre Channel, and in the meantime, vendors will have to manage an inventory of both 2Gb and 4Gb Fibre Channel components. When this occurred during the transition from 1Gb to 2Gb, vendors ultimately had to write off millions in 1Gb Fibre Channel inventory.”

Compliance May Be Pressuring Software Firms

Fibre Channel vendors are not the only ones facing pressures. The software sector has been hit by a number of earnings disappointments lately, including one from storage software firm VERITAS .

Piper Jaffray senior research analyst David Rudow thinks the reason may be compliance with Sarbanes-Oxley, which may be delaying major software implementations.

Section 404 of Sarbanes-Oxley (SOX) requires management to assess and test internal controls to ensure compliance on an annual basis, or when there are substantial changes to controls.

“Our contacts on this issue have told us that the 404 work is being handled by the CFO and general counsel in many companies,” Rudow wrote in a research note last week. “These people are in charge of managing the project and allocating resources to ensure that the work gets done. This onerous workload requires man hours and diverting of other resources to ensure a company will be ready for the 404 attestations that will begin in Q4. With the CEO and CFO taking personal risk for the financials and annual audit, we think they will be more risk averse and delay any project or expense in the short-term that does not help with the SOX compliance effort. Additionally, CFOs are in the hot seat and would feel the heat if a company does not pass its attestation. Think about these issues and remember, the CFO is usually the final signor on a big deal ;mdash; no wonder we have seen delays in big deals in the quarter.”

“We feel this, along with the fairly tight spending environment, are contributing factors to the June quarter misses,” Rudow wrote. “The common themes among vendors that have missed the quarter are big deals being delayed and North American weakness. We believe the CFO’s workload to complete this work is overwhelming and they may not have the time or budget to sign large software contracts at the last minute of the quarter. … We believe the deals are in fact being delayed, not canceled, but at the same time, we are uncertain of whether these deals will close in Q3 or Q4.”

Deal pipelines have grown and the spending environment for software is slowly improving, Rudow said, but “the SOX issue caught many software companies off guard and there was no way that anyone could have known that closure rates for the big deals would melt away as quickly as they did in the final days of the quarter. … Our contacts have told us that they are advising customers not to go live with any new applications that touch the financial systems in Q4 and possibly in Q3 of this year.”

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Paul Shread
eSecurity Editor Paul Shread has covered nearly every aspect of enterprise technology in his 20+ years in IT journalism, including an award-winning series on software-defined data centers. He wrote a column on small business technology for Time.com, and covered financial markets for 10 years, from the dot-com boom and bust to the 2007-2009 financial crisis. He holds a market analyst certification.

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