Money for Nothing

Cutting corners with accounting, support, and resale is going to catch up to the big storage vendors.

March 8, 2006

7 Min Read
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In case you haven't been watching lately, there is a lot of consolidation going on in the storage industry. Companies are swallowing up others right and left and even behemoths like EMC are occasionally the targets of buy-out rumors. (I say Starbucks should buy EMC: They've already figured out how to overcharge for a cup of coffee, so there shouldn't be too much of a culture clash there.)Figure 1:

Some would argue that consolidation is to be expected in the current economy. The consumer appetite for certain classes of storage, especially big iron, has been largely sated and the Fortune 500's spending on IT products and services, hovering as it is at just around 5 percent growth annually, isn't generating sufficient revenues to enable vendors to keep up with Wall Street growth expectations.

Some might argue that we are looking at a "harvest market" in big iron, with vendors of Fibre Channel SANs and enterprise storage frames merely changing out each other's equipment in the same set of accounts on a year over year basis. Tape reached this plateau in the late 1990s. It was only a matter of time before the big array manufacturers reached the same flat line revenue growth wall selling to the 2 percent of companies that account for 60 percent of storage spending worldwide.

I was mulling this point over with a few industry friends in Colorado a week or two ago. One fellow, who was recently released from a major storage vendor, was telling me about "channel stuffing" by his former employer. Basically, deals were being made with large resellers to book a lot of orders for arrays that the vendor had no intention of ever filling. The objective was to make quarterly sales numbers look better to the market analysts to simulate the appearance of robust sales for the company's products.Another fellow at the table bemoaned the practice, noting its "ripple effect" on the providers of the components -- disk drives, controllers, etc., that would be integrated into the imaginary frames. According to this fellow -- who worked for one of these parts makers -- the vendors who engaged in channel stuffing actually ordered the component parts to build the boxes earmarked for the pretend consumers all to keep up the appearances of a legitimate order. Six months later, however, the vendor invariably sought to return the unused components to the parts maker, often in their original and unopened crates "to simplify the restocking process."

This kind of churn, the man said, was killing his own company's business model and creating issues for his company's reporting to Wall Street. He felt checkmated, however, since not taking back the parts might cost him a lucrative OEM contract.

Others at the table acknowledged from personal experience that the practice of channel stuffing was not only widespread, but had been going on for as long as any of them could remember. As a merchant might say of his protection payments to the local extortion racketeer, "It is just a price you pay for doing business."

Not having spent a lot of time on the channel side of the industry, I was aghast at these revelations. I thought about WorldCom and others that were caught red handed engaging in similar types of double-dealing. At least Enron's "products" were vapor to begin with, but as nearly as I could tell, channel stuffing by certain large storage manufacturers is actually creating havoc for channel suppliers and helping to drive up the costs of storage overall.

Moreover, despite the cavalier attitude of those at the table with respect to the ethics involved, it struck me as highly illegal under the SEC reporting rules as I understood them. It also left me wondering how long it would be until a Wall Street probe of a major storage vendor would reveal the practice and the storage industry would find itself in the limelight again -- not for its technical innovation, but for corporate malfeasance.I have spoken before in this column and elsewhere about the questionable ethics of storage vendor sales strategies, especially when they are based on out-and-out lies about product capabilities told to technically incompetent buyers in the front office or facilitated by bribes made to business and IT decision-makers. I have further questioned the practice of warranty- or software-based "gag orders" instituted by vendors in their own customer contracts forbidding the disclosure of performance test data by their customers.

Another beef I have with some vendors is the non-transferability clauses that they write into their array software licenses that prevent the customer from being able to sell off his used stuff on eBay once he has no further use for it. Are we buying storage here or boat anchors?

I could add to my list of rants certain other practices, like stating that the gear the vendor is selling has a three- to five-year useful (or investment) life, when in fact the vendor takes the gear off support in 18 months. If the vendor believes that its equipment has a useful life of three to five years, why not support with cards, cables and other componentry -- not to mention service -- for that full period?

And another practice that gripes me is "interoperability certification." Nearly every vendor out there has a partner certification program: the partner's gear is certified to be interoperable with the vendor's gear. Problem is, most of the interoperability testing that is actually done consists of plugging the two components together and checking to see whether the lights blink in sequence. There is no need to "re-certify" the interoperability, even in the face of frequent firmware modifications and upgrades, any of which can lead to serious interoperability problems in the face of standards that aren't really standards, like Fibre Channel. Read the fine print on any of these "certification programs" and you will see that the certification stamp or seal is meaningless: Certification should not be construed as any sort of legally enforceable guarantee that the two products will work and play together in your environment. It is complete and total crappydoo (that's the technical name for it).

In the face of all of these common industry practices, and many others I haven't the time or space to fully explore in this column, I have become circumspect about vesting my faith or trust in just about any storage hardware vendor. You can pretty much tell they are lying, as a Bank of America VP once quipped to me, "When you see their lips move."That's why I have so much time to allocate to smaller start-ups. Like high school football teams in comparison to NFL franchises, many of these companies are much purer in spirit than their established big brothers. And most play for the love of the game.

It should also be said that most startups are not publicly traded, so they do not have to deliver insane growth multiples that Wall Street wants to see from NASDAQ-traded tech companies. They also have innovative ideas that they can push out to market without looking over their shoulder at the downward compatibility requirements of an existing installed base of customers.

What the little guys commonly suffer from, however, is a lack of visibility. Analysts won't cover them because they don't have beaucoup bucks to spend on analyst products, which is another racket unto itself. Many trade pubs won't give them an inch of ink -- despite their vaunted separation of editorial and advertising -- it is common to see more ink going to big buyers of ad pages than smaller firms that lack the budget. And a lot of consumers won't touch their products, ostensibly because they don't want to entrust their data to an untested commodity coming from a vendor that might not exist a year from now.

I would argue that those decision makers who still choose the product of a three-letter acronym vendor -- not because of its technical fit for application requirements, but because of pedigree, stock valuation, or analyst recommendation -- had better start watching their backs. When the levee breaks, and it surely will, and your preferred vendor is shown doing the perp walk to the federal courthouse on CNBC, you may be held accountable for your choices.

Ask yourself this question: If the SEC axe falls on a major player in the industry, what will that mean for the credibility or continued employment of decision-makers who purchased the vendors wares on the premise that nobody ever got fired for buying Brand X?Jon William Toigo, Contributing Editor, Byte and Switch

What's made you want to stuff your storage vendor lately? Write Jon William Toigo

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