Storage Services Surge

Two providers -- one with new funding and another with new services -- are demonstrating further evidence of positive growth in the resurgent market for outsourced storage services.

First, Arsenal Digital Solutions Worldwide Inc. secured $15 million in funding from Wells Fargo Foothill, pushing the data-protection provider's haul above $100 million (see Arsenal Closes $15M Debt Facility). Also today, Time Warner Cable announced a new disaster-recovery service targeting business customers (see Time Warner Cable Offers Ethernet, Storage).

Arsenal's move represents a different take on startup financing. Unlike big VCs, Wells Fargo Foothill, a subsidiary of Wells Fargo & Company, will essentially extend Arsenal a $15 million line of credit and take only a small equity stake in the company.

This approach has a number of advantages, according to company sources. First, it gives the company more flexibility to use the funds as it sees fit, which at this point could be new services, international expansion, or even acquisition -- none of which the company has ruled out.

The financing also comes at a good price and establishes a relationship with a large bank that could help the company down the road. Perhaps more importantly, though, it validates Arsenal's business model and growth plan because debt financers such as Wells Fargo Foothill only consider established companies with strong potential, says Steven Horan, CFO of Arsenal."Fifteen million is considered a small deal for them," says Horan. "They're looking for later-stage companies that are more mature."

Though he would not disclose revenue figures, Horan cites a customer base of 850 and a data-processing load of 500 Tbytes per month among all of its service partners.

However, much of the market's hopes seem pinned on growth potential rather current bottom lines. Gartner Inc. estimates the storage services market at a just few hundred million dollars today.

"None of these guys are huge," says Adam Couture, principal analyst at Gartner. The biggest player in this space had services revenue of roughly $20 million in 2004, he notes.

Meanwhile, providers are clamoring for storage business, primarily for online backup services (see Online Backup Booming). Basic data protection remains the bread-and-butter need for companies big and small, says Couture."There's always been demand there," he says. "Backup is an onerous task and no one wants to do it."

It's no surprise, he adds, that the survivors of the storage service provider (SSP) market implosion, such as Arsenal and ManagedStorage International Inc. (MSI), are those that specialize in data protection.

Time Warner Cable's expansion into storage services adds to the increased interest in this area from large providers (see Telco Storage Heats Up and KPN Selects Connected, EMC ). Using technology from Nortel Networks Ltd. (NYSE/Toronto: NT), Time Warner Cable will provide disaster-recovery services for business customers in New York and New Jersey through its existing cable and Road Runner networks. The new storage service targets systems with Escon, Ficon, Fibre Channel, IP, and Ethernet connectivity.

Brett Mendel, Senior Analyst, Byte and Switch Insider