StorageTek, HP Deal on Tape

Storage Technology Corp. (StorageTek) (NYSE: STK), which watched a major tape library arrangement from the sidelines in June, is close to winning a deal with Hewlett-Packard Co. (NYSE: HPQ) to sell its new midrange library.

Sources say a deal is imminent for HP to resell StorageTek's SL500 library, and another deal for the enterprise SL8500 library might not be far behind. Neither HP nor StorageTek will confirm the arrangement, but one source says HP has already told customers of its plan to offer the SL500 in between its smaller midrange library from Overland Storage Inc. (Nasdaq: OVRL) and enterprise library from Quantum Corp. (NYSE: DSS).

"HP is telling customers they will bring the SL500 in beneath the Quantum line, but well above Overland," says a source with knowledge of HP's plan. "Then over time, we suspect they will replace the high-end Quantum system with the SL8500."

StorageTek rival Advanced Digital Information Corp. (Nasdaq: ADIC) grabbed a reseller deal with EMC Corp. (NYSE: EMC) for its enterprise libary in June (see EMC to Resell ADIC Tape). StorageTek executives, along with other industry folks, thought StorageTek would have been a better fit for EMC, because it has a stronger enterprise product line than ADIC (see StorageTek Lauds EMC-ADIC Deal ). However, HP pushes tape more aggressively than does EMC, which had been a tape naysayer until signing ADIC.

StorageTek rolled out the SL8500 and SL500 earlier this year. The SL8500, which started shipping in June, can hold 300,000 cartridge slots in a single system (see StorageTek's Incredible Bulk and StorageTek Streamlines Tape Library). The SL500, which recently started shipping, holds up to 577 cartridges (see StorageTek Slings SL500). StorageTek is banking on the new libraries reviving its sluggish tape sales (see StorageTek Decries IT Spending).However, the new libraries aren't the only drivers behind the HP deal. HP was one of StorageTek's OEMs until it merged with Compaq in 2001. After the merger, former Compaq executives ran HP's storage (see HP Names Storage Chief and HP Lays Out Storage Roadmap). One source says the Compaq vets preferred Overland a Compaq OEM – at the expense of StorageTek. Now that the Compaq influence has waned due to departures, StorageTek is back in favor at HP.

How big is the deal? Goldman Sachs & Co. analyst Laura Conigliaro estimates the midrange library deal could be worth $100 million to $150 million in revenue for StorageTek next year. However, she stresses that estimate could change once all the details are revealed.

"We believe StorageTek will likely replace Quantum as one of HP's new tape storage providers for HP's midrange offering," Conigliaro wrote in a research note Thursday. "Since the potential partnership has not been made public and the specifics are not known, we can only guess as to the magnitude."

Sources agree the deal would be worth less for StorageTek next year than the approximate $160 million that Quantum gets through HP. The SL500 will overlap with other products HP sells, and it uses a higher mix of cheaper LTO tape than Quantum, which sells SDLT tape.

— Dave Raffo, Senior Editor, Byte and Switch0