Several technology and economic trends are making things tough for storage vendors.
Storage as an industry segment isn’t looking too pretty right now. Along with a spate of bad news earnings from established storage vendors, some storage startups are struggling. Fundamental shifts in usage, technology and buying patterns are all occurring at the same time as a serious slowdown in regions such as APAC, and weakness in the energy sector due to low oil prices.
Let’s look at the numbers, which aren’t good in any sense. First, the two giants of the hard drive industry are seriously hurting. Western Digital just reported a 3% drop quarter over quarter, but a whopping 19% shrink from the same quarter last year. Seagate is doing worse: It reported a 19% drop quarter over quarter and 21% year over year.
Enterprise hard drive business, a three-month leading indicator of big box storage trends, is down for both companies, reflecting both the softer market and the migration to solid-state drive. Seagate declined from 9.1 million units in its second quarter last year to 8.1 million in its second quarter this year. WD also dropped a million drives, to 7 million.
The storage box segment isn’t in better shape. The migration away from expensive RAID arrays with high-priced SAS drives is gathering momentum. None of the major storage companies registered a gain for 2015. The fall off is small, about 1% or 2%, and the numbers don’t break out the RAID arrays consistently. Still, with the weak buying pattern last quarter for enterprise drives, we can expect a similar weakness to appear this quarter.
This weakness appears to be systemic. WD's CEO forecast the company's total accessible market (TAM) for this quarter will be 100 million drives, which implies results will be about the same as the 2Q16 quarter that just closed. This may in fact be optimistic, for the following reasons:
- China’s economy continues to weaken. This is having a roll-over effect, especially in the EU, where confidence in the economic recovery from the last recession is notably weaker than in the US
- The decline of oil and gas price points has been rapid and that sector’s IT buying hasn't yet bottomed out
- SSD and flash prices are dropping, which will move business to non-traditional vendors
- RAID array technology is at the end of the road and alternatives are cheaper
- Data compression is gaining customers and offsetting storage buys, possibly for a couple of years.
- The decline of the PC market appears to be speeding up, which will shrink the TAM for desktop drives. In addition, the PC vendors are moving to SSD models to incentivize sales.
- The use of container virtualization will shrink the TAM for servers significantly for all future years, with a potential knock-on effect on storage sales
- With the drive market leading the appliance market by a quarter, this means the impact will roll through the first three quarters of the year or longer.
Finally, the cloud continues having a great deal of success in capturing business away from in-house data centers. With most of the gear for these data centers coming directly from ODMs in China, the migration to the cloud implies a reduction in the TAM for all gear for the traditional big-box storage makers. It has the side effect of cutting the storage industry's total revenue picture dramatically, given the low prices of that gear and the use of commodity drives.
Storage startups stumble
A bunch of storage startups also are experiencing trouble. Some, like Violin, were already struggling, while others are showing signs of serious stress. Panasas, which is heavily invested in the energy sector, has lost 5 top executives in the last month, which is not a positive indicator of good financial results ahead.
Even Tegile, which by all accounts is doing well in terms of sales growth, has retracted into its protective shell, closing down operations in Europe, including a team in the Netherlands that just started a quarter ago. Data Gravity also reportedly trimmed staff. On the other hand, startups like Pure Storage are in a good financial and market position to get through this rough patch.
Altogether, all signs are pointing to a harsh year in storage. With containers reinvigorating older gear, we may see a slump in demand. The Internet of Things appears to be behind schedule and there are no other big boosts for storage demand that might offset compression technology reducing raw capacity demand.
This year will see some serious fallout in the storage industry. Companies will sell their IP, be acquired and, like EMC, merged. There will be fewer storage hardware vendors at the end of the year and a lot of market share redistribution. ODM-branded product will, I predict, be the segment showing significant growth, and that will come at a cost to traditional vendors. One bright part of the picture: Prices will fall as demand creates a sharper sense of competition. The customer will get some great bargains this year. Cloud storage will be so cheap that proclaiming, “Tape is dead” may actually ring true!