Storage service providers: The race is on

Even though the idea of storage service providers (SSPs) is still in its relative infancy, the market potential of the storage as a utility model has caught the attention of customers and investors alike. Case in point is StorageNetworks, Inc.'s initial public offering earlier this month, which saw the price per share rise to $100 its first day on the market.

Whether it was confidence in StorageNetworks itself or in SSPs in general that appealed to investors isn't clear. However, StorageNetworks' impressive debut has to bode well for even its closest competitors.

Fremont, Calif.-based SSP, StorageWay Inc. is one such competitor who closely watched StorageNetworks' entrance into the market. StorageWay officially launched its first product just last month.

Unlike "first generation" storage service providers, whose business model and underlying product architecture were designed for the traditional enterprise data center, StorageWay claims to be the first such company to have designed its offering from the ground up for the substantially different needs of Internet-related businesses and business units says its founder, and current Vice president of Sales and Marketing, Dan Marshall.

At the heart of the new offering is a system architecture and business model StorageWay calls its Organic Storage Model, so named because it is designed to fit organically into an Internet data center co-location infrastructure, as well as organically into businesses or business units being hosted. With prices ranging from $20,000 to $45,000 per managed terabyte per month, StorageWay is undercutting many of its competitors, a move that analysts say will undoubtedly meet with quick response.

Shortly after StorageNetworks' IPO, SearchStorage.com talked with Marshall about the burgeoning SSP market, his company's place in it, and what StorageNetworks' impressive IPO means to the SSP market.

SearchStorage.com:StorageNetworks' IPO went through the roof from an initial range of $17-$19 to an impressive $27 per share. As of today it is trading at $113. Do you think that this is indicative of the recognition by the industry of the storage as a utility model as having enormous potential?

Marshall:StorageNetworks' performance adds a lot of validation to this market space. It's good for companies even as young as us, and it clearly helps the valuation of our company. This is a new market and there's really no history to look back on so people are looking at our business model and it puts us in a leadership position. We've developed a model from the ground up that provides storage management that is matched to the users needs. Internet related businesses have different priorities of storage management than the traditional data center, with scalability being the most profound example.

SearchStorage.com:You say your business model puts you in a leadership position. What defines a leader in the SSP industry?

Marshall:First is the ability to execute on a global level and deliver service level agreements that perfectly match the customers application. The second is the ability to deliver storage services as a utility, which is very different than offering a clever form of financing. Turn-key implementation that allows for shorter implementation cycles for customers, the availability of services through leading co-location providers, strong vendor relationships, and the ability to deliver other value-added services through a technology roadmap.

SearchStorage.com:StorageWay is a very young company having only introduced its first product just last month. For some of dot-com/tech startups it's a simple matter of speed; who can get the funding, infrastructure, customer-base, and product out up and running the fastest. Do you feel that StorageWay is in a race to position itself in a market that is about to explode?

Marshall:We started developing our model in 1999 and launched on June 19 of this year. When StorageNetworks announced their model, we were working on ours. There are a lot of companies out there that announced their SSP models and have had to change them to fit the market. We felt that we needed to have the set up first before we launched our business. Now if a customer calls, we can be setup and installed in one week flat. The difference is that we have no initiative to create our own data centers. We cater to dot-com startups, legacy customers, and Web initiatives out of the Fortune 1000 � "bricks to clicks." Our focus is on the whole net community. Because we have the infrastructure in place, we definitely have an edge in the race. Our product was built with the needs of the IRB (Internet Related Business) in mind. We are the only company that makes storage truly a variable cost item. We see a lot of 36- and 48- month contracts from our competitors, we offer storage truly as a utility, giving the customers options for short term to long term contracts, from 100G Bytes to multiple terabyte installations, and the ability to increase or decrease capacity as the customers usage requirements change. We have a reference base of customers and strong vendor relationships.

SearchStorage.com:There is an increasing number of variations on the SSP model. What type of SSP is StorageWay? What are the other types of storage utility models out there?

Marshall:There's a million SSP's all with a different spin. There are three models. The storage as a utility model, which we feel is "SSP Nirvana." It's the true utility model that offers pay-as-you-go storage without the restrictions of a long-term lease. The utility model is what StorageWay offers. The second SSP model has customers buy equipment and the SSP comes in and manages the storage for them, almost like a management service. And finally there's the private utility model, which leads to a captive customer.

SearchStorage.com:Is the SSP market itself filling up with newcomers or do you think that there's still room to breath as far as competition is concerned?

Marshall:There's a large amount of activity of new companies getting into this space. Analyst groups are predicting $8.15 billion market 2004, up from $10 million last year. It puts [a company as young as us] in a leadership position. It gets even more crowded when the larger companies, like Compaq, get into it. I see companies launching with a staff of eight people. If you're not in the market today, it's going to be a real uphill battle.

SearchStorage.com:Do you plan on going public in the near future?

Marshall:We raised our series A (round of funding) in February from Matrix Partners, Redpoint Ventures and Montreux Equity Partners. We plan some additional private rounds before going public at a time to be determined later.

SearchStorage.com:What factors could make or break an IPO in the SSP industry?

Marshall:A catastrophic change in the growth rate of the Internet, if expected rich media content like media asset management, and digital cinema, etc., don't take off as predicted, or if the SSP market doesn't take off as the industry has predicted.

SearchStorage.com:Will there be a shakeout in the SSP market? If so, what market conditions would force such a shakeout?

Marshall:This is hard to predict because of the large capital investment required to become an SSP and be successful in this space. The market will be dominated by the movers that have established a leadership position. I see the possibility of a lot of newcomers going away because of undercapitalization and because they are late to get into this space. Also, the market is still faced with a shortage of competent human resources required to maintain the SSP global field services, application engineering, and professional services.

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