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Storage deals catching up with vendors?

When has it ever been a better time to be a buyer of storage? New technologies such as SATA and iSCSI are putting pressure on prices in the mid- to low-end of the market. Fierce competition stemming from a market correction and subsequent tech rebound is driving prices lower in the high-end. Storage managers are being more stingy with the dollars they spend. Even if "throwing disk" is your answer to managing the ever-expanding pool of data, it's still much cheaper to do that today than it was just a few years ago.

What has been good for Joe Q. Storage Buyer, may be leading to an erosion in earnings for vendors. Earlier this month Emulex issued a stark warning that fourth-quarter earnings would be much lower than expectations. Emulex was not alone with the bad news. Maxtor reported its second-quarter earnings would miss the mark and that they would lay off roughly 500 employees.

This is the best buying opportunity for customers that I can recall in the past 20 years.
Greg Schulz
Senior analystEvaluator Group
This week, the warnings have rolled in from Veritas and StorageTek. Veritas, the clear leader in the backup software space said second-quarter results will dip sharply below analyst expectations. That news sent the company's stock tumbling 36% in one day -- knocking off more than $3 billion in market capitalization. StorageTek said an unexpected decline in orders in the period's last two weeks will result in "disappointing" second-quarter figures.

To what do we owe all of these warnings? Well, seasonality does play into depressed earnings. Typically, says Bob Abraham, tape industry analyst and founder of Freeman Reports Inc., the middle of the year tends to be soft for earnings.

But, is there a larger trend developing here? Will vendors be forced to hike prices? Not likely, says Greg Schulz, senior analyst at Greenwood Village, Colo.-based Evaluator Group.

"Other than normal inflation-related pricing, or premium pricing for new and special functions, I would look for pricing to remain under continued pressure moving forward," says Schulz. "The vendors, however, need volume to keep their inventories low to keep expenses in line. Look for continued good deals for the foreseeable future, particularly if you are open to competitive offerings and proposals."

Schulz also notes that there is a change in the way vendors are offering products. He is seeing more of a needs-based buying as opposed to buying more than you need. He also notes that these days users have a choice to buy lower cost versions of the same products, with less features. In the past, users would be forced to buy a very expensive product with unnecessary functionality.

What may concern vendors on the losing end of the analyst earnings estimates is that by all accounts, storage budgets are rising. In a recent magazine purchasing intentions survey of more than 600 storage managers, only 16% said they were losing budget year-over-year. A whopping 63% said they would have more than 5% more money to spend compared to 2003's figure.

"This is the best buying opportunity for customers that I can recall in the past 20 years," says Schulz. "A buyer equipped with the right tools (budgeted money, capacity plan or forecast, education about the vendors and products, sense of their own business growth) can make some very prudent acquisitions today to stretch their IT dollars."

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