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Nibble: Is the Recovery Going to be Worse for Storage Vendors than the Recession?

In looking over the financial reports from hundreds of US storage companies in recent weeks, I couldn't help feeling a sense of unease. Those storage companies which are growing and making money are a rare breed.

Is the IT Recession really over?

Well, apart from some headline basket cases, it seems that way. There are more disk drives being shipped than ever before, and there are plenty of companies with very high revenue growth rates. The only problem is, that almost no one is making any money out of selling computer systems or storage. We're reporting daily on new rounds of VC investments going into storage companies, so that's another sign that the market is on an upward curve. I worry that we could be heading into a kind of doomsday scenario where demand for storage grows, and the amount spent on storage increases but still no one manages to make any profit.

Organizations do crazy things sometimes. In World War I, after years of trench warfare produced no gain in territory, the allies made the cynical calculation that if they continued to pour men into bloody battle at the same rate as the Germans, they would still win the war, simply because they could afford to lose more men.

There are more companies than ever fighting for market share in every product category. That's good for buyers because they can shop around for bargain products which exactly suit their needs. Most startup storage companies are finding that the new, unique product ideas which they thought up two to three years ago when writing their business plans, were also thought of by maybe a dozen or so other companies. And some of those other startups have already been acquired by bigger more established vendors. So the clock to gain market share is ticking.

The lesson of Dell can't be ignored. You can gain market share and be profitable by being the low cost supplier. But most companies haven't got the time to reach profitability, or become the most efficient producer, and will be tempted to use learning curve pricing on its own to crank up their revenue. That will only work as long as their cash keeps flowing.

As the size of the storage market increases, and the prize of winning market share becomes more tempting, there's a growing risk that companies will do crazy things equivalent to sending more troops over the top in WWI. It wasn't worth it then, and it's not worth it now. Managers in storage companies should look hard at what they're doing and start focusing more on profitability than revenue. Otherwise their companies won't have a future.