Tiny chips that got their big break as components in the iPod Nano almost a decade ago are now shaking up the $65 billion computer-storage market.
Newcomers are taking on EMC Corp. (EMC:US) and other established storage leaders by applying the technology that houses songs in Apple Inc.’s (AAPL:US) tiny music players to corporate computer centers across the world, driven by insatiable demand for data analysis.
It’s called flash memory, named for its ability to speedily access data, and it’s displacing more traditional types of disk-based storage sold by EMC, NetApp Inc. (NTAP:US) and Hewlett-Packard Co. (HPQ:US) Just as Apple was able to make its music player smaller and run longer between charges, companies like Pure Storage Inc., Tegile Systems Inc. and Nimble Storage Inc. are using flash to create systems that are faster and suck less energy.
While EMC, NetApp and Hewlett-Packard are all adopting flash through some combination of acquisitions and internal development, all three are still mostly dependent on older storage technology, which uses spinning magnetic disks and requires more energy and space. Companies such as headphone maker Skullcandy Inc. (SKUL:US) have chosen flash for their data centers because of its speed and efficiency.
“We’d reached the limit of what we could do with spinning disks,” said Brent Allen, director of infrastructure at Skullcandy, which switched to Pure from EMC and NetApp late last year after a product competition.
With its flash system, the Park City, Utah-based company now gets updates eight times a day on customer and market information, up from once with the prior vendors. That enables Skullcandy to respond to changes in consumer demand, Allen said.
“For us, it’s about analytics and getting it as up to date as we can,” said Allen, adding that the higher upfront costs are justified by the dramatic improvement in performance.
As the flash market expands, older storage vendors are struggling to grow. EMC, the largest maker of storage systems, is projected to post sales growth (EMC:US) this year of 5.8 percent, the slowest since 2009, according to data compiled by Bloomberg. NetApp’s revenue is predicted to stagnate in 2014 and Hewlett-Packard’s is on track to decline.
It’s a story that’s playing out across the technology landscape. The trends of cloud, big data and mobile computing are altering the makeup of corporate data centers, opening the way for newcomers and the venture capitalists who fund their research and development efforts.
“The startup ecosystem has more and more become the R&D arm of the industry,” said Matt Howard, a managing partner at Norwest Venture Partners in Palo Alto, California. “A lot of innovation is not coming from the big companies anymore.”
Not that it always works out for the emerging challengers. Flash provider Violin (VMEM:US) Memory Inc. has lost almost two-thirds of its stock market value since its initial public offering last year, a slump that led to the departure of the chief executive officer and head of operations.
Driving the flash migration is an explosion in data and the quest to put it to use more quickly. From 2010 to 2013, the amount of storage installed in company data centers doubled as measured by capacity, according to market researcher IDC Corp.
“There’s a big switch going on in terms of the IT infrastructure,” said Eric Burgener, an analyst at IDC. “The legacy storage technologies that are based around spinning disks cannot meet the performance requirements.”
The history of flash dates back to 1984, when Toshiba Corp. (6502) invented the technology. The chips, which retain data even when a device’s power is switched off, were used in memory cards and other storage media until graduating to wider use as part of the iPod Nano in 2005. Switching to flash allowed Apple to shrink the music player.
Production enhancements have since lowered the cost of the chips and bolstered their storage capabilities to the point where they’ve become viable for data centers.
Pure is doing its part to push the transition. Last month, the 5-year-old company raised $225 million at a valuation of more than $3 billion, tripling in value in eight months. Chief Executive Officer Scott Dietzen said sales surged 700 percent last year, spurred by new customers like the University of South Florida’s health department and Investec Asset Management.
Unlike their larger rivals, which have legacy products that are on the decline, upstarts like Pure don’t have to worry about losing revenue as customers demand new technologies.
“If we were part of one of the big incumbents, they’d want to constrain which markets and which customers we could go after,” Dietzen said. “As an independent, the whole world is our opportunity.”
The market for all-flash appliances like those sold by Pure will jump 59 percent a year to $1.6 billion by 2016, according to IDC. Sales of hybrid systems, which contain flash memory and traditional disks, will climb 21 percent annually over that stretch to $12.3 billion.
The global market for storage systems will increase 3.3 percent to $37.6 billion in 2014 after shrinking last year, according to IDC. The overall market for storage, including hard disk drives, declined 7.3 percent in 2013 to $65.1 billion, according to data compiled by Bloomberg.
Pure’s competitors in the all-flash market include SolidFire Inc., Nimbus Data Systems Inc. and Violin. Nimble Storage, which sold shares to the public last year, and Tegile are among the leaders in the hybrid market.
EMC says it’s already selling products that meet customers’ new needs and is working on others that will put it ahead of the competition. On May 5, the company said it bought flash startup DSSD Inc., following the purchase of ScaleIO Inc. last year and XtremIO Inc. in 2012.
“The challenge is that you’ve got to get on board with the disruption even if you’re cannibalizing your existing business,” said Jeremy Burton, EMC’s head of products and marketing. “We recognized that this thing was coming and got on board early. The market is still early days.”
Executives at NetApp and Hewlett-Packard said they too have been preparing for flash’s arrival. George Kurian, an executive vice president at NetApp, said his company has been using flash memory in products for five years, selling it to cloud service providers. Hewlett-Packard used technology from its 2010 acquisition of 3Par Inc. in designing a system that works with both flash and traditional hard disk storage, said David Scott, senior vice president of storage.
“All of the incumbents have been able to make the investments,” said Scott.
While that may be the case, the traditional vendors are surrounded by a host of new competitors that are forcing them to choose between protecting their old multibillion-dollar storage businesses and focusing on emerging products.
For some older technology providers, the flash trend is most welcome. SanDisk (SNDK:US) Corp. and Micron (MU:US) Technology Inc. sell flash memory chips to smartphone makers and in the form of solid-state drives, or SSDs, for use in data centers. The number of SSDs sold for use in corporate storage will surge 39 percent a year through 2018 after reaching 4.5 million in 2013, according to researcher IHS Inc.
SanDisk is trading at a record and Micron is at a 12-year peak. SanDisk said earlier this month that SSDs now account for more than a quarter of its revenue, up from almost nothing in 2009.
Cloud computing is a big catalyst. Companies like Amazon.com Inc. (AMZN:US) and Google Inc. have been building their own storage systems for several years to support their cloud businesses, which they sell to customers looking to outsource their storage needs. Those companies built many of their systems from scratch with flash storage, cutting out traditional suppliers such as EMC.
“It’s showing up in their numbers,” said Abhey Lamba, an analyst at Mizuho Securities USA Inc. “Data is moving more to the cloud. That’s impacting the traditional vendors.”
Another risk they face is more companies following the do-it-yourself model pioneered by Google, Amazon and Facebook Inc.
The flash upstarts aren’t without challenges. As more of them enter the market, price competition picks up and vendors have to come up with new and clever ways to differentiate their products from the crowd. Fusion-io Inc. has dropped 42 percent in the past year. Nimble gained 62 percent in its market debut in December and has since fallen by about a third.
Pure and its peers will need to make rapid inroads in converting customers to their flash products to take advantage of their early start, because cash-rich rivals are closing in.
Startups “need a four-year advantage to be successful,” said Hewlett-Packard’s Scott. Instead, they had closer to two years, which isn’t enough, he said.
Still, Needham & Co.’s Richard Kugele said the changes coming to the storage market are the most dramatic he’s seen in more than a decade covering the industry.
“The new technology is real and will represent the vast majority of solutions that are going to be sold three to five years from now,” said Kugele. “The question is -- How much of that will be done by the vendors that are supplying them now?”
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