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JULY 28, 2003
By Olga Kharif Network Appliance's Early Advantage [Page 2 of 2] REACHING OUT. NetApp is leading the charge in introducing these technologies. In February, it launched its first iSCSI device, even as rival EMC continued with the ongoing development of its own product. "They are probably the most aggressive company in adopting new technologies," says Lehman Brothers analyst Harry Blount. NetApp also should profit from the continued adoption of the Linux operating system, some analysts say. Offering lower costs than many rivals, NetApp already is a key partner for Linux-based storage for database king Oracle (ORCL ). Though it's off to a good start, NetApp has yet to prove its long-term mettle in SAN. Success hinges on tailoring its products to more operating systems, says Goodwin. That's easier said than done. Competitor EMC supports 30 operating systems in more than 200 varieties and spent billions in research and development to get there, says EMC's Hollis. At the moment, NetApp's SAN devices work with about half a dozen different operating systems, and it says it's planning to offer support for more operating systems soon. Even with its product advantages in SAN, some of NetApp's other diversification efforts could be hard to pull off. It has announced it will introduce NAS products priced at under $10,000 this fall, well below its traditional midprice market. Problem is, software giant Microsoft (MSFT ) already works with computer maker Dell (DELL ) to sell devices in this price range. Any budding competition between NetApp and Microsoft could push prices down -– and send NetApp's gross margins perhaps as low as the high-50s, from 68% now, says Daniel Renouard, an analyst with Robert W. Baird & Co. BEYOND WINDOWS. NetApp says it isn't worried. "While this is one of the most competitive markets in technology, we've been able to compete in this environment and take share and remain profitable –- and there's no reason why we can't do the same thing moving forward," says NetApp Chief Financial Officer Steve Gomo. Dell, with strong relationships in the corporate market, is another serious adversary. Yet, NetApp has some things in its favor. Its NAS devices support operating systems other than Windows –- and many corporate systems run on Unix, the Windows alternative. NetApp already has products for some varieties of Unix, though more are needed. Also, NetApp's overall costs for hardware and software would probably come close to those of price-slashing Dell, says Lehman's Blount. Dell, after all, has to pay a licensing fee to Microsoft, while NetApp, whose hardware likely costs more, uses software in-house software. Another concern is increased competition in the NAS market from Dell-partner EMC. In the future, Dell might consider rebranding or reselling more machines from EMC, says Mike Skymba, senior product manager for enterprise storage at Dell, where storage is the fastest-growing business. In February, EMC introduced its Celerra NS600, designed to compete with NetApp in the midprice market. Still, some signs indicate that NetApp might make a go of its bold strategy, particularly when helped by favorable market trends. Storage is a top-three priority for companies, according to Morgan Stanley's May survey of 225 chief information officers. And NetApp is already seeing an more interest for some of its storage products due to new government rules, including requirements that many corporations keep more data, such as e-mail. As NetApp navigates its way in a robust market for storage, interested investors will have to figure out where to jump on board.
 Kharif covers technology for BusinessWeek Online in Portland, Ore. Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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