Zerowait Corporation

Recession fears are mounting, and the bank panic in the UK at Northern Rock followed by the nationalization of the bank creates cause for concern. Some people say the business cycle is dead and other folks seem to say that it has morphed into other places because of securtization, globalization, and government intervention. Inevitably financial fears affect business, and planning in an uncertain market makes all business planning hazardous. How can a rational storage manager plan in these uncertain times?

NBER has recently published a paper which is very interesting and clearly states some of the problems that we are facing .

Banking Panics

Implicit contracts do not necessarily contemplate systemic problems, which may characterize the subprime crisis. There have been at least ten banking panics in U.S. history, but the last one, during the Great Depression, is a dim memory for most people. A banking panic occurred when depositors at banks had reason to believe that their bank held assets of possibly lower value than they had previously believed. Banking panics tended to be a peculiarly American phenomenon because the United States had many banks (because of branching restrictions), resulting in less diversified portfolios than might otherwise have been the case.

Banking panics are not irrational, as Charles Calomiris and I show ⁹. Rather, they are rooted in a lack of information. Panics have tended to happen near business cycle peaks; with a recession coming on, there would indeed be some loans that would not be repaid ¹⁰. Depositors would go to their banks and demand their cash back, because the value of cash is easily determined, unlike the value of bank deposits. But the banking system could not honor these demands, since their loans are illiquid, so redemption was suspended. In fact, suspension was usually illegal, but was tolerated during panics¹¹. The illiquidity of assets, and resulting plummeting prices should these assets be sold, meant that another solution needed to be found.”

The illiquidity does affect the storage business – because enterprise storage is expensive when new capital is costly. NetApp’s sales declines may be a leading indicator from the credit contraction in banking as Reuters says:

Chief Executive Dan Warmenhoven said weaker orders by U.S. financial services clients stung by the credit and mortgage crisis had spread overseas, with large banks including France’s Societe Generale (SOGN.PA: Quote, Profile, Research) cutting back on technology spending. Banks are among NetApp’s largest customers.

“We are less concentrated now, but the problem has spread,” Warmenhoven told Reuters in an interview after company on Wednesday reported fiscal third- quarter results.

“They’re squeezing down all their expense structure internally,” Warmenhoven added. Technology budgets “are on the table.”

NetApp, based in Sunnyvale, California, plans to add jobs in marketing and sales to boost its market share in fast-growing industries such as telecommunications and energy and lessen dependence on banks, Warmenhoven said.

“The strategy going forward is to expand broadly,” he said.

Most folks understand that storage is a horizontal business, but the fear of recession and credit crunch is also horizontal – it affects all business sectors that store information. Therefore growth of new storage products into other sectors which NetApp hopes for may be constrained by broad based economic fears.

Efficient storage management and extended service life are essential ways to maintain staff and infrastructure if we are in a worsening credit and business cycle. Some folks we work with say our business of maintenance, management and monitoring is countercyclical, which may explain one of many reasons that we are growing so quickly.

We are living in interesting times.

A successful business needs to have a clear plan, so that its customers and employees understand the direction the company is going for the long term. Our business is based in the belief that if we provide outstanding service and support to our customers we will earn their trust and our business will grow. Our Network Appliance business is continuing to grow because our customers want a reliable partner who can maintain their equipment for the long term, while NetApp is in the business of forcing their customers to upgrade their products by making new product sales. Our business relies on our ability to help our customers understand our long term vision of a strategic service and support model for their high availability storage equipment.

When NetApp came out with their separate Storevault division a couple of years ago, I thought that it was going to be doomed to failure. How could NetApp concentrate its efforts on two different markets? It just did not make any sense. Respected bloggers like Ben Rockwood thought it was an odd choice also…

StoreVault is to NetApp as LinkSys is to Cisco. NetApp wants this business to be entirely seperate and entirely self-sustaining. Thats why they put up so many brick walls. The diffrence of course is that LinkSys product sells at Fry’s for $100… StoreVault isn’t expensive but you don’t throw $10,000 at a storage solution your unsure about especially when it has a non-refundable policy.

If anyone from StoreVault is reading this… help me help you! Competing against yourselves is fruitless and avoidable.

But NetApp thought they could do it.
June 26, 2006
StoreVault: Storage for Small Businesses
NetApp has created a new division, called StoreVault, to provide storage systems for small and medium businesses (SMBs). The S500 is our first StoreVault system. It’s based on the same Data ONTAP software that we use in our enterprise systems, but with a management interface optimized for SMBs, including simple wizards for the most common tasks. (Pricing starts around $5,000. Maximum capacity 6 TB. Supports iSCSI, Fibre Channel SAN, CIFS and NFS, as well as snapshots and double protecting RAID.)

Enterprise Disease
One challenge of building an SMB product in a company like NetApp is that we focus so much on the requirements of giant enterprise customers, that it would be easy for us to get confused about the needs of small and mid-sized companies. Mid-sized businesses aren’t just stripped down versions of big enterprises. They have their own separate requirements, and simply creating a stripped down version of the standard enterprise solution isn’t good enough. Our CTO calls it “enterprise disease” when people who have spent too much time focusing on giant customers try to design products for smaller ones. We created a separate StoreVault division in part to protect our SMB team against enterprise disease.

Perhaps the market has changed and now it looks like NetApp to allow its SMB resellers to sell its high end Filers against IBM and NetApp sales folks?

February 14, 2008
NetApp Moves StoreVault Back Into Mothership
NetApp will widen the audience for the successful SMB system
By Mary Jander, February 14, 2008, 1:30 PM
Network Appliance is eliminating the boundaries that kept its StoreVault division a distinct entity inside the company.

“Today, StoreVault is focused exclusively on sales to small and medium businesses. We see a bigger opportunity to expand the target for the StoreVault platforms into remote and branch offices as an extension of our core FAS product line,” said Jay Kidd, chief marketing officer at NetApp. “Coupled with our FAS 2000 product, this now gives our NetApp and our channel partners a broader entry product line to sell.”

So this seems to suggest that CDW will now also sell filers.

StoreVault, a Network Appliance Inc. division, has inked a deal with CDW Corporation to sell its StoreVault S500 storage product to customers that buy through Web site and catalog advertising, but StoreVault resellers are concerned that the new deal may affect their selling strategy.

Under the terms of the agreement, CDW will add a new selling component to the StoreVault S500, which will entail advertising the product online as well as through its catalog. Customers can buy directly from CDW, which will not publish the street price of the product in ads to protect StoreVault’s 400 other resellers’ ability to charge in relation to their integration work. Instead pricing is available directly from CDW.

A clear plan requires teamwork and vision, how is this muddled sales and marketing plan for storevault easily explained to NetApp’s resellers, customers or employees? NetApp has at least one employee who sees the value of clarity in corporate vision. Rusty Walther writes. …

(1) Do you understand the vision and strategy of both our company and department, and do you agree with them?

Employees that fundamentally disagree with, or are confused by the strategic direction of a company or team are very easy to recruit away, since the “roots” they need to stay grounded simply don’t exist.

Can he explain strategic direction as exemplified by the storevault roadmap to the rest of us?

Yesterday I was visiting customers of ours around Washington DC. The traffic was bad, the weather deteriorated throughout the day, and I had a great time. It is always refreshing to sit down with customers who bring their colleagues in to meet with me and then allow me listen as they tell their colleagues about how great Zerowait’s service and support is. It almost takes all of the work out of selling when our customers recommend us so highly to their peers : ) . All I have to do in these situations is confirm that what our customer is saying is true, and that makes it a pleasure to be a sales person. It makes me proud of my staff for all of the hard work they do everyday to help customers solve their problems.

My next stop was at a government agency where we talked about network engineering concepts and how to improve storage reporting and create even better trending information than our current exception reporter program is now capable of. Our inventive customers are coming up with some nifty ideas which we will be incorporating into the next version of our monitoring program. Customers always appreciate when we incorporate their ideas into our systems which inevitably makes our service and support better for them. We deliver the services that our customers tell us they need at an affordable price. It makes everyone happy!

My final visit was with a customer that Zerowait introduced to NetApp back in the summer of 2000. Although we introduced the customer to NetApp when we were NetApp resellers and registered service providers , NetApp took the customer direct soon after Zerowait had done the missionary sales work and hosted the customer at NetApp’s Sunnyvale conference center. High Availability Storage remains a small business, reputation is important since everyone knows everyone. We have been working with NetApp equipment since 1998, so it is no surprise that Zerowait has a reputation for long term service and support, and we are working with this customer again after 7 years.

Quality service and support never goes out of style. Our customers understand our direction and dedication to the idea of providing long term affordable quality service and support. So even though the weather yesterday was frightful, causing the traffic to be ugly, I had a great day visiting our customers and friends.

I’ve been thinking about getting a new car and some of my buddies have recommended the Infiniti G35. So I eagerly checked out the specifications, determined what I wanted, and decided to do some price shopping. Logical, right? Easy, right? Uh-huh.

I went to their website www.infiniti.com and ran through it and came up with a couple of close by dealers: Winner Infiniti in Newark, DE and JBA near Baltimore, MD. Since my belief is that it’s a good idea to get a feel for the marketplace before making a purchase of this size, I sent the specification to both dealers and asked for quotes last week. Neither car dealer has provided me pricing yet. Winner won’t even respond to emails or phone calls. Three JBA salespeople have called me, but none will provide me a price. Rachel at JBA told me she would get me a price, but could not get the color I wanted, since they didn’t have it on the lot. I asked, “Does that mean you can’t order it? People used to be able to order cars with different features?” According to Rachel I am unable to order a car from the factory that I would like. If we don’t have it right here, you can’t have it, is their motto, I guess. By the way she has not sent me a price yet either.

What happened to customer service? Why can’t I order a car I want from Infiniti? What is so difficult about providing a price? We hear all the time from customers who are amazed at how quickly Zerowait comes back with a quote for them. They tell us it can take two weeks sometimes to get pricing out of other storage vendors. Has the inability to price items become passe`? Is Zerowait so unique? Is business so good that vendors can afford to just diss their customer quote requests?

I wonder why dealers can’t provide a price quote immediately–for cars or storage. Right now, I wonder what the street price of a G35 is. Can you imagine if NetApp made it this hard to order a filer or parts. Wait– they do! I wonder if Infiniti and NetApp have the same programming team working on their “Quoter” tools.

Did you every get a cell phone call in your car and talk and talk for a while and then wonder how you got to where you were when the phone call was over? It has happened to me, and I think it is pretty common. Sometimes, I have ended up where I expected to be as the phone call ended, sometimes I have been 20 miles past the exit I was supposed to take. I was talking to a customer in person a couple of days ago and were were discussing this and it related directly to the storage world the customer lives in.

When the customer started their conversation with NetApp, a F760 with 1 TB of storage was a lot. Back then NetApp had a road map of how with head swaps they could cheaply and effectively continue to upgrade their systems and storage to grow with customers usage. Back in 1999 the road map seemed pretty reasonable: stay with NetApp and storage was an affordable toll road. But then NetApp changed from Alpha processors to Intel processors with the 800 series and they moved to BCS (520) drives from ZCS(512) drives and moved to the DS14 shelves. None of this had been on the public road map that NetApp showed their customers and upgrading suddenly had additional costs. NetApp told customers that 520 sectors was better and the DS14 shelves would be supported for quite a while. So upgrading sort of made sense. But it seemed the toll road had gotten more expensive suddenly, and the maintenance costs were higher too.

Things were going along pretty well for a while but then NetApp decided to change things up a bit and came out with the DS14 MK2 shelf, which had a wider slot in the disk carrier so customers could not use their DS14mk1 carriers in mk2 shelves. NetApp also decided about this time that 512 sector drives were good again, at least for Nearstore purposes. This left people wondering if they were still on the same road any more. While they were able to look at their newest road maps and see the newest things on the horizon, it seemed to some that the map held no way to get back home anymore. And there were a lot of folks out there who just wanted to keep their old equipment running on the old map.

Zerowait started getting more and more customers who liked the old maps: they were easy to understand and simple to maintain, and the repair parts were readily available from Zerowait.
This is the road map that we provided, a simple, safe road map of maintenance for your old equipment with a low fee and easy to understand helpful folks who were committed to making your trip enjoyable.

NetApp has just shuffled its executive suite, now that they are a big company their road maps are pretty extensive. I hope that they can still find their way to where they are going, because it seems that many of their customers have given up trying to follow the NetApp maps.

We have a little poker game that I play in, the players consist of other technology folks in the area, and we play about once a month. It is not high stakes poker by any means, but we have a lot of fun and talk about our businesses and the economy. Mostly we just laugh a lot as we each joke about bad hands and cards. One of the things that we learned a long time ago in this poker game is that players and cards are much more important then seating arrangements. If you are a good poker player you know what it takes to win a hand, and how far to push when you don’t have the cards. But moving to a new chair has no discernible effect on the outcome of a card game.

NetApp has been playing the same hand now and with the same players for a few years now. And while their technology was new it seemed they could play the hand and with bluffs and some discounting they were able to continue to grow. But it seems that since the Spinnaker purchase in 2002 they have been unable to significantly increase their ability to provide performance gains which are valuable to their customers. So they have been growing on their reputation more than on their abilities to increase performance.

NetApp acquired its clustered storage technology when it bought start-up Spinnaker in 2002. Back then the company said that it would complete the integration of Spinnaker’s clustered file system into its mainstream product line by the end of 2006. The job still is not done, and only very recently the company was talking about completing the integration during 2009. If there are any more delays, customers may worry that NetApp’s efforts to converge its clustered and non-clustered products have totally foundered.

As in poker, moving the executives to new seats should have no affect on the cards they are playing.

Georgens’ new title is president and chief operating officer. In order for him to take that position, NetApp’s former president Tom Mendoza has been moved sideways into the role of vice chairman. The company described that position as a newly created role, in which Mendoza will be ‘chief customer advocate’.

Providing long term value to customers is what is required to keep a company growing. Slicing and dicing software feature sets, and dealing from the bottom of the deck in license transferability with customers seems to have made it harder to get customers to come back to the table for another hand at the NetApp poker table.

About a year ago we learned that the IBM relationship with NetApp was working beautifully and that their efforts focussed on areas where NetApp’s sales force was not engaged. It seemed that IBM was focusing on bringing NetApp sales into the big data centers. From the press articles it seemed like a perfect match.

Mendoza, president of NetApp, said that improving sales through IBM (NYSE:IBM) is not affecting NetApp’s solution providers. “IBM is very focused on what I call white space, which is where we are not covered,” Mendoza said. “For example, state and local government, and retail. So it’s largely incremental for us. They’ve done an excellent job of minimizing conflicts by focusing on where we are not.”

It was interesting to learn last week that IBM is now going to be selling the NetApp line through distribution . After only a year, it seems that the IBM / NetApp relationship may be starting to cause some conflicts.

IBM, Armonk, N.Y., has signed agreements with Ingram Micro, Santa Ana, Calif.; Tech Data, Clearwater, Fla.; and Synnex, Fremont, Calif. under which the three will distribute the N Series products and work with IBM to recruit new solution providers to the line.

IBM’s N Series includes nearly the entire hardware appliance line of NAS and SAN appliances from Network Appliance (NSDQ:NTAP), Sunnyvale, Calif.

Brian McCarthy, president and owner of Sencilo Solutions, a Lake Mary, Fla.-based NetApp solution provider, is not as excited about the new distribution agreement. NetApp has a history of helping IBM and its solution providers win deals that could have gone to NetApp partners instead, McCarthy said. “NetApp allows their reps to partner with IBM,” he said. “When I go to register a deal, NetApp may decline it. And if I ask why, they might say they’re working the deal with IBM.”

IBM’s new distribution deal will only hurt NetApp partners, McCarthy said. “IBM has been very predatory with pricing,” he said.

Is IBM concentrating on ‘white space‘ or their bottom line? Either way, it seems that IBM must have one great discount from NetApp to be able to purchase equipment from NetApp, and still have margin enough to pay distributors, while leaving enough profit for the integrators to make some money as they compete directly with NetApp’s own resellers who have to purchase from Arrow and Avnet. It seems like a very convoluted go to market strategy to me. But it may not make a difference in a few years to the resellers, as this comment made by NetApp’s CEO in Feb,2007 seems to be coming true.

Solution providers who do not take advantage of NetApp run the risk of being left behind as that company continues to grow rapidly, Warmenhoven said. “If that doesn’t happen, you will be a less significant partner of ours,” he said last week. “Let’s scale together.

Is IBM’s move going to provide an incentive to NetApp’s resellers to start scaling up or down in 2008? In a tightening economy will small business people who run many integrators invest in staff training in the NetApp product line? What is the long term reseller strategy of NetApp?

Today the Fed cut its rates as the Politicians in Washington react to the growing credit securitization problems. There are plenty of people pointing fingers at each other, but the reality is that folks need to look to themselves now to see how they can maintain their businesses in these turbulent financial times. According to the Wall Street Journal even Yahoo is under pressure to grow earnings and will lay off employees to try to increase profitability.

Yahoo Inc. expects to cut staff in some areas under a drive to rein in its budget and focus its activities, people familiar with the matter said. The exact extent of any future layoffs at the Sunnyvale, Calif., Internet company isn’t known, though one person familiar with the matter estimated they potentially may affect hundreds of workers. Yahoo expects to finish 2008 with about the same number of workers as it had at the end of 2007 while planning to add staff in some areas deemed priorities, these people said. The company, which has experienced executive turnover and increased competition for selling online advertisements in recent years, now has about 14,000 employees.

According to the Blog of James Burke of NetApp, Yahoo email is run on NetApp filers. As a major customer of NetApp, Yahoo probably gets pretty good prices from NetApp for service, support and systems. But they may be able to save some employees jobs by tightening their budget on NetApp upgrades and software support costs. Are they going to look at cutting their support costs for their filers? I’ll bet their stockholders would appreciate it.

Losing technical support and institutional knowledge is hard on companies and their customers, because when systems go down, often the guy who knows how to fix things is no longer employed. Personally, I have visited many companies over the last few years that have been able to save technical staff positions by cutting their hardware support costs. When budgets get tight are you going to save people and cut back on support costs? Yahoo in the past has not been interested in the options we have provided them. When they contacted me in the past it was to purchase their excess NetApp inventory, not to cut their support costs.

Businesses have to adapt to the economic environment that they are operating in and faced with. Turbulent times are going to see businesses evolve in new ways to meet the challenges they face. I expect to see a lot more companies contact Zerowait as they look to adapt to these business conditions. Like many business people I have 20/20 hindsight, but my forecasting abilities are often myopic. In today’s environment, I will be cautious with our budgets as we grow in 2008.

Imagine what it is like to be a NetApp executive these days. IBM, one of your best business partners, has just purchased another company and seems to be readying to directly compete with you. Your company initiated a legal battle with Sun which has the effect of scaring current and potential customers. HP has publicly announced that it is aiming at your market. Dell, your jilted former partner, has purchased Equallogic to compete for your SMB and Midrange customers. And a friend of yours has been convicted, and is going to be spending some time in the big house. It is certainly a lot to handle.

IBM has purchased IV , an Israeli company that specializes in high availability storage, for about $300 Million. With ownership of this company, it is safe to assume that IBM will compensate its sales representatives better to sell their own product, than the products they resell for NetApp as their margin will be better. As the phrase goes: Salespeople are coin operated. Although this may take a while to gel, expect IBM’s move to cost NetApp sales in the Enterprise glass house where NetApp has relied on IBM’s gravitas as a major lead generator. In 2005 SearchStorage noted that there was no time limit on the IBM – NetApp deal.

“Interestingly, there is no time limit on the OEM deal with NetApp, which raises the question of how long IBM might be willing to sell someone else’s product?”

Sun and NetApp are fighting over patents and it looks like it will be a drawn out affair. This continues to worry IT decision makers: Where should they put their recession limited strategic storage investment dollars? NetApp’s lawsuit may have quite effectively legitimized ZFS in the marketplace. As Chris Mellor has pointed out

“Sun will have its ZFS market profile raised massively and have the opportunity to shift a boatload of ZFS-using Sun storage gear. Schwartz sees this as a win-win situation. Sun cannot back down from NetApp’s initial lawsuit and he’s going to ride the wild surf of the free software movement to help wash away what he and Sun perceive to be NetApp’s castle built on sand.

NetApp on the other hand will be under attack. Competitors will comprehensively rubbish its position and sow fear, uncertainty and doubt among its customers using the questions above and others.”

HP and Dell are also aiming for NetApp’s market position.
According Internet news HP has stated,

“We’re making deeper investments in our core technologies, and we plan to aggressively compete against NetApp,” he added.

When the PolyServe acquisition was first announced, industry observers noted that the technology buy-up would not only make HP a competitor to NetApp but also to heavyweights such as EMS and Hitachi Data Systems.

Even if HP just takes a few percentage points of business from NetApp by bundling storage with their servers it will have an enormous effect on NetApp, by breaking their grip on the market.

Adding to sales and marketing problems is Dell’s purchase of Equallogic. NetApp’s former partner is now a direct competitor. According to SearchStorage.com

“EqualLogic has always considered midrange storage titans EMC, Hewlett-Packard and Network Appliance its main competition.”
.Assuming that Dell packages storage and servers in some of their data center deals in the next few quarters, you can assume there will be an erosion of NetApp’s market share by a few points.

NetApp’s customers are looking for affordable alternatives and there are a lot of them out there now. As Robin Harris says:

“NetApp appears to be the most vulnerable. Their largest customers are ripe for conversion to a more scalable architecture and lower costs. No matter how much NetApp discounts, their costs are higher than commodity hardware. They can fight for a while, but not forever. They have to be competitive and their big customers have to believe they will be competitive.”

And on top of all of this one of NetApp’s old friends, Greg Reyes, has just been sentenced to jail for stock option backdating.

What a way to start a new year.

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2008 is shaping up to be an unusual year. It has been many years since our economy has faced the problems caused by a credit crunch and uncertain monetary policy simultaneously. When combined, these issues may reveal some unintended consequences of the way High Availability storage manufacturers have approached the marketplace over the past few years. Whether we are in a recession or going into a recession, macro economic concerns are causing corporations to cut back on their IT expenses, or at least look into how they can contain costs if they need to in the next few months.

Over the last few days I have been visiting several customers with large storage infrastructures who are concerned by the costs of maintenance and upgrades from the manufacturer of their storage infrastructure. On one visit this week, the storage manager asked me “How can you provide service and support for half of what NetApp charges?” I thought about his question, and answered “Perhaps you should ask your NetApp sales representative how come they charge twice what Zerowait charges?” This customer wants to make certain that his staff can maintain their high availability service levels, while living within the rules imposed by a cost conservation 2008 budget.

The fundamental requirement of a storage infrastructure is that it must provide high availability at a reasonable cost. In good times, the costs of acquisition and maintenance could be justified and amortized over a 2 year or 3 year time frame. When the business cycle turns toward hard times, can you stretch your infrastructure to work for a 4, 5 or 6 year time frame?

If we are in a business downturn, customers may need to partner with vendors that help them maintain their equipment for the long term to conserve their precious financial resources. A company that is basing its revenues on selling new products and ‘sizzle’ may have trouble providing affordable service and support for the long term. The service and support business niche that companies like Zerowait inhabit, is diametrically opposed to the new product sales business. Unit sales businesses often compensate sales representatives with a commission on unit sales goals. Often service and support companies pay compensation on meeting service targets, which are longer term. This longer term view aligns a service company’s interest with companies that look to squeeze strategic value out of their IT infrastructures. Companies pinched by the business cycle in 2008 may look for vendors with a long term business model.

Commission salesman and marketing pros are often looking for quick solutions and catch phrases to find ‘the low hanging fruit’. Tough times will require studious reviews of technical documents and rethinking of storage capacites, ROI time frames, and costs structures. This is hard work. My conclusion after visiting many clients last week is that there are many companies that are staffed with innovative employees, with drive and creativity, which will be able to maintain and grow their storage resources in today’s tumultuous business economy.