Zerowait Corporation

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.

Over the last few years Zerowait has recommended that customers consider either redeploying their storage infrastructures or redriving their hard-drive carriers rather than just replacing them wholesale with new, larger drives and disk shelves. Our point of view was treated with enthusiasm by our growing NetApp customer base. However, most consultants and columnists treated our opinions with proportionate derision based on the compensation they, or their companies, received from the storage and array OEM’s. Therefore, it came as quite a surprise when an old buddy of mine sent me an article from IDC that contained this statement: “…existing storage infrastructures that normally would have been decommissioned should be redeployed as subsystem components within the storage 3.0 model to protect and extend the useful life of existing storage subsystems …” IDC # 209702 vol1

The message is getting out! Because Zerowait is a specialist in NetApp equipment, with long-term knowledge of the products, we can help customers when they want to maximize their storage without breaking their budget. Regularly, we hear from NetApp users that the OEM, instead of simply selling them a few drives, will only provide them a quote for a new shelf and drives. The problem is that this often causes the filer to exceed its published maximum raw capacity. In other words, this is a subtle way for the OEM to force customers to upgrade their head unit when all they need is some drives.

Zerowait’s customers have learned that we are here to provide them with long term service and support of their storage infrastructures, not to force them to move on up to the latest models. We help them understand what they are being quoted by the manufacturer and recommend ways for them to get the most out of their NetApp storage investment. Often, the OEM sales force recommends a solution that is a long-term, cost-effective solution, but sometimes there are alternatives available simply by redeploying the customer’s own equipment. This is where Zerowait can save the customer a lot of money while maintaining the high availability and reliability they need. As we enter another tumultuous year of expanding storage requirements—and shrinking maintenance and management budgets—customers need to be aware of all of their viable alternatives for storage.

A few weeks ago a NetApp power user who was considering giving his NetApp infrastructure to the grim reaper called us with his problem. NetApp refused to sell the customer 72 GB drives which they needed to provide their Oracle Database the spindle count it needed for performance reasons. Complaints by the customer to his Oracle DBA’s about a lousy Database design were not winning him any friends, and were falling on deaf ears in management. NetApp’s solution was to sell him larger drives. But if he went with bigger drives he would not be able to stay below the Raw capacity limits of his Filer and would therefore need to upgrade the head unit, incurring huge costs. He just wanted some drives! So he began looking at alternate sources for storage of his Oracle DB. In a conversation with one of his peers, he learned about Zerowait. Out of desperation he called us to learn if Zerowait could help him. We told him we have a large stock of refurbished 72GB drives and can ship right away. After a series of questions and answers he wanted to check our references. I provided him with a list of reference customers for him to contact and he said he would.

Subsequently I learned that our customers told him that Zerowait’s folks really care about the details and provide them with excellent follow up on issues. He told me how he was pleasantly surprised by the comments he heard about us and wanted to give us a try. He told me he was recommending to his purchasing folks that they place an order with Zerowait.

We got the order and delivered the product on time and as specified. After a few weeks the new customer wrote me: “NetApp filers are great for databases because you can quickly provision storage, tightly integrate the host and the filer with the SnapManager suite, and change filer parameters to handle different database workloads.” The same customer goes on to say “Zerowait is great because they can provision equipment faster than Network Appliance, procure equipment that means your specific needs, and provide parts at a lower cost than Network Appliance.”

Our customers recognize that Zerowait provides them with a unique blend of NetApp hardware and outstanding high availability service and support. Our commitment to independent high availability service and support is what separates us from resellers and distributors of NetApp’s products. We recognize that NetApp makes great products; our focus is helping our customers maintain them for the long term, and helping these customers get the most value and performance out of their NetApp investments.

Outrage is building in NetApp’s reseller channel as NetApp continues to redefine resellers’ best accounts in an effort to build their own representatives’ sales figures. NetApp acts towards resellers as if they are a missionary sales force working to generate leads and create house accounts for NetApp’s direct representatives, instead of facilitating the reseller’s long term revenue growth. Resellers’ sales forces need to make a living and provide long term value to customers. However, NetApp seems to care more about unit sales and providing sales incentives to promote unit sales than long term service to resellers and their end users.

One reseller was telling me recently that NetApp would not let them quote Software Support only and that they must include hardware support also. I replied that many resellers and NetApp itself provides ‘SSP’ only quotes. I showed him the evidence and he chuckled at recent comments by NetApp that say they are trying to build a new relationships with their channel partners. Resellers know that NetApp seems to change its reseller stance with the tides.
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2001
“The most critical factor for channel success is to have executive support and sponsorship. For example, what we are achieving at Network Appliance is changing the company’s business model, leveraging the channel to move the top line. This requires a change in attitude, affects our corporate culture and requires new processes that will lead to success with our channel partners.”
2002
“… the company is implementing a new pricing model, including lower list prices for commodity products and an across-the-board increase in partner discounts. Our discounts are off gross revenue to encourage partners to not discount off list price,” he said. “We feel they can achieve [discounts] in excess of 20 percent if they don’t drive the street prices down.”
2003
“We always said it was a matter of time, not when we would do it…”

” NetApp’s goals for bringing its appliances through distribution are two-fold: let the distributors take care of administrative details so NetApp can focus on its core business, and use the distributors to expand its business to even more solution providers. Our channel sales are growing three times the rate of the rest of the company,” he said. “We can’t scale without partners.”
2004
“Network Appliance (NSDQ:NTAP) is preparing to offer solution providers customer leads for the first time. Starting Oct. 1, NetApp will provide leads to its channel partners.”… “It’s the first time NetApp has ever done a lead-generation campaign with the channel,” he said. “I’m not sure if I should be proud of this, or embarrassed.”
2005
“The VIP reseller program and initiatives are an important component of the Network Appliance strategy to attract and retain the industry’s top storage-focused resellers…”
2006
“The StoreVault line will have only one sales channel: VARs. ‘This is the only go-to-market vehicle for us,’ Krishnan said. ‘No CDW (NSDQ:CDWC ). No e-tailers.‘”
2007
“StoreVault, a NetApp (NASDAQ: NTAP) division, today announced it is adding CDW Corporation (NASDAQ: CDWC), a leading provider of technology products and services to business”

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In a discussion I had with a NetApp direct customer a few weeks ago I was told
“Our discount structure with NetApp is 40% off Hardware and 65% off Software”. This seems to be quite an aggressive pricing structure and it is more than the discount off list that many resellers seem to be getting. When a vendor provides this type of discount off their list pricing to end users it makes a mockery of the list prices that they publish. One customer recently was quoted software support by a reseller and NetApp and found the pricing difference of almost $20,000.00 . While this is significant in itself, the customer is trying to justify the pricing over a 36 month period and is concerned about the additional “tax” on his 6 TB of data. NetApp is turning into a very expensive storage platform when Software support is added in to his costs.

Robin Harris wraps up some of NetApp’s problems well,

“NetApp needs to focus on their long-term marketing problem: NAS is a commodity. They’ve got 5 years to re-invent themselves for a world of Internet-scale data centers.”

NetApp’s sales management hierarchy historically has taken a very short term, tactical approach to working with resellers. Their pricing, discount structure and history of abrupt changes in channel marketing strategies creates an atmosphere in which resellers are disincentivised to build any strategic customer relationship. Storage is a long term investment for most customers, and creating long term relationships is very important to both resellers and end users. How can a customer make a strategic storage decision when the sales force is concentrating on monthly or quarterly numbers?