Outside of mobile phones, it's tough to think of a big tech hardware field that has seen changes on the scale that enterprise storage has witnessed over the last decade.
An industry whose sales once revolved around a relatively limited number of systems respectively aimed at large enterprises and small/mid-sized businesses, and which was dominated by a handful of big players, has evolved to one in which a much wider variety of hardware and software architectures are actively used. And in which the number of meaningful players has swelled.
One only has to look at research firm IDC's recent sales estimates to see how the landscape is changing. After having risen by just 2.9% annually in Q2 and declining fractionally in Q1, IDC thinks total spending on enterprise storage systems grew 14% in Q3 to $11.77 billion, as an Intel Corp. (INTC) server CPU refresh lifted depressed corporate sales (for now) and capital spending by cloud giants remained strong. But less 10% of this revenue growth went to the industry's 5 biggest players, and their combined share fell to 54.9% from 59.1% a year earlier.
In Q2, ahead of the Intel refresh, the top 5 vendors saw their combined storage revenue drop by nearly $1 billion to $5.8 billion. Their combined share fell to 54% from 64.9% a year earlier.
IDC thinks Hewlett Packard Enterprise Co. (HPE) , the industry's biggest player, saw its share drop by 2.9 percentage points in Q3 to 20.2%, and by 3.7 percentage points in Q2 to 20.1%. The declines would be larger if not for HPE's $1 billion April purchase of midmarket flash and hybrid storage array vendor Nimble Storage, which did $322 million in product sales during its last full fiscal year as an independent firm.
No. 2 player Dell, which in 2016 acquired storage giant EMC, is estimated by IDC to have seen its share drop by 2.3 percentage points in Q3 to 18.8%. In Q2, when the corporate sales that Dell/EMC rely on were weaker, its share fell 7.5 percentage points to 18.4%.
IBM Corp. (IBM) and Hitachi, who were tied at #4 in Q3, have also been losing share. Last quarter, their combined share fell to 8.3% from 9.6% a year ago. No. 3 player NetApp Inc. (NTAP) , which is a couple weeks removed from posting a strong October quarter report and upbeat guidance, has been faring better: Its share rose 0.3 percentage points in Q3 to 6%.
But the lion's share of industry growth has gone to a group of vendors IDC refers to as "ODM Direct." They consist of contract manufacturers (many based out of Taiwan) that supply modular, low-power servers with integrated storage to third parties -- to a large degree, cloud giants such as Alphabet/Google (GOOGL) , Facebook (FB) , Amazon (AMZN) and Microsoft (MSFT) .
The designs and specs for these systems are typically created by the cloud giants themselves, in some cases for open-source initiatives such as the Facebook-spawned Open Compute Project. The systems are deployed within giant data centers relying on hyperconverged architectures that allow thousands of server/storage systems to be pooled and jointly managed, with admins able to quickly add new hardware nodes as needed.
In addition, smaller independent storage vendors have been collectively gaining ground. IDC thinks everyone outside of the top-5 and ODM Direct had 24% of the market in Q3 and 22.7% in Q2, up from 23.8% and 21.3% a year earlier. The group's share are likely larger if one backs out some traditional enterprise players that have been losing share, such as Oracle Corp. (ORCL) .
Clearly, the preference among cloud giants to rely on their own server/storage designs is a big headwind for old-guard storage vendors, especially as more and more enterprise workloads move to cloud infrastructures. But it also isn't helping that enterprises are also embracing distributed server/storage systems. While incumbent players claim a big piece of this pie, there's more competition here overall than there is for traditional external storage systems, and -- due to the fact that many of these systems rely on commodity hardware -- margins are often lower.
Hyperconverged solutions, offered to enterprises by the likes of HPE and Cisco (CSCO) as well as upstarts such as Nutanix Inc. (NTNX) , are one piece of the pie. Nutanix's shares rose nearly 10% on Dec. 1 after the company beat estimates on the back of 46% revenue growth and 32% billings growth, and also issued strong guidance.
The growing popularity of object storage -- an approach to storage that does away with traditional file systems and folders (like the ones within PC operating systems) in favor of a distributed pool of storage "objects," are another factor. Object storage typically relies on clusters of commodity servers (potentially, but not necessarily, hyperconverged systems) rather than proprietary storage arrays. IBM bought object storage hardware/software firm Cleversafe for $1.3 billion in 2015, and has since reported seeing strong demand for its object storage lineup.
Then there's the rising adoption of software platforms that in one form or another can pool the storage resources of many servers and let them be jointly managed/accessed. Dell EMC directly offers one such solution (called ScaleIO), and its VMware Inc. (VMW) unit offers another (called vSAN) meant for use with VMware server virtualization software. But open-source platforms such as Gluster and Ceph -- both are backed by Red Hat Inc. (RHT) -- are also gaining followings.
Also: The traditional storage system market's shift away from hard drive-based systems to flash memory-based systems (all-flash arrays, or AFAs) has caused a measure of disruption. While the likes of HPE, Dell EMC and IBM are major players in this space, so are upstarts such as Pure Storage Inc. (PSTG) and Western Digital Corp.'s (WDC) recently-acquired Tegile Systems unit. Pure's sales rose 41% annually in its October quarter to $278 million.
Finally, NetApp's turnaround -- fueled by strong demand for its AFAs and clustered network storage offerings, as well as innovative software for jointly managing local and cloud storage -- has become a headache for old-guard peers. NetApp's product sales rose 14% during its October quarter to $807 million.
NetApp's focus on storage, and storage only, is helping it hold its ground in a tough and rapidly-changing industry environment. But many of its more diversified traditional rivals are facing tougher sledding.