DELL, MICROSOFT JOIN FORCES IN STORAGE GAMBIT

October 27, 2000

COMMERCIAL NEWS

San Diego, CALIF. — Joe Wilcox reports that Dell Computer and Microsoft entered into a strategic alliance for developing advanced storage systems. The companies revealed few details about their plans, which would pit Dell PowerVault systems and Microsoft’s Windows 2000 operating system against some of the biggest names in storage, including Compaq Computer, EMC and IBM.

The first product, using Dell hardware and Microsoft software, is expected to reach the market during the first half of 2001, the companies said.

The development agreement is Dell’s first major storage announcement since the company established a separate storage division in September.

The collaboration is an extension of both companies’ contribution to Dell’s PowerApp “server appliance” efforts unveiled in April. Server appliances – small, limited-function devices geared for specialized tasks such as email or data storage – are one of the industry’s growth areas, according to market researcher IDC.

Many server appliances, which rely on data stored on servers, run on the Linux or Unix operating systems. The Dell-Microsoft partnership brings Windows 2000 running on standard hardware, such as Intel processors, to the market segment. IDC forecasts the server appliance market will exceed $11 billion by 2004, up from $1 billion in 1999. Market watcher Gartner is more bullish, forecasting $14 billion by 2004.

“There was some question about where Microsoft was in the server appliance space and relative to Windows 2000,” said Bill Veghte, vice president of Microsoft’s embedded appliance platform group. “And this agreement really underscores that Windows 2000 is a great solution for network-attached storage.”

The companies’ next area of attack is entry-level and midrange network-attached storage (NAS) devices. But neither Dell nor Microsoft offered much detail, saying only that a product offering up to 1.5 terabytes of storage consolidation would ship by mid-2001.

Technology Business Research analyst Brooks Gray said the partnership makes sense because the “midrange NAS is going to be a hot market that has the potential to steal business from the midrange SAN (storage area network) market.” Dell’s tried-and-true model of selling for less to gain market share quickly could pay off in that storage segment, he said.

“With Microsoft and Quantum technology satisfying Dell’s low-end NAS product line – up to 1.5 terabytes – I would expect the next area of focus to be in the 1.5-terabyte to 5-terabyte range,” Gray said. “Dell is currently able to achieve that capacity through an OEM agreement with Network Appliance, but that relationship is being phased out. It is a high probability that Dell will form another alliance in the midrange NAS market over the next several months, or possibly make an acquisition.”

The Dell-Microsoft product is expected to begin filling the void vacated by NetApp’s high-speed file servers. Dell plans to stop selling NetApp products because of sales conflicts.

Dell hopes to do with storage what it did with PCs and workstations. Typically the company focuses on standard hardware components and Microsoft software to break into markets where it has negligible market share. Rather than reaping high margins, Dell focuses on moving volume at a lower price than competitors while managing component, manufacturing and distribution costs to pull in profits.

The strategy propelled Dell to the top of the workstation market in less than four years. The company has been trying to recreate this success with servers, specialized products such as server appliances, and now storage.

“You have to break in, get the people comfortable with the products. Pricing would help drive it,” Dell chief financial officer James Schneider said in a recent exclusive interview.

The strategy has paid off in the server arena, Schneider said. “Now we’re No. 2. And in fact, in the U.S. we’re bigger than IBM and (Hewlett-Packard) combined.”

Dell considers the yet-to-be-named product an extension of the PowerVault 705N storage server unveiled in early September. The 705N is not a Dell product but Quantum’s Snap Server 4100.

The NAS servers are expected to complement systems acquired from ConvergeNet in September 1999. The $340 million acquisition thrust Dell full speed into the storage area network (SAN) market. Unlike NAS, in which storage is attached to servers, SANs use high-speed Fibre Channel technology to connect servers and storage devices.

Cahners In-Stat Group forecasts both storage markets to reach $2 billion in sales this year and to exceed $10 billion by 2004.

With their commodity gambit, Dell and Microsoft take on some stiff competition, such as Compaq, EMC and IBM. But Russ Holt, vice president and general manager of Dell’s storage systems group, insists that standardization and lower prices will appeal to customers forced to pay $20,000 or more for network-attached storage.

“Up until now, implementation of network-attached storage has been on proprietary operating systems or proprietary platforms,” he said. “We want to reset the bar in terms of price performance using standard products.”

By focusing on entry-level to midrange systems, Dell and Microsoft hope to tap a market they feel is underserved by storage giant EMC and others. And Dell is willing to play hardball to win market share.

“EMC is probably operating around 60 points of margin, while we are something like 70 percent less than that,” Holt said.

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