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Understanding the Enterprise Storage Market State

Peter Thiel in his book Zero to One describes, perfect competition as both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supplies meet consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products.

A parallel can be drawn between the concept and the recent state of the storage industry, whereas vendors have been selling similar and homogenous products for a long period of time. Product enhancements happened overtime and we can name many of the technologies that permeated the storage ecosystem for the past five to ten years; caching, compression, de-duplication, RAID improvements, bit rot corrections, new protocols and others.

However, vendors such as NetApp, EMC, HDS, IBM and others have been iterating through the same architecture type without major technology advancements. Since the invention of the SAN, a dedicated network that provides access to consolidated block level data storage, everything remained pretty much the same. Even whereas All-Flash arrays arrived on the market, they are just another iteration of the same legacy three-tier and dual controller architecture, replacing slower mediums with a faster mediums. The flash devices themselves are certainly a mammoth innovation.

According to Thiel, innovation on existing products is possible only when the technology factor is at least 10x better than the previous version. It is hard to quantify technology value, but in my opinion none of the technological advancements in the recent enterprise storage industry have provoked a dramatic shift in the way data is stored, accessed or managed. Perhaps, one of the most prevalent changes was the retirement of backup tapes and the adoption of optic and digital mediums to safeguard data; Data Domain largely drove that change. The clearest way to make a 10x improvement is to invent something completely new.

With so many storage vendors producing and selling the same homogeneous products no vendor has real market power, having to sell their products at whatever price the market determines. Under perfect competition no company makes an economic profit.

It’s easy to relate perfect competition to airline, energy or telecommunication companies, but in the past few years it was also easy to notice the increased competition between enterprise storage vendors in an attempt to retain customer base. There have been near zero technology differentiators that could persuade a customer to buy a product from vendor B instead of vendor A. It was down to who can sell better, who has better relationships, who can lower the margins the most, or even who can take a profit hit to retain the customer base. Things started to get pretty ugly.

 

Thiel then describe the opposite, the monopoly.

 

WHEREAS A COMPETITIVE FIRM MUST SELL AT THE MARKET PRICE, A MONOPOLY OWNS IT’S MARKET, SO IT CAN SET ITS OWN PRICES. MONOPOLY IS THE CONDITION OF EVERY SUCCESSFUL BUSINESS.

 

Thiel describes the “good monopoly”, where a firm maintains market dominance via technology and innovation. Apple is a great example, having a complex suite of proprietary technologies and patents, both in hardware and software, which allows them to sell their products at a premium price.

Until not long ago the storage market was in “perfect competition” state, and this is the ideal moment for innovators to bring to market new technologies that leapfrog the current market; bringing differentiated value to customers and a new and more efficient way to do things. That’s why in the last few years we have seen so many new storage startups, companies such as Nutanix, Cohodata, Simplivity, Maxta, Scale Computing, Exablox, Inktank and many others.

Thiel’s view monopoly differs from how traditional economics sees monopoly.

As an example, Nutanix, the company I work for, has monopoly over the yet small and nascent Server SAN market due to better technology, patents and first move advantage, and the history tell us that monopoly businesses replace incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.

 

I conclude with a simple but yet powerful quote from Steve Jobs “Innovation distinguishes between a leader and a follower”.

 

Peter Thiel co-founded PayPal and Palantir, made the first outside investment in Facebook, funded companies like SpaceX and LinkedIn, and started the Thiel Fellowship, which encourages young people to put learning before college. Zero to One: Notes on Startups, or How to Build the Future

 

This article was first published by Andre Leibovici (@andreleibovici) at myvirtualcloud.net.

3 comments

  1. Steve

    “Nutanix, the company I work for, has monopoly over the yet small and nascent Server SAN market due to better technology, patents and first move advantage”

    That’s a bold assertion.

  2. Andre Leibovici

    Hi Steve, there are few researches out there, but here is one from Baird discussing Nutanix market position “Nutanix is the market leader. Nutanix has approximately 50% share of the hyper-converged market”.

    https://baird.bluematrix.com/sellside/EmailDocViewer?encrypt=a6dc4a75-b3ac-45be-a154-48ad7e016adf&mime=pdf&co=Baird&[email protected]&source=mail

    Remember that according to Thiel, monopoly is different that what Economics 101 teach us.

    That said, we know that at any point in time another vendor could leapfrog us, and that’s why we need to keep innovating at a fast pace.

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