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Storage VARs looking forward to strong 2007

Last quarter was good to VARs selling storage; 2007 looks to be even better.

Storage resellers are, if not giddy, certainly very pleased about the revenue they've been pulling in over the last quarter or two. In the third calendar quarter of this year, nearly 40% above expected revenue, and most believe that the fourth quarter, as well as 2007 as a whole, will continue to show positive returns.

These findings, from a recent report by Milwaukee-based financial advisory and market research firm Robert W. Baird & Co., are just a few indicators that the storage market remains strong for most VARs, both in North America and in Europe.

Next year also looks strong, with resellers generally expecting revenue for 2007 to improve over 2006, taking it to its highest level since the first quarter of 2005, year over year, the report noted.

Part of the reason for the positive outlook might be due to dual trends of less pricing pressure on servers and storage systems, according to the report. The report noted that storage systems experienced significant declines relative to previous quarters.

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There seems to be a lot more parity in the server marketplace, according to Rich Boccinfuso, chief technology officer of MTI Technology Inc. in Irvine, Calif. "The guys who were demanding premiums realized they needed better parity with the lower-end providers," he said.

That's certainly true of HP, the server vendor on which Phoenix, Ariz.-based IT Partners has standardized.

"We haven't been losing too many deals price-wise on our HP servers. They have been aggressively pursuing Dell and IBM and not wanting to lose deals," according to Bill Cassidy, vice president of technology for IT Partners. "That's important to our profits because servers are becoming an increasingly important driver in the fight to increase revenues, so pricing is critical."

The same generally is true of pricing on storage systems.

"Pricing is so deal-driven that it's hard to say whether prices have eased, but we haven't gotten any push back from vendors saying they can't get to a particular discount level. We still have plenty of flexibility on pricing, and we are definitely not seeing any increases," Cassidy said.

Hot technologies

iSCSI is on the rise as well. The report noted that slightly more than half of the resellers surveyed saw either strong or moderate demand for iSCSI storage systems, due to increased demand by small and midsized businesses. Of the VARs contacted by, most indicated that at least 50% are considering iSCSI in some form.

The market for iSCSI, however, is taking its time in ramping up.

"I would have thought this would have been a bigger year for iSCSI. It's been the year of iSCSI for three years in a row now," Cassidy said.

But the time is coming, he acknowledged.

"When a vendor as disk-abusive as VMware announces support for iSCSI as a target option for storing virtualized disk files, that says something. We perceive it as customers telling them they want iSCSI as an option," Cassidy said.

Now that all of the major vendors have announced support, the last hurdle before it takes off is 10 Gigabit Ethernet (GigE), Boccinfuso predicts. "Once we see 10 GigE as pervasive technology, we'll see more iSCSI," he said.

Storage encryption also is coming into its own, according to the R.W. Baird report. The survey noted that about one-third of the resellers surveyed indicated either moderate or strong demand for storage encryption to enhance enterprise-wide security.

Although storage encryption may someday be a big revenue-producer, it's taking its sweet time, Holloway said.

"It's where iSCSI was four years ago. People are asking for it, but not really buying it yet. We're starting to see some questions about it from our mid-range customers, but I haven't sold one yet."

Although it's ramping up slowly, there is no doubt that storage encryption is getting hotter, Zammet added.

"I've been trying to pitch it from many angles for several years and for a long time, nobody was buying. Now it's more timely, and people are willing to listen," he said.

The key to successful storage encryption sales is to pitch it to top executives, not to IT managers, according to John Zammet, president of HorizonTek Inc., a Huntington, NY-based VAR.

"If something happens, it's the people at the top who will care," said Zammet, who plans to put a lot of energy into the market for storage encryption and expects to see significant growth during 2007

Not surprisingly, the report also detailed the dramatic impact of VMware, a virtual infrastructure increasingly used in the storage world. Resellers indicated that their customer bases are currently 23% penetrated by VMware, with the penetration rate expected to reach 45% within two years.

Some resellers, however, indicate that the number is much higher.

Dave Holloway, executive vice president of West Coast Technology in Aliso Viejo, Calif. said that up to 90% of the company's customers ask about VMware; Cassidy said VMware is his company's No. 2 IT partner, lagging behind only HP. "I can't think of a handful of customers that aren't either on the edge of the virtualization concept or fully bought in," he said.

Although the technology clearly is hot -- Boccinfuso expects that up to 70% of his customers have expressed interest in it -- he's not sure it will live up to that potential, given Microsoft's impact on many accounts.

"We're starting to see the point where the low-hanging fruit might all be picked, so it will require a little bit more strategic positioning to get VMware to the next level," he said.

"It's the Netscape effect. Better technology doesn't always win," Boccinfuso said. "Customers have leveraged VMware to fix inadequacies in the Microsoft operating system, but Microsoft has responded by pushing Microsoft Virtual Server. We all have to realize that Microsoft isn't going to play fair. They own the operating system sitting on top of VMware, so there will be a battle."

Finally, the R.W. Baird report surveyed resellers for their top vendor partner picks. According to the report, storage vendors continue to jockey for position, and standings have changed during the past year. The most notable increase was by HP.

Of all vendors, HP was most likely to be above plan for Q3 and was the most improved vendor in terms of servers, the second most improved in storage, and the second most improved in plans for 2007.

Sun Microsystems and Dell generally received poor scores, although the report noted that Sun has made some gains recently. Resellers rated Cisco, HP, NetApp and IBM as the best performers. EMC, Hitachi, Veritas, Lenovo and CommVault scored in the midrange.

The response from resellers contacted by is mixed.

NetApp produced the most changes in affiliation.

IT Partners moving away from a multiyear relationship with NetApp this year, while HorizonTek moved away from EMC in favor of NetApp.

Interestingly, IT Partners' reason for discontinuing its relationship with NetApp involved its relationship with the channel — exactly the reason HorizonTek hooked up with the company.

"NetApp is doing a very good job of keeping me happy. They care if we make money, they bring us deals, and they nurture us," Zammet said.

Other vendors popular with VARs contacted by include HP, IBM, QLogic, Xyratex, EqualLogic, StoneFly, Overland Storage, Quantum and LeftHand Networks.

Distributor numbers

R.W. Baird also released results from its Q3 2006 distributor survey. The report indicated that more than 80% of distributors are above plan for Q3 and expected a strong fourth quarter and 2007. Favored vendors included Seagate, Western Digital and Samsung, with Hitachi receiving relatively poor ratings.

The report also noted that the mobile market is likely to remain contentious over the next year, with fierce competition expected.

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