Rivals take aim at EMC

When the giant data-storage firm EMC Corp. fell short of revenue expectations for the second quarter, company executives offered a reassuring explanation: Customers were so eager for the new Symmetrix DMX-3 storage systems that EMC hadn't made enough to go around.

That explanation drew a derisive chuckle from Andy Monshaw , general manager of the storage business at EMC archrival IBM Corp. Monshaw pointed out that EMC introduced the Symmetrix back in September, leaving plenty of time to ramp up production. Instead, Monshaw said, EMC's real problem is a revitalized IBM storage business that's beginning to eat EMC's lunch. ``Their business model is deconstructing," said Monshaw. ``All of what we call their profit zones are under attack."

And not just from IBM. Hewlett-Packard Co. is also on the hunt. Sales of the company's EVA line of mid range storage systems were up 46 percent in the second quarter. Meanwhile, EMC's Clariion midrange line saw just a 4 percent increase, largely due to the introduction of an upgraded product halfway through the quarter.

``We're just taking full advantage of that to continue to ramp what we consider is the real sweet spot of the business," said Duncan Campbell, HP's vice president of storage marketing. Indeed, HP on Monday unveiled a new $5,000 entry-level storage array for small- and medium-sized businesses -- the same market that EMC targeted with a new entry-level Clariion last year.

Officials at Hopkinton-based EMC scoff at their rivals' chest thumping. ``We are either number one in every major market we serve, or the fastest growing in every major market we serve," said Mark Lewis, EMC's chief development officer.

Industry statistics generally leave out a large chunk of EMC Clariion systems that are sold under a co branding deal with computer maker Dell Inc., EMC officials say. Factor those in, they say, and EMC is well out in front.

Still, there's not much doubt that EMC's leadership in data storage is being challenged like never before. Doug Chandler , storage analyst at IDC Corp. in Framingham, accepts EMC's claim that a shortage of new products is the reason for the earnings shortfall. But Chandler said, ``I think they're facing tougher competition than they were a few years ago."

Apart from IBM and HP, Chandler cited Network Appliance Inc. and Hitachi Data Systems of Japan as companies that have beefed up their product lines in a bid to grab a larger share of the data-storage market.

These companies are all attracted by a data-storage market that remains strong even as some computer sectors, like desktops and servers, have shown hints of weakness. IDC found that sales of external disk arrays such as those made by EMC were up 10.3 percent in the first quarter of the year, to $4.2 billion.

The high-end portion of the market -- systems priced at $500,000 or more -- grew by 40 percent. Meanwhile, data-storage software sales in the quarter grew by 10.2 percent to $2.4 billion, the 10th straight quarterly double-digit increase.

The surge in demand for storage software appears to vindicate EMC's commitment to derive a third of its revenue from software sales. It's a plan that has driven a series of major acquisitions in recent years, including last month's deal to buy information security software maker RSA Security Inc. of Bedford for $2.1 billion. Many financial analysts questioned whether EMC paid too much for the company.

And some rivals say the EMC acquisition binge has provided them an opening, by distracting EMC executives from their core responsibilities.

Duncan Campbell of HP said he saw the same thing happen when his company absorbed Compaq Computer in 2002.

``That kind of acquisition takes a lot of work," Campbell said. ``You take your eye off the ball."

EMC's Lewis called the quarterly shortfall ``a self-inflicted wound" that's attracted more attention than it merits.

Lewis prefers to talk about some of those ``distracting" acquisitions: VMware Inc., whose software lets server computers run multiple operating systems , has been a major hit for EMC, with revenue up 73 percent last quarter. The acquisitions of Captiva Software Corp. and Documentum Inc. have made EMC a power player in the market for software that manages business documents.

That business grew 79 percent last quarter. In 2004 EMC bought System Management ARTS Inc ., a company whose software allows large companies to manage all the information technology resources on their networks. Revenue for that business doubled last quarter.

It's all part of a plan to take EMC far beyond its core business of building ultra-large digital file cabinets.

``We're definitely still a storage company," said Lewis, ``but we hope to project EMC as an information-centric IT company, not a storage company."

That's fine with EMC's rivals. ``We're more than happy to help them get out of the storage hardware business," said HP's Campbell.

Hiawatha Bray can be reached at bray@globe.com.