Mini-mill phenomenon in Enterprise Storage sector

"Disruption is a theory : a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances. These forces almost always topple industry leaders when an attacker has harnessed them because disruptive strategies are predicated on competitors doing what is in their best and most urgent interest : satisfying their most important customers and investing where profits are most attractive. In a profit-seeking world, this is a safe bet." - The Innovator's Solution: Creating and Sustaining Successful Growth, by Michael E Raynor and Clayton M. Christensen

   Clayton M. Christensen in his all-time business classic named Innovator's Dilemma narrated how mini steel plants (called minimills) brought disruption in the US Steel market between 60s and 90s and pushed the established large Integrated steel mills out of business. It is a classic case of incumbents pursuing the path of higher profitability ceding the low-profitability space to new entrants and in turn helping the new entrant to get better in operation and finding the opportunity to replace the incumbent from more premium segments. 

Backblaze's comparison

The question is whether the similar pattern can happen in the storage industry. 
 But steel was commodity, you argue and storage system is not. Buyers know that EMC, NetApp, IBM, HP storage servers are expensive but IT managers buy them for the vendors guarantee for the system's reliability, features and the performance. While that argument does hold good, there were few who tried to build a business, the success of which were critically dependent on the cost of storage and they were astonished to find that they could bring down the cost by a magnitude if they built the entire system on their own.  Backblaze in 2009 published their finding of how much cost saving they could bring by building their own storage.  But Backblaze had a specific need and they had to develop/customize whole range of software to make their hardware useful for their business. Their chart shows that, even with all those R&D cost, they still managed to keep the cost of storage quite close to barebone disks. You may argue that  this could be a special case and it hardly proves the rule. 

Well, it wouldn't, had it been a single case. Gartner and other analysts have predicted that most enterprises will have cloud storage in their setup in next 3-4 years. When they talk about Cloud storage, they primarily mean the specific way of accessing and organizing storage, which is different from traditional methods of storage access, like NFS, CIFS or fibre-channel based block storage i.e. SAN. Beside renting storage from public cloud vendors e.g. Amazon, rackspace, enterprises may decide to build their own cloud infrastructure, especially if they have large user-base. Just like the PC hardware got freed from the clutch of IBM, HP and became commoditized at the hands of Taiwanese and Chinese ODMs few decades ago, storage server hardware is showing distinct signal of getting commoditized at the hands of Taiwanese ODMs like Quanta, Wistron.

Fact is, almost all enterprise storage vendors at present outsource their hardware manufacturing to ODMs in Taiwan [Quanta etc] or China [ where Jabil has a very large manufacturing base]. Traditionally storage OEMs have claimed to make their differentiation in their software. Now thanks to Open source movement, there are some proven solutions which can run on commoditized hardware. What prevents these enterprises to approach directly the ODM's for getting the customized hardware at cheap price?

Mike Yang, VP and GM for Quanta's
Cloud computing Business

 Nancy Gohring's recent article in IT World is an interesting read. She reports how Quanta has built itself as the vendor for data centre's customized hardware. Quanta, traditionally an ODM for server OEMs like Dell, HP is seen to be selling directly to the large-scale cloud providers after their first success story with Facebook around  five years ago. 

EE Times article tells how likes of Facebook, Google found viable alternative to likes of IBM, EMC, NetApp in Quanta and how Quanta recognized the opportunity to expand itself as the customized hardware vendor for big data centres. Facebook's need was to find a source for large number of low-cost hardware customised for their huge data centre. Clearly branded storage servers were found to be too costly and a little inflexible for them to sustain their business model. So they followed what other cloud providers like Rackspace, Google did. They approached the ODM, who have been supplying the unbranded hardware to the storage/server OEMs, and brought down their hardware cost drastically. The advantage that Facebook, Google or Rackspace have is that their unique model of services are driven entirely with software and they have a very strong software team who just needs powerful hardware [which ODM's manufactured based on customized design from Facebook] for their software to run. The necessary question is: does one need as big a data centres as the ones that Amazon, Rackspace have to justify the risk of taking this approach against the cost advantage that one gains. 
There are reports that second tier of cloud providers have already adopted this strategy of going directly to the ODMs for their hardware. Check this recent EE times article if you need reference.

Present Scenario

Future Scenario

Of course the cloud providers do not represent the general enterprise buyers who are the customer-base for enterprise storage/server vendors. Enterprises may be tempted but will never have the man-power or the risk-appetite to justify overhauling their existing IT setup..unless it becomes so cost-effective in the long run that they will be forced by their stakeholders [ It seems that Goldman Sach also bought hardware directly from quanta bypassing brands like Dell, HP ]. Remember, how virtualization swept every enterprise and forced every IT setup to adopt virtualization? Adopting public cloud could become a similar sweeping wave in next few years once the competition between Amazon, Rackspace, Google and second tier of Cloud providers flare up. Gartner says that Cloud and CRM will constitute large component in enterprise software spending in next two years. "It's very clear that mature regions like North America, Western Europe are focusing on public cloud computing, while emerging regions are focusing on private cloud computing," said Ms. Swineheart from Gartner during a recent press meet. Salesforce [leading CRM SAAS provider] already expanded their infrastructure anticipating larger customer acquisition. So one can reasonably expect that further expansion of Cloud infrastructure will reduce the revenue for storage OEMs and expand growth of Taiwanese commodity hardware ODMs like Quanta. All storage OEMs may not immediately see a revenue reduction since overall growth of enterprise IT expenditure will adequately compensate in absolute terms. Also following Clayton M. Christensen's conjecture, established players will find it unprofitable to compete with Quanta and instead focus on high-value customers who are too paranoid to try out commodity hardware. That will improve their profit margin and push their stock price, assuming there is enough growth in that segment. The pattern will continue till commodity hardware become baked enough to compete against branded hardware. Facebook's Open compute project can accelerate the process for a open standardized hardware design that people can use for enterprise servers.
However for the trend to be disruptive enough for the existing storage OEMs, enterprises need a viable ready-made software solution, an open source server software which can run on these commodity hardware which can directly be inducted, to data centres, like a HP or Dell server.  And that is one challenge that we do not have clear answer yet. While Rackspace sponsored openstack is becoming a strong contender for opensource software for cloud providers, it has some miles to go before standard-track enterprises can adopt it for their private cloud setup. But once they mature, OpenCompute certified commodity hardware with Openstack software could become a formidable entity to start the domino effect of disruption for the enterprise storage sector. Like enterprises running mainframes,  NAS and SAN will continue to exist in enterprise IT but major growth will be in cloud infrastructure.
  As Clayton M. Christensen explained, the disruptive solution always comes first as inferior alternative to existing solution and appeals to Niche buyers, in this case large scale cloud providers. But as the time goes opportunity pushes further innovations and soon the Industry gets a credible alternative to existing products at much lower cost-point at every customer segment. And when that happens Industry shifts to new structure quite fast creating new leaders of the Industry. That is how EMC became storage leader earlier pushing costly IBM servers. That is how Nucor became the leader riding on mini-mill disruption in US steel industry. Commodity enterprise hardware and open stack software have the potential to bring the mini-mill effect in enterprise storage sector but whether we will see a new leader in place of EMC depends on which path incumbents take. High tech software sectors are lot more connected compared to what steel Industry was in 70s-80s. EMC is in fact in the board of Openstack and so there are chances that incumbents will see the long-term pattern quite ahead and change themselves to survive the disruption force.