Hitachi Ltd. and IBM recently announced a joint venture (JV) that will combine hard disk drive (HDD) research, development, manufacturing, and related sales/marketing (Hitachi will initially own 70% of the JV).

Of more strategic significance, the two companies also formed a storage systems alliance to develop standards-based (e.g., the Common Information Model [CIM]) storage software and components for future storage systems and solutions, taking IBM's block-based "in-band" approach to storage virtualization. We believe IBM will concentrate more of its efforts on critical storage management software (the alliance), while Hitachi focuses more on hardware (the JV).

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Situation analysis: The IBM/Hitachi JV agreement marks IBM's exit from the highly competitive HDD market, where it has fallen behind the market leaders (e.g., Quantum, Seagate) during the past two years. Although IBM currently stands firmly behind its flagship Enterprise Storage Server array subsystem (a.k.a. "Shark"), we believe that, during the next 12-18 months, competitive market realities will force the JV to expand beyond the base hardware component level to include the controller subsystem. Fundamentally, we believe that without a competitive storage subsystem platform, selling robust storage management software (the real business value) becomes almost impossible. Sharing a robust common controller base will eliminate counterproductive intercompany hardware competition, drive more standardization, and enable IBM to focus on solving users' strategic, increasingly critical pain point: heterogeneous enterprise storage management.

This will soon leave three primary high-end storage hardware vendors: Hitachi (OEMing to IBM, HP, and Sun), Compaq, and EMC. While HDS/IBM will be EMC's major competitor at the storage system level, ironically, the JV promises to add a competitive alternative to EMC's main HDD supplier (Seagate)--reducing its supplier dependency and, ultimately, its costs. We expect the new HP/Compaq entity to maintain its current dominant midtier market share (with the Dell/EMC partnership claiming a strong second), and it is beginning to attack high-end enterprise storage as well.

The JV will also help Hitachi/IBM establish critical mass efficiency in the HDD market, with systems vendors Hitachi Data Systems (HDS), IBM, HP, and Sun as "captive" customers for its drives. IBM also benefits, exiting the money-losing, commodity HDD business to focus on developing and delivering real business value in robust heterogeneous storage management.

Near term (2002), we do not believe this Hitachi/IBM partnership will have any impact on the storage systems market. All major storage hardware vendors (e.g., Hitachi, IBM, Compaq, EMC) are expected to introduce significant systems enhancements during the next 12 months that will be unaffected by the Hitachi/IBM partnership.

Longer term (2004/05+), we believe the IBM/HDS partnership will further strengthen standards-based (e.g., CIM) storage management. Although we expect this de jure, standards-based storage management approach to eventually gain critical mass momentum (2004/05), in the interim users will require an EMC WideSky-like near-term middleware alternative to deliver solutions and smooth the transition (and asset optimization) from older technologies. Indeed, in the context of continued storage industry consolidation, IT organizations must target real, delivered, and often tactical solutions (vs. promises) to manage spiraling enterprise storage growth. The Hitachi/IBM alliance's success will ultimately be measured in timely, robust, heterogeneous storage management rollouts--a significant test for any adolescent alliance.

User action: The IBM/HDS agreement will have little effect on storage hardware's projected 30%-35% price/performance curve during the next three to five years. However, when projecting storage budget growth, users must include the growing storage software component required to manage that rapid storage growth. Indeed, we project that the increase in storage software costs will slow the steep hardware price/performance slope to a composite price/performance improvement of only about 20%-25% annually, while yielding commensurate personnel economies.

Longer term (2004/05), we expect the promise of robust storage management software to deliver sufficient automation to drive material improvement in storage management productivity, improving efficiency and overall storage unit costs.

"IBM/Hitachi Storage Partnership: A Marriage Made for the Market"
By META Group analysts Dale Kutnick, Rob Schafer, Carl Greiner, Sean Derrington, Phil Goodwin, and Rich Evans
Originally publish April 30, 2002

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