What Killed The Storage Service Providers?

Storage Service Providers (SSPs) were common back in the dot-com days. The idea was that instead of buying your own disk drives, you could buy disk space from an SSP and access it over the internet, or over some kind of metropolitan area network.

Many people believe that the SSPs died out because corporations want to keep their data nearby and will never allow it to be stored offsite. (I followed Jon Rath’s blog to two articles about the possible resurgence of SSPs, here and here.)

I don’t think offsite data was the main problem. I believe that SSPs died because their business model evaporated out from under them.

To understand the original SSP business model, you have to think back to the crazy days of the dot-com boom, when the SSPs were popular. Companies were growing so fast that they just couldn’t keep up with the hiring. Money was plentiful, but IT staff was scarce. Everyone believed that there was a limited time to make a land grab, so they couldn’t afford to slow down.

In that environment, the SSP business model was: We charge more, but you’ll pay it anyway, because you can’t hire IT people yourself. Part of the reason that startups couldn’t hire IT staff themselves was that SSPs and other IT-centric startups were luring them in with pre-IPO stock options. Why be in a supporting role at a product-centric startup when you could run the show at an IT-centric startup?

The model fell apart after the dot-com crash, because dollars became scarce, potential customers no longer needed to grow fast, and there were plenty of unemployed IT people around to hire. “We charge more so you can grow fast” lost its appeal.

In response, SSPs tried to change their business model. They claimed, “We can save you money because of economies of scale.” The problem is, they never actually demonstrated that. Helping your customers grow very quickly, but at a high cost, is very different from helping your customers save money. The SSPs just weren’t able to make the change.

Part of the cost problem is that the bandwidth required to feed a big disk array is expensive. It’s true that bandwidth keeps getting cheaper, but then again, disk drives keep getting bigger. Some SSPs focused on outsourcing storage within co-location facilities where customers would also host their servers. This solved the bandwidth problem, but left SSPs vulnerable when the co-lo model collapsed. The final blow was that many of the SSPs’ biggest customers were the failing dot-com companies.

In summary, their business model evaporated, their technique for dealing with bandwidth cost collapsed, and their best customers went bankrupt. (“Other than that, Mrs. Lincoln, how was the play?”) So it’s true that the SSPs flamed out, but that doesn’t prove that the storage outsourcing model can never work.

I don’t buy the part about corporations never allowing data offsite. Ask people at many corporations where their voice mail is stored; they have no idea, and it doesn’t worry them. (Answer: Offsite in a phone company data center.) Ask them where super-important legal documents are? (Answer: Offsite in an Iron Mountain warehouse.)

Of course, you only let critical data go offsite if you really trust the provider, which makes this a difficult business for startups.

One way to get around the bandwidth problem is to outsource the whole application, instead of just the storage. There is usually less bandwidth between the application and the user’s eyeball than there is between the application and the storage. This is exactly what Oracle does with its On Demand business, which has been quite successful, and likewise SAP with their Managed Services offering. Another approach is to store less critical data, like photos at Shutterfly, or personal e-mail at Yahoo! and Google. For disaster recovery copies, the data must be offsite anyway, so it takes just as much bandwidth to mirror to your own remote storage as it does to mirror to outsourced storage. Iron Mountain is getting into this business.

I doubt it will ever be cost effective (cheap enough bandwidth, fast enough bandwidth) for SSPs to outsource all disk drives, and I’m sure there is some data that big corporations will want to keep close to home, but there are already many situations where it makes sense to outsource the management of important corporate data. I predict this trend will keep growing.

 

Comments

[Frederic Bada]

Interesting article, thanks!

[Steven Schwartz]

I was actually a part of the SSP revolution in a few different ways. Originally at Level 3 we looked into hosting customer application data, but in the end we found that managed services, rather then strictly managed storage was a much better option for most businesses. Secondly we looked at this model during my tenure at STK. Both originally with inception of Managed Storage International, which is now MSI and a part of Incentra. Then as a second try with STK we launched a BCDR (business continuity disaster recovery) service portfolio, which even included the ability to utilize SAM FS for doing storage tiering, but was aimed specifically at online disk-disk-tape backup options. In the end all of these failed badly because no matter how cheap the network segment got, the network was still too expensive for companies to host storage externally. We tried to overcome this by hosting storage within Qwest Cyber Centers, and offering the services to co-located applications.

Another large objection we had at STK, was the issue of owning the storage media. Our general counsel had major liability concerns with leasing/renting the storage media, because in the end STK could be held responsible if there was corruption or data loss.

There have been a few companies that are still looking into this model again. FalconStor has the ability to host customer's data and has launched a service for doing that. MSI has moved more into a managed services approach similar to what Storability tried to with the SOC (of course this was prior to STK's destruction of that business).

Even with some of my customers today, those who don't want the hassle of managing the IT or Storage environment move into managed locations offered by ViaWest or other co-location facilities.

[Adam]

Dave,

After spending almost 7 years at NetApp I joined an SSP last year - Arsenal Digital. We have been around since 1998, and our business model has never been more solid. One of the reasons I think we are successful today, and that we survived the dot com blast is b/c of our focus. Arsenal's business is providing backup and DR services, like e-Vault and LiveVault/Iron Mountain do.

We've had financial success to the tune of 6 consecutive years of double digit revenue growth, resulting in almost 25 petabytes of storage (tape and disk) under management. We're able to take on new partners and customers every day because they understand we'll protect them and save them from dealing with a historically non-strategic IT function. I like to call this solving the "Your Mess for Less" dilemma with shared goals and good management.

That amount of storage we manage doesn't compare to the amount of storage NetApp sells in a typical quarter - but when you think of it in terms of just backup data (and more of it coming from SMBs than ever), it is pretty relevant and puts us in rare air with much bigger companies.

The fact is our profitable business model is coming back into vogue with partners and customers; and SaaS, or storage-as-a-service, is becoming more accepted and trusted.

Keep up the good blogs!

Adam

[TM]

The Wall Street Journal recently ran an interesting article, “The Online Storage Wars” (http://online.wsj.com/public/article/SB117132942506806612-AFbBCIbeoOSA2_HtbG4fBCYa57A_20070219.html?mod=mktw), about the high growth being seen in what is effectively Consumer SSPs (personal files). Perhaps Corporate America will follow?

[David Phillips]

What about Amazon S3?

[Peter Mojica]

I think SSP's will see/start to see/very soon another resurgence. Mostly due to the changing environments, abuse and misuse of email and other content, mostly unstructured in form. The US and now non-US governments are positioning themselves, in some cases rightly so - due to the fiasco's such as Enron, to essentially run Americaan corporations. The level of work that the normal IT operations has to do to manage against the "potential" litigation, is amazing, and they basically have one thing to do- store and manage a lot more data, especially email. This phenomenon is causing organizations to sock away 100's of GB's of data, many cases 300-400GB daily, do that math its not that difficult, and keep if on spinning disk, due to search and extract requirements. The average corporation, even above average corporation eventually looks at their floor space, power, cooling, etc. to keep peta-bytes of data, and the decision becomes clear, where is the SSP?