The latest quarterly tracking numbers from market research firms IDC and Gartner Dataquest reveal that the long-term trends defining the evolution of the enterprise storage market are still firmly in place. At the same time, however, the results for fourth quarter 2004 show that operational execution still counts.

The big picture looks like this. In 2004, revenues generated by external-controller-based disk storage grew a paltry 5.1 percent, according to Gartner Dataquest. The fourth quarter revenue numbers were even more dismal, with Gartner Dataquest putting growth at 1.2 percent for the quarter compared to the same time period in 2003 and IDC reporting fourth quarter growth on the hardware side at a scant 1 percent. The total disk storage market, which includes both internal and external disk storage systems, grew only 3.2 percent in 2004, according to IDC. In fact, the internal storage market showed all its growth in the last quarter of 2004, when end users added server capacity at year-end.

Although revenue growth for storage hardware vendors was modest to nearly flat, customers' demand for storage capacity continues to soar. According to IDC, capacity as measured by petabytes jumped 57.7 percent in the fourth quarter and 63 percent for the year. Of course, this is an old and ongoing story. As the cost per petabyte falls rapidly, overall revenue growth is modest even as capacity demand remains robust. The mainframe computer sector experienced the same sort of conundrum for years. The demand for capacity in MIPS skyrocketed as the price per MIPS crashed.

Furthermore, many of the reasons for the declining cost per gigabyte in storage are well known. First, storage vendors are aggressively pursuing the small-to-midsized business (SMB) market and pricing their products accordingly. Industry observers note that virtually all the major storage vendors expanded the midrange and lower ends of their product lines in 2004, often offering features once found only more expensive equipment. Second, customers are warmly receiving new high-capacity, lower-priced technologies such as Serial ATA (SATA) disk drives.

The move to lower-priced and even commodity solutions can be seen most vividly in the storage-networking arena. There, in fourth quarter 2004, revenues of providers of Internet SCSI (iSCSI) Storage Area Networks (SANs) skyrocketed 32 percent over third-quarter revenues. In comparison, the overall storage-networking market grew 11.6 percent and Network Attached Storage (NAS) expanded 14.7 percent year over year.

But the long-term trends and natural evolution in hardware were only part of the story in 2004. Shockingly, four of the six top enterprise-storage vendors experienced declining revenues. Revenue at IBM dropped 8.7 percent, while revenues at HP, Hitachi Data Systems, and Sun Microsystems also dropped. Only EMC and Dell experienced revenue growth in 2004, increasing 13.4 percent and 15.8 percent, respectively.

Operational execution is the culprit behind enterprise storage vendors' sagging revenues. Both IBM and Hitachi Data Systems announced exciting new enterprise-class storage subsystems in 2004 but weren't able to deliver on them in a timely fashion. In IBM's case, analysts reported, the prospect of the new technology disrupted a traditional pattern of strong fourth-quarter performances. In Hitachi's case, analysts said that the company faces longer sales cycles as customers work to sort out the value of new features, particularly virtualization, that the new offerings include. HP is also in the middle of a product refresh and additionally has had well-publicized operational problems.

On the other hand, during the same period that hardware revenues suffered, storage software sales did just fine, thank you. IDC reports that storage software grew 16.1 percent in 2004 and 15 percent year over year in the fourth quarter. The storage-resource-management sector showed the most strength, climbing 19.7 percent year over year in the fourth quarter. The storage-replication market grew 17.2 percent; file-system software grew 14.2 percent; and the backup and archiving software category, which continues to be the largest overall, grew 9.5 percent.

Interestingly, EMC emerged as the big winner on both the hardware and software sides. EMC increased its market share of the external-disk-controller market in the fourth quarter from 19.6 percent to 22 percent. It also increased its share of the storage software market from 25.1 percent to 31.7 percent in the same period.

There is a lesson to be learned, or perhaps relearned, from EMC's performance. When the cost per MIPS started falling rapidly in the mainframe arena, IBM's overall business suffered mightily. It wasn't until IBM recast itself by offering services and software that the company was able to stabilize and then grow its business. IBM still generates a huge amount of its revenue from hardware sales, but the hardware is bundled within wider offerings. EMC is following the same strategy in storage. And it's clearly working.