Overall spending for storage systems sank in 2001 for the first time in 10 years and will not significantly rebound this year, according to "SAN and NAS 2002 Report," a recent research report from Peripheral Concepts. According to the study, spending on Direct Attached Storage (DAS), Network Attached Storage (NAS), and Storage Area Networks (SANs) dropped to $23.5 billion in 2001, down from $24.5 billion in 2000. The company projects that in 2002, spending will hit only $24.1 billion—less than the 2000 peak.

Third-quarter earnings reports from several major storage technology suppliers appear to support that projection. In October, market leader EMC announced that third-quarter revenues had climbed a scant 4 percent compared to the third quarter last year. VERITAS Software stated that sales rose 7.5 percent in the quarter ending September 30, while storage-network software vendor McDATA forecast a revenue increase of 5 percent in the third quarter. Senior officials from all these companies suggested that they don't anticipate a rebound in corporate spending on storage solutions this year. Several Wall Street analysts who follow this sector have echoed that view.

Although EMC and other storage companies eked out modest revenue growth, other companies in the sector didn't fare as well. Adaptec, a manufacturer of storage-access solutions, anticipates that its third-quarter revenues might fall as much as 20 percent. But QLogic, a manufacturer of components for storage networks, experienced a better-than-expected 19 percent jump in revenues.

The overall industry growth numbers might mask the underlying trends. Perhaps the most significant development is that total demand for storage capacity has slowed considerably. According to Peripheral Concepts, overall demand for storage capacity grew only 30 percent last year, down from an average growth of 60 percent a year in each of the past 5 years. Interestingly, the slowdown in the need for storage capacity is most evident in the data center. According to EMC, information systems sales dropped 15 percent last quarter, led by declining sales of EMC's high-end Symmetrix storage technology.

For the time being, companies are meeting the need for more storage capacity by consolidating resources and better using existing infrastructure as much as by adding new systems. Consequently, NAS and SAN continue to be compelling solutions. According to Peripheral Concepts, revenues from SAN grew 18 percent last year, while NAS sales grew 35 percent. NAS and SAN more than doubled in both 1999 and 2000. Peripheral Concepts projects SAN sales at $5.8 billion this year, with NAS revenues reaching $3 billion.

Another market research company, Pioneer Consulting is even more bullish on SANs, believing that SAN technology will generate $7.5 billion in revenue this year and reach $84 billion in 2007. SAN will grow at the expense of DAS, Pioneer Consulting analysts argue, and IP-SAN, which will prove to be the least expensive route to a SAN network, will emerge as the market leader.

In the interim, sluggish market conditions might lead to dramatic changes in the industry, with several established participants restructuring their businesses while new companies make their way into the market. Already, Quantum has announced that it will spin off its NAS division into a new company called Snap Appliance; Quantum itself will focus on what it calls data-protection products. And, of course, IBM's is in the process of exiting the hard disk drive manufacturing business.

But as companies cut back and focus their efforts, an 800-pound gorilla is about to enter the arena. By December, Cisco Systems is expected to launch its first networking products for the storage sector. Cisco's entry definitively signals the emergence of storage as a network technology. Within the context of slow sales, new winners and losers will emerge, reshaping the competitive landscape over the next several years.