Expanding Storage Market Benefits Dell, EMC, H-P

In another sign that the tech recovery is continuing, two major research firms reported that the market for external storage systems, a mainstay of business computing, was growing strongly by the end of 2003.

Significantly, IDC found that the market grew by 8.4% year over year to $3.7 billion in the fourth quarter of 2003, the largest quarterly gain since the first quarter of 2001. A slow start to the year kept the growth rate for 2003 to 2% as the market reached $13.2 billion.

Rival researcher Gartner/Dataquest, which collects data somewhat differently, reported Thursday that Dell ( DELL) took advantage of stronger corporate spending on external storage systems in 2003 to expand its revenue in that market by 44% to $634 million.

After several years of declining total sales, the overall external storage market increased by 6% last year to $12.89 billion, according to the Gartner report.

However, IDC warned that currency effects were responsible for much of the storage growth outside of the U.S.

"The U.S. was the first to feel the downturn and is now leading in the recovery with a healthy 7% growth rate," said John McArthur, group vice president of storage research at IDC. "Outside the U.S., much of the perceived growth is the result of a weakened dollar. However, we are at least seeing signs of stabilization, which is an improvement over past quarters."

EMC ( EMC), which sells storage systems to Dell for resale to corporate customers, retained its lead in the external storage market, growing revenue by 7% to $2.65 billion and boosting its share by 40 basis points to 20.6%, according to Gartner.

Because of the differences in methodology, Gartner ranked EMC No. 1, followed by Hewlett-Packard ( HPQ). IDC reversed the rankings.

According to Gartner, Hewlett-Packard retained its No. 2 position in external storage with a share of 18.6% and revenue of $2.39 billion, an increase of 8%.

Hurt by continuing problems in the Japanese economy, Hitachi and its wholly owned subsidiary HDS saw revenue drop by 17% to $1.07 billion, said Gartner analyst Roger Cox. Of the eight companies listed by Gartner, Hitachi was the only one whose external storage revenue shrank last year. Hitachi also lost the largest amount of share -- 230 basis points.

It's worth noting, however, that when H-P or Sun Micro ( SUNW) resells a storage product made by Hitachi, or when Dell sells an EMC product, only the final sale is counted in Gartner's ranking.

According to EMC, as much as 81% of the external storage sales made by Dell in 2003 actually were resales of EMC equipment. That number has not been verified by Gartner, nor has an EMC claim that with Dell revenue added to its total, EMC outpaced its competitors by 2 to 1, said Cox. Cox also notes that Dell marks up the price of EMC equipment it sells, making it even harder to account for all the money in the two-tier sales process.

The difference in the interpretation of Cox's numbers by EMC and the analyst himself, as well as the different statistics produced by the rival researchers, are good examples of why investors should always view market-share claims with a degree of skepticism.

Third-place IBM ( IBM) lost about 50 basis points of share but grew revenue by 2% to $1.69 billion, while Sun lost 20 basis points of share and grew revenue 4% to $881 million, according to Gartner.

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