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Network Appliance Sees Software Demand Surge

The company gained 2 percentage points of market share.

SAN FRANCISCO -- Data storage device maker

Network Appliance

(NTAP) - Get Report

took another chunk of the market for software that helps companies secure, back up and find data crammed into storage hardware.

The company's software revenue surged 34% to $298 million in the second quarter, according to data tracker IDC. This far outpaced the 10.4% growth of the total market for storage software and left the growth of rivals

EMC

(EMC)

and

IBM

(IBM) - Get Report

in the dust.

Network Appliance's share of this segment of the data storage market rose about two percentage points to almost 11%. But the company still lags behind EMC,

Symantec

(SYMC) - Get Report

and IBM, the top three by sales, in that order.

Share of Network Appliance closed down 71 cents, or 2.6%, to $27.04.

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IBM's storage software revenue grew 19% to $362 million, making it the only other company besides Network Appliance to outpace the market's growth. Its market share rose almost a full percentage point to 13%. The company's shares fell $1.35, or more than 1%, to $116.00.

EMC held onto the lead in market with revenue rising about 5% to $685 million. But competition from IBM and Network Appliance chipped more than a percentage point from EMC's market share, which now stands just under 25%.

EMC shares shed 8 cents, or 0.4%, to $19.42.

Symantec's market share also shrank, although the company's storage software sales rose about 7% to $488 million.

Symantec's shares jumped 44 cents, or more than 2%, to $19.84.

The fight over the fast-growing market for data storage devices may come down to who has the best software. The need for data management software is especially acute today as more information is stored in so-called unstructured format such as videos, Web pages and presentations.

Unstructured information in this format is harder to track, because it's not stored neatly in the rows and columns of a database. Also, it's often stored on individual computers, rather than in centralized storage repositories.

Storage companies see an opportunity to sell hardware by creating software that would find data that's scattered around networks and hold it in a dedicated storage device.

"Today, there's a lot of data kicking around and not all of it sits neatly in rows and tables," said EMC's Chief Financial Officer David Goulden, in an interview following the company's last earnings report.

"We believe that 80% of the information out there is unstructured, so having the right content management drives opportunities to install and sell the storage

appliances sitting underneath."

Aside from making storage devices "smarter," software can boost manufacturers' profitability because it carries wider profit margins than hardware. Software licenses also offer recurring revenue that can pad companies' cash flow. IBM is relying in part on increasing sales of software to help it reach its goal of

nearly doubling earnings per share by 2010.

The need for storage software began with data-intensive industries such as engineering firms that store complicated diagrams and health care firms that store X-rays and MRI scans.

Other trends are ratcheting up demand. New securities laws require publicly traded companies and financial firms to provide long-term storage of materials related to transactions. If ever this information is needed for an investigation or lawsuit, software will sift through it to find evidence for depositions and trials.

"Software is what helps companies be smart about where they store data and how they use it," says Forrester analyst Andrew Reichman. "It will make the difference and add value going forward as hardware becomes commoditized."