EMC Changing Tack

$900M loss in Q3 prompts storage leader to move beyond hardware.

Standing before a group of reporters at the CeBIT fair in Hannover, Germany, last March, EMC Corp. Chairman Mike Ruettgers began to deliver what had become his standard marketing pitch—enterprise storage needs were about to soar as Internet business expanded. And at the head of that growth curve, he assured the crowd, would be EMC.

Last week, a much less confident Ruettgers tried to explain the Hopkinton, Mass., companys nightmarish third quarter, which included a big loss, its first in 12 years.

Undone by increasing competition, the struggling economy and its own poor business decisions, EMC may still be the data storage market leader, but its perch is more precarious than even just last year, when its stock price hovered around $100 a share. Late last week, the stock dropped to a new low of about $11 after the company announced a net loss of $945 million in a quarter that saw revenues halved from the third quarter of last year.

In response, EMC is moving on a number of fronts to shore up its business. Next week, the company will outline its Automatic Information Storage initiative, which involves software and a storage virtualization appliance. The program illustrates the companys attempts to move beyond hardware, which is becoming increasingly commoditized, and to introduce technology that is more interoperable with products from storage rivals.

Virtualization is a way of pooling storage resources, and the appliance reportedly will be able to pool not only EMC storage products but also those of other vendors. In the next few years, EMC will also aggressively market to the rich-media industry, sources said.

To cut expenses, the company is laying off 4,000 employees—reducing the head count to 19,000—and outsourcing work while also introducing monthly sales quotas and using more sales channels. The company said that the moves should result in $800 million saved annually.

EMC is also changing the way it approaches the market and its customers, both in its sales pitch and its corporate culture, according to company CEO and President Joe Tucci.

"Were mad at ourselves that we slipped in execution," Tucci said. "We know that most customers have more than EMC storage on the floor."

Over the past year, major companies such as IBM, Hitachi Ltd., Compaq Computer Corp., Hewlett-Packard Co. and Sun Microsystems Inc. have formed alliances to muscle in on EMCs market share, while smaller startups have cropped up to fill in niches these companies are ignoring. Vendors such as Nishan Systems Inc. are moving into the IP space, while Trebia Networks Inc. is making a storage-specific network processor. Another small competitor, SANgate Systems Inc., is readying a data replication device.

And while EMC has seen revenues drop, a chief rival, IBM, announced last week that revenue from its high-end storage product line, called Shark, jumped 14 percent over last year.

"The good thing I see about the competition coming into the space is that I can get the technology more economically," said John Studdard, chief technology officer of VirtualBank, a division of First Virtual Inc., in Palm Beach Gardens, Fla.

VirtualBank holds several terabytes of data in EMC equipment, and Studdard said his EMC Symmetrix units are "bulletproof." But, he added, "I would want to make sure that, as they develop these new technologies, Im not going to get left with these useless old ones."

"The world has changed, thats just the bottom line," said Rich Malone, CIO at St. Louis-based Edward Jones, a 20-terabyte EMC customer. "Theres no question that the competition is catching up. The premium [of the EMC name] has diminished. The bottom line is, were all running businesses."