Recession Time

2007 was an interesting year for most of us. Overall the economic environment for data center-related companies was pretty vibrant—most companies grew. The tail end of 2007 had some feeling skeptical about macro-economic conditions going into 2008, and they were right. Our industry is acting, well, sort of like grown-ups for a change. Instead of pushing full steam ahead after what was a great year overall, most are adding some caution to their optimism for 2008. So far, the markets are tumultuous, the IPO opening has closed at least temporarily and overall IT spending looks like it will be flat or even down. The Sub-prime mortgage debacle has long reaching U.S. ramifications and the bottom isn't known yet. Bear-Stearns is toast. I must admit, I didn't see that one coming.

So do we plan on more gloom and doom? No. While never an advocate of outrageous spending ahead of any market, the fact is that demand for capacity—in every way, shape, and form—is absolutely going to jump to the highest levels ever this year. As a matter of fact, over the next three years, we'll double the amount of data managed in the corporate world—and in five or six years we'll be up by an order of magnitude. The growth rates over the next 12 months will be higher than in 2001, as a comparison. In that recession, IT spending got flat or decreased. Likewise, IT headcount was flat or decreased, but despite that, data growth continued unabated. IT pros simply had to get better at dealing with their operations—and they did. They squeezed more utilization out of what they had and "managed" versus "just buying more"—maybe for the first time in decades. Even while many vendors took hits, data growth didn't.

This year we'll see higher than average data growth rates because of the new era of "Internet Computing and Data in the Cloud"—Web 2.0 meets the commercial enterprise. That, combined with economic caution, should lead to another round of IT professionals "poking their heads up" and looking around at new and better ways to address these new (and existing) issues—which is exactly what happened between 2001-2005. The result, then, was that more up-and-coming companies were able to grab a market foothold than at any other time prior. We saw some big IPOs and big acquisitions—but mostly we saw "old school" customers rebuke the incumbent and take a shot on an emerging player with a better solution to a current problem. Will that happen again this time? I think so.

In the last recession, the incumbents were too fat, dumb and happy to react quickly or properly, as a general rule. This time, they won't be so slow. If we had "do-overs," one could believe that Riverbed, Data Domain, 3Par, Equallogic, etc., would have been bought or crushed early on. Either way, it would have been a heck of a lot cheaper than dealing with them now. This year we're going to be talking about the requirements of Infrastructure 2.0—caused by the attributes associated with data created in the Web 2.0 world. That means scale-out capabilities are going to become the thing. Self-managing, self-tuning, dynamic expansion and a cost structure based on entirely new criteria will rule the next 5 years—starting in 2008.

The difference in this new era/economic downturn is that the incumbents aren't going to sit on the sidelines and do nothing about it. It remains to be seen just when they actively get into the game (you could argue that Dell and IBM already have with their recent acquisitions), and whether they lead or simply follow. It's hard to tell a customer to stop giving you $100 because you have a better option for them for $25.

No matter what, the world is changing, and this change is happening much faster than past changes—this one is going to be violent and potentially unforgiving. The good news is this new era, like the previous two (the transactional era and distributed era), will ultimately be accretive and not combative. Just as the mainframe/transactional era didn't die when the distributed era came around (it has grown at a 26 CAGR from a capacity perspective since 1960), neither will it die in the Internet computing era. And like the previous eras, the new era will dwarf the previous, as the vast majority of new data created and managed in the commercial world will quickly become born of this era.

So what does it mean for you and me? I'm hoping (and planning) that history will repeat itself. When the incumbent analyst firms dealt with the recession by firing talent to cut costs, little ESG hired. When others offered less value, we invested in bringing more to the table. Those investments may seem contrarian, but our growth over the last 8 years has almost been perfectly linear. Why? Because being small, and private, we don't gauge our prognosis by our cost structure, and fortunately don't have to deal with shortsighted 90 day windows. We continue to invest in people and processes because that model has proven effective in good times—and even more effective in tight times. If you suck and a recession hits, you tend to get squeezed. If you add inarguable value, you tend to get a bigger piece of the pie – whether you're an IT guy or a vendor. When times get tight, the smart get called on. Of course this isn't always the way, as sometimes when times get tight, morons prevail. If you fire all the smart, expensive people, imagine how much money you'll save!!

In 2001 IT tightened their wallets and we saw more emerging vendors snag some share than ever before. This time the incumbents' see it coming, and probably won't let it happen quiet so easily. IT may stop spending, but industry won't be able too. It will be interesting to see who takes advantage.