Reeling in the tape industry

Could recent events portend more merger and acquistion activities in the tape storage space?

All signs are pointing to more shakeups in the tape industry, industry watchers say, in light of recent events such as Sun's purchase of StorageTek, and the disclosure that ADIC in August bought close to ten percent of Overland Storage shares.

While the jury is still out on whether ADIC and Overland will eventually become a merged entity, changing industry demands is making it increasingly difficult for tape vendors, especially smaller players, to remain standing alone.

The acquisition ball started rolling last October, when Quantum snapped up rival Certance in a move to expand its tape drive offerings. Sun completed its acquisition of StorageTek just last month.

Issues at hand
There are a few factors driving the onslaught of such mergers. The chief of which appears to be the emergence of low-cost disk, which is relegating the role of tape to archival storage.

In many cases, organizations prefer to use disk as their primary backup because it provides a higher speed of data restoration than with tape. The availability of low-cost disk has also driven the growth momentum of this particular segment.

According to Phil Sargeant, Gartner Asia-Pacific's research director for servers and storage, organizations that had chosen tape as their primary backup storage two or three years ago, are now increasingly using low-cost disks for primary backup purposes and choosing tape for archival storage.

However, he noted, tape still has an important part to play in supporting organizations with increasing data volume that needs to be stored for longer periods of time and in a cost-effective manner. But it is getting harder for tape storage vendors to make money, Sargeant said.

According to research firm IDC, the total Asia-Pacific tape drive market is expected to grow at a compound annual growth rate of 3.6 percent in unit shipments from 2004 to 2008, but revenues are expected to grow at only 1.3 percent during the same period.

Tape is still far less cheaper than disk. According to Horison Information Strategies, low-cost disk, which includes serial ATA (SATA) disks and JBODs (Just a Bunch of Disks), costs between US$5 and US$15 per gigabyte (GB). In comparison, the cost of tape which includes drives, media and library, ranges between US$0.50 and $3.50 per GB.

Meanwhile, tape vendors have already attempted to diversify their product offerings in reaction to changing market conditions. On top of tape products, ADIC, Overland Storage and Quantum, offer disk-based backup products as well as storage management software.

IDC storage analyst Jack Yu sees this trend emerging across the hardware industry, and is not necessarily unique to tape vendors.

"Consolidation is not something confined to the tape industry," he said. "NetApp's acquisition of Decru and Hewlett-Packard's recent purchase of AppIQ demonstrate that increasingly, hardware vendors are aiming for a bigger share of the lucrative integrated solutions pie, driven in part by falling hardware margins."

"With the storage market moving toward a solution-centric approach, we will see more consolidation in time to come," Yu said.

The Overland deal
Overland made headlines in August when news broke that the company will be losing its largest OEM customer HP, to a yet-unnamed alternate supplier. Shortly after, the company released its financial report and noted that it is expecting to register financial loss in 2006.

IDC's Yu sees the two entities--ADIC and Overland--coming together as "logical", since ADIC plays in the midrange and enterprise tape space, while Overland's strengths are in the entry-level to midrange segment.

"If a full-scale merger eventually happens between ADIC and Overland…we will no doubt see a much bigger and stronger player in the market," he said.

But when contacted for this story, Overland was emphatic that there will not be a merger any time soon.

In an e-mail interview with ZDNet Asia, Philippe Cazaubon, the company's director of Asia-Pacific sales, said: "Mergers are always a possibility…(but) we do not envision any merger with ADIC. Their investment was timely as our stock was down below its logical price, so they stand to make a sizeable profit when they resell these shares."

ADIC declined to comment for this story.

But the company's rival Quantum, is unfazed by the merger rumor.

Jim Simon, Quantum's director of marketing, said: "ADIC's purchase of some Overland Storage shares further reinforces the fact that the industry is at an inflection point.

"Whether or not the industry continues to consolidate, we believe we are very well-positioned, based on the groundwork we've laid over the last two years," he said.

Meanwhile, customers should view any consolidation in the market as positive, Yu said. They can look forward to simplified product lines and having fewer vendors to deal with, he said.

He urged customers to consider the technology roadmap of solutions they eventually opt for, and to "go for one which can ensure (product) continuity in years to come".

Gartner's Sargeant noted: "Tape is not dead. It's still a very cost-effective medium for archiving large amounts of data. But what I would suggest (to customers) is to consider alternative products (such as disk) as their primary backup-and-restore option."