Thursday, February 21, 2008

Enterprise Storage in an Uncertain Economy

Recession fears are mounting, and the bank panic in the UK at Northern Rock followed by the nationalization of the bank creates cause for concern. Some people say the business cycle is dead and other folks seem to say that it has morphed into other places because of securtization, globalization, and government intervention. Inevitably financial fears affect business, and planning in an uncertain market makes all business planning hazardous. How can a rational storage manager plan in these uncertain times?

NBER has recently published a paper which is very interesting and clearly states some of the problems that we are facing .

Banking Panics

Implicit contracts do not necessarily contemplate systemic problems, which may characterize the subprime crisis. There have been at least ten banking panics in U.S. history, but the last one, during the Great Depression, is a dim memory for most people. A banking panic occurred when depositors at banks had reason to believe that their bank held assets of possibly lower value than they had previously believed. Banking panics tended to be a peculiarly American phenomenon because the United States had many banks (because of branching restrictions), resulting in less diversified portfolios than might otherwise have been the case.

Banking panics are not irrational, as Charles Calomiris and I show 9. Rather, they are rooted in a lack of information. Panics have tended to happen near business cycle peaks; with a recession coming on, there would indeed be some loans that would not be repaid 10. Depositors would go to their banks and demand their cash back, because the value of cash is easily determined, unlike the value of bank deposits. But the banking system could not honor these demands, since their loans are illiquid, so redemption was suspended. In fact, suspension was usually illegal, but was tolerated during panics11. The illiquidity of assets, and resulting plummeting prices should these assets be sold, meant that another solution needed to be found."

The illiquidity does affect the storage business - because enterprise storage is expensive when new capital is costly. NetApp's sales declines may be a leading indicator from the credit contraction in banking as Reuters says:

Chief Executive Dan Warmenhoven said weaker orders by U.S. financial services clients stung by the credit and mortgage crisis had spread overseas, with large banks including France's Societe Generale (SOGN.PA: Quote, Profile, Research) cutting back on technology spending. Banks are among NetApp's largest customers.

"We are less concentrated now, but the problem has spread," Warmenhoven told Reuters in an interview after company on Wednesday reported fiscal third- quarter results.

"They're squeezing down all their expense structure internally," Warmenhoven added. Technology budgets "are on the table."

NetApp, based in Sunnyvale, California, plans to add jobs in marketing and sales to boost its market share in fast-growing industries such as telecommunications and energy and lessen dependence on banks, Warmenhoven said.

"The strategy going forward is to expand broadly," he said.

Most folks understand that storage is a horizontal business, but the fear of recession and credit crunch is also horizontal - it affects all business sectors that store information. Therefore growth of new storage products into other sectors which NetApp hopes for may be constrained by broad based economic fears.

Efficient storage management and extended service life are essential ways to maintain staff and infrastructure if we are in a worsening credit and business cycle. Some folks we work with say our business of maintenance, management and monitoring is countercyclical, which may explain one of many reasons that we are growing so quickly.

We are living in interesting times.


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