The storage industry has been abuzz recently with rumours and
preliminary filings by startups for initial public offerings (IPO)
of stock, the first steps toward new publicly traded players in the
market. In the last six months, Isilon Systems, Double-Take
Software Inc., CommVault Systems and Riverbed Technology have all
filed Form S-1, a Securities and Exchange Commission preliminary
registration document that details a company's proposed IPO and
estimated stock price. Meanwhile, other successful private
companies, like EqualLogic, BlueArc, PolyServe, Compellent
Technologies and 3PARdata, are rumoured to be considering going
public in the near future.
Of course, even registration for an IPO isn't a guarantee that a
company will go public, and it's a far cry from a guarantee that
the company will be successful. The last attempted storage systems
IPO, LSI Logic Corp.'s planned spin off of its Engenio Systems
division, was pulled off the market a little over a year ago. No
storage company has succeeded in going public since Xyratex two
years ago, and at least three of the companies now considering it
-- Isilon, Riverbed and Double-Take -- are not yet profitable.
But supposing even a few of the companies currently dipping their
toes in stock market waters end up taking the plunge -- what does
it mean for the market, and specifically, what does it mean for
users of those companies' products?
It's mostly good news, analysts say
The biggest benefit of successfully going public is that more
capital is poured into the foundation of a company. More capital
resources, according to Brian Babineau, analyst with the Enterprise
Strategy Group, means more investment in research and development ,
and possibly even better customer service.
"Usually, startups outsource or have minimal investment in
customer service," Babineau said. Public companies are also
competing in a much faster paced arena where they are scrutinised
more by competitors and have to execute better on roadmaps. While
this presents a significant challenge for the companies themselves,
greater accountability can be a boon for users who can expect newly
public companies to adhere more strictly to product-release
cycles.
Then there's the matter of more and better competition. "A new
class of public companies would change the dynamic in the storage
industry, especially as it has been over the last six or seven
years, which have allowed so-called Tier-1 players to get a little
lax from a competitive standpoint -- as they haven't had to
challenge customers as much for attention," said Brad O'Neill,
senior analyst with the Taneja Group.
It could also make competition-dulling merger and acquisition (M
& A) consolidation more difficult for the big guys, O'Neill
said. "Tier-1 vendors may have to come to the table to acquire very
expensive public companies that they could have acquired for a
fraction of the cost three years ago."
What's more, more freedom and means to partner for new public
companies could bring more players into the storage market at the
same time, O'Neill said. Meanwhile, according to Babineau, newly
public companies could acquire more capital for their own M & A
activity, meaning that "some smaller guys, who might not have made
it, may have just found more alternatives to keeping their
technology alive -- and that's very good for innovation in the
industry."
While the positives generally outweigh the negatives, the
analysts said, that doesn't mean there aren't potential pitfalls to
the IPO process. For one thing, when a company that began as a
nimble, innovative startup becomes a larger player, it can lose
flexibility, both in terms of the development of products
themselves and in its pricing.
"In the early days, companies are usually out there doing a
'land grab' -- it's about mind share and recognition, and getting
as much of both as possible," Babineau said. After going public,
companies have to answer to shareholders every quarter with
demonstrably steady revenues -- and so are less flexible in their
pricing.
Short-term thinking hinders innovation
According to Garrett, "[another] danger is becoming more
short-sighted and losing long-term vision for innovation and
developments because of an over focus on short-term earnings
goals."
Ultimately, the difference between a company that retains its
startup spirit while acquiring the financial power of a public
company and one that doesn't is the ability of the company's
management team to make the right strategic decisions at the right
time.
"The tradeoffs are, these companies could get the resources to
really start building and innovating on what they've started, but
are they going to get defocused?" O'Neill said. "The fact of the
matter is, some companies manage that well and others don't."
Ultimately, if a company has been a good partner to a user, the
analysts said, it's probably worth the risk to stick with it as it
navigates IPOs. "The bottom line," said Garrett, "is that to please
their shareholders, they first have to please their customers."