EMC Squared
The Bear Argument
By
David Langford (Wotdabny)
Note: The Bear argument of this article was revised and corrected on 12/28/00.
Everyone thinks EMC is the wave of the future, that it can do no wrong, that it is one of the great investment choices of this, the age of computers and networks.
I don't see it that way at all. The argument most often made by EMC buyers is falling apart. The argument goes that the need for data storage is accelerating faster than data storage technology and, therefore, sales of storage products will increase to infinity -- or as EMC's annual report put it, it is "leading a market with no limits."
Well, I've got a limit for EMC: the rate of technological advancement is accelerating, and the need for greater storage space won't outpace the growth of technology forever, or even very much longer. The day is destined to come when EMC suddenly finds itself in the same unglamorous market as any other commodity maker -- and might as well be selling VCRs, TVs, or washing machines. When that happens -- and the day might not be far off -- it will, as some brokers say, cease to offer compelling investment returns.
Other technology companies don't have to worry as much. A steady price per CPU and growing demand have kept Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> very much alive and healthy. EMC doesn't sell individual megabytes that get upgraded, it sells mass storage that depreciates. For every unit of storage sold today, 10 times the storage capacity will be selling for half the cost tomorrow.
At this point, the storage business is no longer a growth industry, and the hardware end of it drops straight to the bottom of the stock chart. But, that's okay, EMC has a path of survival once this reversal is realized, and that path is software.
Oh, wait, no it isn't -- EMC just jumped into bed with Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>. Having sold out to the Evil Empire itself, EMC won't be the world's fastest-growing software company any more. Instead, the world's most oppressive software company will do -- well, what it's always done. Remember Microsoft's partnership with Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> to "help" develop Java? By EMC's own admission, its deal with Microsoft is more beneficial to Microsoft than EMC -- is anyone really surprised? A year from now people are going to be saying, "I can't believe EMC walked right into that one."
There's little point in even having EMC around in a world where storage becomes cheaper faster than it's needed, and especially in a world where networking is becoming increasingly simple and powerful. It used to be that only huge corporations could afford the staff necessary for a mighty and complex computer network. That was then. Now I have a network in my own home, and the instructions that came with my hub were printed on a 5x7 card. I could handwrite sufficient instructions on a postcard for my mom to operate a network. It's hardly more complicated than plugging in the little jacks where they go, thanks to plug-and-play, and who needs software for it -- everything I needed was already in Windows. Ooh, there's that Microsoft thing again. Anybody remember Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %>?
In the years to come I'll still visit Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> through JDS Uniphase's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDSU)") else Response.Write("(Nasdaq: JDSU)") end if %> optical pipes, but those Rule Making companies don't use EMC products. Well, how about Rule Breaker Human Genome Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HGSI)") else Response.Write("(Nasdaq: HGSI)") end if %>, with its own impressive computing and storage needs? Nope. If these prominent companies from The Motley Fool's own portfolios don't use EMC's products, what does that say about EMC? Maybe EMC isn't able to provide them with the best solution. I mean, Yahoo! is adding a terabyte of storage capacity a week, but it doesn't use EMC?
Maybe EMC hasn't cornered the market quite as completely as it'd like you to believe. The most powerful computer systems don't use EMC -- Pixar (Nadaq: PIXR), maker of computer animated movies, uses Sun's hardware. Cray <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRAY)") else Response.Write("(Nasdaq: CRAY)") end if %>, maker of supercomputers since there has been such a thing, doesn't either. The Department of Energy is going to have a whopper of a computer soon -- 106 tons of computing might, pumping 12.3 teraflops, and it uses IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> hardware to simulate those naughty nuclear explosions.
These days EMC faces increasing competition from IBM -- the company with the record for the most storage per square inch -- and the rest of these companies, not to mention Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>, now that EMC has lost HP as a customer. Besides, if you want a supercomputer power at a bargain price, you build a Beowulfcluster -- using cheap, off-the-shelf components and a free OS like Linux. How is EMC going to compete when the power of low price storage and easy networking can steal market share like this?
I've found EMC absent at the top and the bottom of the megacomputer hierarchy, and even EMC admits two-thirds of the market belongs to businesses other than itself. It looks to me like there's a "limit" already -- with much worse ones to come.
Soon.
[Note: The Bear argument of this article was revised and corrected on 12/28/00. Originally, a number of companies were listed as not being EMC customers because they were not listed on EMC's website and SEC filings. However, those assumptions were inaccurate because the company has confidentiality agreements with some clients. The Fool regrets the error.]
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