Industry representatives are warning the channel about the dangers of relying on storage hardware for profits, claiming the days of making ends meet on product alone are over.
XSI Solutions managing director, Max Goldsmith, claimed margins across storage-related goods had fallen sharply during the past 18 months. While resellers could have once secured 15-25 per cent on a deal, this was now more likely to be about 10 per cent, he said.
He attributed the falling percentage points to an increasingly competitive landscape.
"It is a classic case of everyone getting into the storage market," Goldsmith said. "We're now seeing the server manufacturers make more money on the storage than the seller. Everyone wants their piece.
"Dell comes into the market and sells at prices no one can believe."
Goldsmith also highlighted failed storage player, SecureData Group, as proof that the industry was experiencing tough times.
"It's hard to make money in this industry," he said. "The storage vendors need the channel to get their growth but we have to survive on the margins. With hardware, it now just comes down to price."
Data#3 CEO, John Grant, said pressures were being exercised on margins through the commoditisation of product by vendors. This had led customers to believe that storage could be implemented in the same way servers or PCs have been - and with a similar price point.
However, the reality was that the technology required complex integration skills, which in turn required the customer to commit to a whole solution, Grant said.
"There is a breaking point between the hardware margins we can quote and applying storage services," he said.
EMC general manager for partners and alliances, David Henderson, said that while hardware still offered higher margins than the majority of IT goods, the real money was to be made in information management.
"Any integrator looking at revolving their business around hardware should look at the history of PCs and networking: this teaches us that hardware margins diminish over time," he said. "We're seeing this in storage at the moment.
"Our pitch to partners is simple: if you're betting on just delivering hardware you will hit trouble. The industry has moved to the management of information."
But one of the problems was that many storage vendors still expected partners to hit certain volume and revenue targets on hardware, Goldsmith said.
"Vendors expect us to increase our revenues, but the products are half the price," he said. "This creates enormous pressure on us. We need to hire more people to provide services, but with less margin on the products."
Henderson said EMC had previously centred its reseller targets on volume, emphasising hardware and software sales. In order to help direct resellers down the solutions path, the vendor had recently changed its partner targets to reward those demonstrating all three elements of storage: hardware, software and services.
"It's a point system rather than a dollar system," he said. "Rather than drive them to sell hardware, we are now encouraging them to sell a solution. If they do this, their targets become smaller."
Partners who sell an integrated solution for example, will have smaller targets for hardware, allowing them to hit rebate levels faster, Henderson said. In addition, $10 million in hardware sales could earn resellers the same amount of points as $2 million in software sales.
IT Wholesale, which distributes IBM's range of storage hardware products, is also pushing for its vendor partner to change its approach to reseller targets.
General manager, Darryl Tucker, said he was in ongoing talks with Big Blue to convince it to start providing incentives for dealers who gained certifications in storage or sold a services component. Currently, IBM's reseller performance was gauged on hardware sales strength.
However, the vendor was conducting a country-wide series of training sessions to help partners learn about its storage products as well as educate them on how to sell a solution, Tucker said.
Hitachi Data Systems (HDS) marketing manager, Tim Smith, said it continued to reward partners who created a complete storage solution. Its Channel Services Program, launched in November, was focused on pushing client services through its partner base, he said. While disputing claims there had been an overall erosion of margin across the market, Smith said the cost of storage had come down. This had seen products at the lower end of the market reduce in price.
"Twelve months ago the channel was not doing small deals, so the deal value was higher from a smaller proportion of the market," he said. "Now customers with 80-100 people are experiencing the same issues as the larger corporates, so the starting margins are different." Gartner vice-president and research director of storage, Phil Sargeant, said raw storage costs had gone down by an average of 40 per cent year-on-year for the past five years.
"The good thing for vendors is that the capacity people want is going up at a greater rate - between 60-65 per cent on average," he said. Growing demand for storage also created a need for managing it, Sargeant said. As a result, major multinationals such as HDS, EMC, IBM and HP were introducing more services to address this.
Resellers needed to look into these areas in order to claw margins back, he said. But principal consultant at SLI-Consulting, Jose Goldmann, said resellers could still make money on hardware sales by positioning and differentiating product.
"If you don't find out what the competition is offering, then you deserve to be off the market," he said.
"Simple box moving is not viable. Resellers also need to understand what is required - the business challenges, obligations, where the company wants to move and how they're consolidating business islands."
HDS's Smith said its most successful partners sold storage on business issues rather than software or hardware fixes.
"Partners should leverage the technology to differentiate themselves; it's not about trying to find a hardware sale," he said.
EMC's Henderson urged partners to undertake further certifications and boost their services capabilities.
"Unless they have this focus, integrators won't have a role in the marketplace," he said.