Lively flash market leaves Fusion-io standing on shaky ground

The flash-storage market has become more cramped over the past few months, with recognized brands such as EMC (s emc) and IBM (s ibm) making stronger pushes into the space. That leaves smaller guys scrambling to cover up and find ways to stay competitive.
One of those smaller guys, Fusion-io, (s fio) has to deal with a stock price generally trending downward and speculation about how much a suitor might pay for it. It’s gotten into an interesting jam: Diversify its customer base further in hopes of taking in much more revenue, or risk getting eaten up by some other company that can offer more attractive prices if it starts spreading itself too thin.
It’s ironic that the company faces this sort of quandary, because it found success and went public largely thanks to big companies buying up large quantities of its server-side PCI-Express flash memory cards. It’s been a poster child for server-side flash storage, which is now well recognized along with SSDs in storage arrays as a way to speed up application performance — a critical move for webscale companies and other properties that want to deliver service to end users with as little delay as possible, even if it’s still expensive.
Small wonder webscale companies such as Apple (s aapl) and Facebook (s fb) give Fusion-io the lion’s share of its revenue. That’s a double-edged sword — should the big accounts falter, Fusion-io could be in trouble. (To be fair, though, plenty of other companies are at the mercy of the 80-20 rule and have to live with volatility as a result.) It looks like the company has realized this, as it has been taking steps as of late that could help its products get wider adoption from smaller companies.
Gary Orenstein, executive vice president of products at Fusion-io, disagreed with the characterization. “We already have thousands of enterprise customers,” he said. Rather than make a big enterprise push, he said the company seeks to grow its business across all market segments. The introduction in January of the ioScale product aimed at webscale customers seems to validate the notion that Fusion-io isn’t exclusively aiming at enterprises.
Still, some announcements the company has made since then can be viewed as efforts to bring on board more companies that have different needs and buying patterns from webscale players.

The latest cards played

Recall the acquisition of NexGen Storage in April, which could yield revenue indirectly should enterprises and smaller businesses choose to bring in the software and hybrid storage boxes featuring Fusion-io flash.

Robison. Source: Fusion-io

Robison. Source: Fusion-io

And the sudden departure of two co-founders, CEO David Flynn and Chief Marketing Officer Rick White, might well be part of a bigger plan to rely more on smaller customers, too, although it’s still unclear exactly why they left. Orenstein wouldn’t comment, deferring to previous statements from new CEO and former Hewlett-Packard (s hpq) executive Shane Robison, which include his stated intent to “lead Fusion-io through its next chapter of growth.”
And then there was the boost of its virtualization tech, which could be of use to service providers and enterprises wanting to offer better flash caching performance or bring on more virtual machines per physical server. The big question is whether such efforts will actually succeed in widening Fusion-io’s customer base, increasing investor confidence in the company and keeping it independent enough to stand on its own.
If the company’s customer base remains as is or shrinks, Fusion-io could face considerable revenue declines in the style that Rackable Systems did when Facebook started looking more toward Dell’s (s dell) Data Center Solutions group for custom servers. Rackable ended up buying SGI for $25 million — peanuts, as Om called it at the time. And now Rackable is a product line under the SGI brand name.

Acquisition possibilities

It’s fair to wonder if and when the company will get acquired anytime soon if its leaders fail to expand its business, although nearly every company faces that challenge.
Jim Bagley, senior analyst at Storage Strategies NOW, doubts the company could get bought later this year, given the company’s high perceived value. Other flash companies, such as OCZ, (s ocz) might be a better deal at the moment, he said.

A SanDisk flash card. Source: Sandisk

A SanDisk flash card. Source: Sandisk

Nevertheless, he doesn’t doubt that heavy-duty foundry operators such as Intel, (s intc) Micron (s mu) and SanDisk (s sndk) present formidable challenges to Fusion-io at the enterprise level.
“If there’s a SanDisk salesman knocking on the door, saying, ‘Here, I’ve got the same thing for half as much money,’ aren’t you going to listen to that guy?” Bagley said.
Given that there’s been a bunch of flash acquisitions in the past couple of years — OCZ with Indilinx, SanDisk with Pliant, IBM with Texas Memory Western Digital’s (s wdc) HGST with sTec last week and SanDisk again with SMART on Tuesday, to name a few — he wouldn’t be surprised to see the company acquired eventually. When? He’s awaiting the next earnings report to get a better idea.

A recognized brand

Another analyst, Howard Marks, founder and chief scientist at DeepStorage, set aside acquisition questions and instead showed how the company has a lot to lose. Marks said the company boasts lots of brand value by being the first to market with PCIe SSDs, and it’s perceived as a leader with an optional feature called atomic writes, which simplifies the process of writing to storage media and can extend the life of flash memory.
But that advantage could fall away. The atomic writes could become a standard that all flash vendors could introduce, because INCITS’ T10 committee is exploring the addition of atomic writes to the SCSI command set, Marks said.
“I am not terribly bullish,” he said. “I think they have a tough road to hoe. I think that they have to keep going down the value-add software path, but, you know, there’s a lot of other people chasing them that way.”

A NexGen hybrid array

A NexGen hybrid array. Source: NexGen Storage

On the software end, companies with worthy options for VMware-compatible (s vmw) caching comparable to the enhanced ioTurbine include PernixData, Proximal Data and SanDisk’s FlashSoft, Marks said. And Nimble Storage, Tintri and others already sell hybrid arrays that are similar in some ways to the NexGen gear, although NexGen is notable for software that offers “cutting-edge” quality of service that cuts down on noisy-neighbor issues, he said.
EMC or Intel could bolster their hardware and software stories by buying Fusion-io. And alongside those candidates for acquiring the company, there are others to contend with, including newcomer Memblaze; Violin Memory, which has a newly expanded alliance with Toshiba; and Virident, which recently received an investment and a major channel win from Seagate. (s stx)
At least Fusion-io has an ally in another big storage player, NetApp. (s ntap) Fusion-io also has OEM relationships with Cisco, (s csco) Dell, (s dell) Hewlett-Packard, IBM and Supermicro. These deals are important for selling into enterprises, but they might not last.
“(Companies) could buy similar products from other people for half the price,” Marks said. “I can’t see Fusion-io sustaining their position.”
The tech industry is littered with companies that got rich in a short period of time by exploiting demand for a hot new technology, only to run into headwinds when the giants of the tech world wake up to the challenger in their midst. Fusion-io is at the point where it’s going to join the former group or become a sustainable tech giant in its own right, should it manage to remain independent in the next year or so.