451 Research analyst Simon Robinson wrote the piece below describing the downfall of fellow San Diego firm Nirvanix.
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In other words, we are firmly established, broadly diversified, and financially sound (read: profitable).
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Emphasis in red added by me.
Brian Wood, VP Marketing
Three reasons why Nirvanix failed
Analyst: Simon Robinson
Anyone following the adoption of cloud-based IT has probably heard that Nirvanix – one of the pioneers of the cloud storage model – has recently, according to widespread reports, shut its doors. While that is unfortunate for the company’s employees, it would appear to be particularly unfortunate for Nirvanix’s customers, which have apparently been given two weeks to move all of their data out of Nirvanix facilities. Although the consequences of not doing so are still unknown, one can only fear the worst.
This is a nightmare scenario for customers, which are faced with the real prospect of, at the very least, experiencing limited access to their data, and at the worst, of losing their data altogether. It’s also potentially a big blow for the cloud model, since it seems to validate those fears around the risks of handing your data over to a third party. Indeed, the failure of a cloud player is likely to have a larger impact on the perception of cloud than any outage.
Exactly how this will ultimately play out has yet to be determined. The immediate response on the Twittersphere suggests that plenty of other firms are stepping in with offers of help to stricken Nirvanix customers looking for a way to get their data out (although again, exactly how realistic this will be for data volumes that in some cases might exceed multiple petabytes remains to be seen). There may be legal challenges; there may be rescue attempts or a fire sale – it will be an interesting story to watch, for sure.
But taking a step back, one question to ask here is: why did Nirvanix fail, and what are the implications of this for other cloud storage specialists? After all, Nirvanix seemed to have a lot going for it. As a pioneer of the cloud storage-as-a-service model, it had first-mover advantage, and this brought it plenty of funding – roughly $70m in total. It also brought in an extremely experienced management team led by enterprise storage veteran Scott Genereux. This focus helped it establish a good-sized customer base – it claimed more than 1,200 customers in mid-2012 – including some large organizations in the media, financial, healthcare and education verticals, not to mention plenty of service providers. Indeed, in the most recent storage wave from TheInfoPro (a service of 451 Research), Nirvanix lined up as the third most popular ‘in use’ external cloud storage offering among medium and large enterprises, behind only Amazon and Microsoft. Finally – and crucially for any startup in terms of third-party validation – it won the support of some of the industry’s heavyweights: a strategic partnership with IBM Global Services in October 2011, as well as a less formal partnership with Dell.
It seems that these tailwinds ultimately failed to count. Moreover, the fact that Nirvanix has so far been unable to sell its assets – even through a fire sale – suggests that prospective suitors saw nothing that interested them, or at least they deemed that it would be more trouble than it was worth.
Why is this? We believe the writing has been on the wall for Nirvanix for some time; the cracks have been showing for several months. CEO Genereux – along with other senior managers – left the company earlier this year, and the company went into lock-down mode. Although a new CEO – former CIO of Zynga, Debra Chrapaty – was appointed in March, the company has made few public statements since. It has only issued three press releases this year, always a sign that things aren’t going swimmingly.
What went wrong
But these are only the final scenes – symptoms rather than causes – because the seeds of Nirvanix’s failure were sown much earlier. Indeed, the company may have been doomed from the start. We think there are three primary reasons for its failure.
1. A capex-centric model drained the coffers. One of the aspects of Nirvanix’s approach that made it stand out from the crowd is that it was, in effect, a service provider, offering storage as a service billed on a dollars-per-gigabyte basis at an extremely competitive price point. The idea was that this would appeal to customers because it simplified things – one bill, only one throat to choke if things go wrong, etc.
But in reality, this became the albatross around Nirvanix’s neck because it had to construct its own physical infrastructure at no little expense. The company built out several storage ‘nodes’ worldwide for storing customer data, and also offered the option for customers to deploy one its nodes on-site – although still managed by Nirvanix – as a ‘private cloud.’ This model, we believe, was its undoing. It raised a good amount of funding and used that cash to buy the hard drives, enclosures, racks and other components to assemble multiple very large storage systems, and then rented floor space in datacenter facilities, but that is not the way to offer differentiated value – it is table stakes stuff. And in a market where prices are being continually squeezed by much larger rivals – giants such as Amazon and Microsoft – Nirvanix was always going to be at a disadvantage because of these rivals’ enormous economies of scale.
This perhaps wouldn’t have been so bad were Nirvanix operating on a relatively small scale, but Nirvanix was a big-game hunter – as far as it was concerned, the more data, the better. It cited several multi-petabyte deals, including an 8.5PB digital archive with the University of Southern California, although it said other deals were substantially larger. Storing such data volumes requires massive capex investments, and although the inner workings of Nirvanix’s technology were never fully discussed (see point 2, below), Nirvanix’s pay-per-month business model meant it had to bear much of the up-front cost itself. This is a very difficult model to sustain at significant scale, especially for a startup.
2. Where was the real IP? Allied to this was a nagging suspicion that Nirvanix had a relatively small base of software intellectual property. Although it waxed lyrical about its ‘Cloud File System,’ the company was reluctant to share details of its underlying storage architecture and whether there was any significant IP here. The success of the business would have depended in large part on its ability to scale effectively and efficiently; if it had little real smarts here, then this would double the challenge of remaining cost competitive. It also relied fairly heavily on partners for crucial aspects of its service; for example, it partnered frequently with cloud storage gateway vendors such as Panzura in order to ‘on-board’ data onto its cloud. Although it had some of its own capabilities here (i.e., CloudNAS), these didn’t scale to meet the requirements of many customers.
This is not to say that Nirvanix wasn’t innovative. It pioneered the notion of storage capacity as a service, while its ability to offer replicated data services across multiple physical locations worldwide – either for disaster recovery, archiving and backup purposes, or for content delivery – appealed to large organizations looking to deal with data growth, improve their ability to survive a disaster, improve global collaboration, get off of tape for DR, and so on.
All of this has enormous appeal if it’s at the right price, and the problem for Nirvanix was that the right price for the customer was just not enough to sustain a business. We know of a large customer where Nirvanix effectively proposed to bear the up-front hardware costs in order to win the contract and have a marquee reference. Although this is hardly unusual in the IT world, it’s only viable for a small amount of cases; losing money on every account – even if only in the short term – may win plenty of customers, but it will also quickly drain cash reserves.
3. There’s limited appeal in storage-only services. Storage doesn’t exist in a vacuum, and while there are undoubtedly plenty of storage-specific services, such as those mentioned above, in reality, this is still a small market in aggregate. Moreover, while storage as a service for things like backup and DR is indeed booming, adoption is overwhelmingly among small and mid-sized businesses. Nirvanix, on the other hand, was primarily targeting large enterprises because of the much larger deal sizes on offer.
Nirvanix never really succeeded in evolving beyond offering storage as a service. Amazon sells bucket loads of storage, but in large part, this is because the storage is attached to some other application or service also running on AWS. Although it was hard to see how Nirvanix could effectively compete as a broad-based IaaS provider, this ultimately limited the extent to which customers regarded it as a strategic cloud partner; if customers wanted anything other than storage in the cloud, they had to look elsewhere.
IBM is a case in point. Despite the strategic relationship between the two – which, we understand, did result in plenty of sales – IBM’s acquisition of SoftLayer may have effectively ended the relationship. SoftLayer – which offers a variety of managed and cloud services – offers storage as just one component in a range of integrated infrastructure services. This is ultimately what many customers want as they evolve to the cloud. We note that IBM says it is working to offer all Nirvanix customers – be they IBM or not – a migration path to SoftLayer.
What are the implications?
A separate report will examine the wider fallout of Nirvanix’s failure on the cloud market. But one question that has arisen is what this says about other players in the cloud storage space, specifically. We believe this largely depends on the type of player. We don’t believe there will be a huge impact on software-centric storage players that, rather than offer their own services, build software – sometimes paired with commodity hardware – and sell it to service providers, which then offer that storage to customers as part of an integrated service. This may be a storage-specific service, or it may be part of a broader application or service. We believe this market – formed of many vendors offering things like object storage and cloud storage gateway – remains a healthy and competitive sector that, although not without its challenges, still holds much promise.
The outlook for more storage-centric service providers may ultimately depend on their focus. Amazon obviously has a hugely successful business – in terms of adoption – around S3, and as discussed, storage is just one of a much broader suite of infrastructure services and applications. While it’s true that Amazon’s storage success has encouraged a legion of other service providers – small, medium and large – to invest in building out their own cloud storage services, the jury remains out on how successful these efforts have been to date. Certainly, our research suggests that the scale players – chiefly Amazon, but also Microsoft – are becoming more dominant in public cloud, and by continually reducing prices, they will keep the pressure on smaller players. So far, most of the other storage-centric cloud players have succeeded by focusing on relatively small environments – online/cloud and hybrid backup being a particular strong growth area.
While its always tempting to view one failure as symptomatic of a wider issue, it’s important to view it as just that, the failure of one relatively small operation. Nirvanix is not the first (recall Iron Mountain’s decision to pull its cloud storage service a couple of years ago, or even the failure of storage service providers like StorageNetworks Inc over a decade ago), and it probably won’t be the last, although it is one of the most high-profile businesses of the cloud era to actually fail. Ultimately, though, we think Nirvanix’s problems were self-inflicted. The market for cloud storage undeniably exists, but as a small startup, Nirvanix’s focus was on the wrong part of the solution. The cloud provider market is always going to be a tough space for any company to make money – even giants like Dell have concluded they are best off focusing elsewhere.
Nonetheless, the Nirvanix experience suggests that simply offering vanilla ‘storage as a service’ is by itself not enough to differentiate either against the large public clouds or against traditional on-premises storage system vendors (EMC, IBM, HDS, NetApp, HP, etc.), which also boast considerable scale economies. Nirvanix will go down as a cautionary tale and a brutal example of that old technology maxim: innovate or die.