During the conference yesterday I asked Phil Soran, CEO of Compellent, if the up-and-coming crop of Internet storage services like Amazon S3 are a competitive threat to his business.

His answer was two parts: 1) Compellent sees storage services like S3 as potential customers, and 2) Compellent focuses mainly on customers that need higher-end storage.

I understand his response but I respectfully disagree with some of his thinking.

First, storage services probably are not going to buy Compellent storage. It’s simply too expensive on a $/GB basis. It scales vertically pretty efficiently (by adding disk shelves) but not horizontally. If I were building a storage service I would look for the cheapest disk I could find. Then I would find a way to make it scale (virtualization, load balancing, mirrored storage, etc).

Second, it’s true that many companies need the storage performance that a company like Compellent can provide. Sadly services like S3 will still eat into Compellent’s growth — and their own story proves it. Compellent’s big product claim is their automated tiered storage. Basically a customer can install fast fiber-channel drives and slower sata drives in the same SAN. The SAN will then migrate less frequently accessed data blocks to the slower drives — keeping the faster drives free to store more high-performance data. It’s a smart concept. The problem is what happens when companies start replacing those sata drives with S3. Or, what if S3 becomes the third, and lowest, tier of storage. People just won’t need to buy as many new drives and shelves.

Sure, but companies will always need faster storage right? Well, not if the SaaS companies have something to say about it. My customers aren’t buying storage for Microsoft Exchange and Sharepoint anymore because I provide it at my datacenter. My customers aren’t going to buy storage for Microsoft CRM. Eventually they will be outsourcing their ERP and business intelligence applications to SaaS providers. And guess what? Some of those young SaaS providers are starting to build their platforms on top of the online storage services.

Phil made a good point that many companies don’t want to store confidential information on “shared” storage services. I agree that this is an impediment to the growth of the Internet storage platforms. But this is definitely starting to change — especially with SMB. The larger companies will follow suit as they outsource more of their applications to SaaS providers.

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