Microsoft Gets NASty

In less than three months, Microsoft Corp. (Nasdaq: MSFT) will release Windows Powered NAS 3.0, an enhanced version of its Server Appliance Kit (SAK) software aimed squarely at Network Appliance Inc.'s (Nasdaq: NTAP) bread and butter.

It's easy to see why Microsoft wants a bigger slice of the NAS market. Worldwide spending on server consolidation, a major driver of NAS sales, is expected to grow from $5.2 billion in 2003 to $8.5 billion by 2006, according to IDC. Microsoft figures the server consolidation opportunity is enormous, with approximately 1.2 million old servers running Windows NT or Novell Inc. (Nasdaq: NOVL) NetWare, and 400,000 Exchange messaging servers installed just by Hewlett-Packard Co. (NYSE: HPQ) customers.

The threat to Network Appliance is real enough. Without even trying, the hungry Redmond giant has been successfully selling its Windows-based NAS appliance software to HP, Dell Computer Corp. (Nasdaq: DELL), and IBM Corp. (NYSE: IBM) since mid-2000. According to IDC, Microsoft started getting considerable traction after it shipped version 2.0 of its SAK in April 2001 and now has about 30 percent of the total NAS market worldwide (see IDC: Microsoft Ups NAS Share and Microsoft's SAK Attack).

[Ed. note: Cut to a Microsoft executive swinging back in a chair in Redmond... Mmmm, what about this NAS market then? Looks like theres something in it, guys...]

Lo and behold, HP and Dell are set to OEM version 3.0 of its NAS software soon after its launch in May. NAS 3.0, which will come soon after Microsoft launches Windows 2003 Server, will have more advanced file-serving and file-sharing features among client workstations and servers. Windows 2003 Server, formerly called .NET, has also been significantly souped up to take share in the storage market (see MS Touts .NET Storage Features).Charles Stevens, corporate VP of product development in Microsoft's enterprise storage division, says the company will absolutely compete with NetApp -- but it will work with NetApp, too, to ensure Windows interoperates with Network Appliance devices. As testament to this co-opetition, he points to NetApp's recent licensing of Microsoft's Windows protocols. [Ed. note: Actually, the U.S. government forced Microsoft to do this, but perhaps we're splitting hairs.] (See NetApp Scores Windows Protocols.)

"Our biggest competitor in the NAS space is Network Appliance... If a customer asks whether they are our partner, we say, 'No,' " Stevens says. "We are trying to offer a different proposition." However, he says, for customers that have installed Network Appliance, Windows must interoperate.

U.S. Bancorp Piper Jaffray analyst Ashok Kumar warns that NetApp will find it increasingly difficult to sell into Windows environments as vendors like Dell integrate Windows 2003 Server technology into their NAS products. Kumar, in a note to investors today, points to the Shadow Copy of Shared Folders feature in the new Microsoft OS as a "serious threat to NetApp's crown jewels."

Other analysts say it's no surprise to anyone, least of all Network Appliance, that Microsoft has NetApp filers in its gun sights. But to imply that NetApp is about to get its head handed to it by Microsoft is a little extreme.

"To suggest that a copy function is NetApp's single crown jewel -- now threatened by Microsoft's lust to commoditize -- is ludicrous," says John Webster, founder of Data Mobility Group. "While the folks at NetApp don't admit publicly that Microsoft is hot on their heels with this strategy, they are absolutely aware of a hostile presence and have been so for a while." (See NetApp on Red Alert, NetApp: 'Thanks, Microsoft!', and Microsoft vs. NAS: The Sequel.)Moreover, Webster notes that Microsoft has a bigger problem ahead in tackling the open source software movement. "Linux is now eating away at Windows market share within the enterprise," he says. "While there's still lots of growth in the short term for Windows-based storage, longer-term prospects aren't so bright. Linux is fast becoming the next big growth opportunity."

Microsoft’s Stevens agrees the company must execute on a number of different fronts. But he says industry momentum towards lower storage costs and better integration helps Microsoft enormously. "We must be very open, very close to customers, and very trustworthy, and it will work," he says. "We can't just be me-too, lower cost; we have to innovate in this market."

For its part, NetApp is unfazed by the looming threat from Redmond. In a statement responding to Kumar's note sent to Byte and Switch today, NetApp says snapshot capabilities are not a competitive differentiator. "Microsoft is simply adding a feature that it has been lacking for a number of years," the company says.

It should be noted, according to NetApp, that Microsoft's "real goal" is to improve Windows as an application server. "Its storage group is specifically focused on improving the data management and storage integration capabilities of Windows, as well as Microsoft's Windows applications like Exchange Server and SQL Server," NetApp says.

Stevens will outline Microsoft's goals for the storage market Thursday, during his keynote at HP’s National Storage Days