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March 5, 1999

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EMC Corp

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Subject: EMC and the Enterprise
Author: BryanMorgan

I saw a request a few posts ago concerning a text on "Information Management" and I've also seen several posts wondering about small company's competiting with EMC. I wanted to try to explain my view of what EMC does, why I think they'll be successful, and why I plan to buy more if the price is right. I build enterprise systems for a living and understand many of the issues in this area and wanted to put forth my thoughts in hopes of helping those who don't really "get" what EMC does.

WHAT DOES EMC DO EXACTLY?

EMC does three things very well which have enabled them to begin to dominate this market segment. They build high-capacity/high-availability data storage units that work as advertised, they build data access/data storage software that provides for load-balancing, data path management, and storage management, and they provide customer service, technical support, and now, consulting (they call it professional services). Of these three items, the software and professional services businesses have the potential to be very high profit and high margin. The software business, in particular, is booming for EMC. They are the world's fastest growing software company. This is a key ingredient to further dominance, in my opinion, because other vendors, when faced with a gorilla, will simply throw in the towel at some point, and make their systems compatible with EMC's. This allows EMC's software to work with many vendors, instead of just EMC's, which in turn allows EMC to sell more high-profit-margin software.

WHY DO PEOPLE NEED EMC's PRODUCTS?

I read a post a few days ago where someone was saying they didn't use all of their hard drive so weren't sure about the need for EMC data storage. Keep in mind that you probably use your computer for word processing, a few spreadsheets, Internet access and email, and a couple of games. That right there requires maybe 1GB. Now, imagine you are General Motors. You make hundreds of thousands of cars in hundreds of models at hundreds of plants in dozens of countries. Each individual cars has parts coming from maybe 500 suppliers. On top of all this, you have several hundred thousand employees to keep up with, millions of pieces of equipment (and hundreds of those suppliers)...can I stop now? On top of all the databases (probably either IBM - DB/2 or IMS - or Oracle) used to store these terabytes of data, you will be building data warehouses to allow managers and employees to quickly query the data and extract needed information.

Let me paint another picture of the future of data storage. Every mouse-click and Web site access someday will be tracked (whether you like it or not). Today, advertisers pay advertising rates based on the number of 100,000 pairs of eyes to see an advertisement. They can show a commercial and have a fuzzy idea what a certain audience (say, an NFL game) is interested in. Even then, though, perhaps only 3 out of 100 people are actually interested in buying a Chevy truck. That's alot of money to spend for a generic ad to a few interested individuals. Now, imagine 10 or 15 years from now where all TV advertising is sent over streaming video servers. These servers will have at their fingertips perhaps every piece of programming and movie ever shown. It will be available to you for free by simply viewing and responding to some targeted advertising. The advertiser loves this model because they will know (based on your previous orders and Web site visits/purchases) which types of products you are actually looking at buying (TV's, cars, etc.). They will be able to pinpoint EXACTLY which customers to advertise to and will build on-the-fly custom advertisements for you to view. How does all this apply to EMC?

Imagine the sheer volume of data storage used to store all the mouse-clicks on the Internet!! Now combine that with the high-powered servers required to handle all the video-streaming needs of a nation!! The technology is not ready now, but trust me...it will be. EMC already makes a Media Server storage product.

WHY NOT JUST BUY A SMALLER COMPETITOR'S CHEAPER PRODUCT?

Keep in mind that the situations described above will only be required by America's largest corporations. EMC DOMINATES that market and is content to leave the scraps (1TB and less) to others. It's the same principle that allows small business to run over $10K Windows NT Servers but allows Sun to sell $40K UNIX Servers and IBM to sell $1M+ mainframes. Enterprises will pay for the highest quality and best capabilities in terms of performance, scalability, and availability.

Smaller competitors may nip at EMC's heels but there are a few enterprise segments that must be 100% reliable. Data storage devices, relational databases, and communications backbones come to mind as "accept no substitutes" areas.

EMC IS BIG. WHY NOT INVEST IN A STARTUP COMPETITOR?

This is a key area that I think many investors new to this technology don't understand. From a purely financial standpoint, if two companies are competiting, and both have good financials but one has a 40% market share and one has a 2% market share, the safe bet is on the dominant company as long as their vision and strategies look correct. If you want to gamble on a "growth" stock, it is true that the 2% company could grow to 4% or 5% and provide a good return (if the management is smart...not a guarantee in a small company...). However, keep in mind that we're talking about the technology industry. Every segment of this industry is ruled by one, or at most two, gorillas. Corporate managers, large-system developers, CIO's, etc. like to buy what they know. This is because of the long-standing tradition in this industry of companies promising the world and not delivering. If your Fortune 500 companies data is on the line, no gambles can be taken to save a few bucks. In short, you have to ask yourself: which will grow faster...the low end of the data storage market or the mid- to high-end. EMC, for now, is willing to give a little on the low end because of the humongous growth in the mid- to high-end. Their CEO's every waking moment is spent trying to determine ways to further strengthen the grip on this market. Therefore, if you think high-end data storage will continue to grow at a large rate, EMC is the only choice, in my opinion.

CAN EMC GROW ANY FURTHER?

This is where it starts to get fun. Even if EMC stagnated and simply kept their market share (they have a 2%...2%!!!!...customer turnover) they would continue to grow quickly over the next five years due to the size of their market. Data storage is currently less than a $10B market. EMC's CEO, Michael Ruettgers, said recently that they expect this market to grow to $35B by 2001 and $50B by 2002. Think a bit about what I tried to explain above and you'll start to understand why. EMC currently has a 36% market share and it's growing every year. EMC had $2B in sales last year. I'll pause for a moment while you do the math.... (36% of $50B in five years....). Breath-taking, huh?!? Several analysts have commented on EMC's conservative estimates but that's what we're looking for as investors. Responsible management that will not promise the world and spend time chasing windmills (a la Larry Ellison of Oracle) but instead will set reasonable estimates then go about the business of destroying them.

CONCLUSION

None of this has anything to do with the stock price. I personally don't think it's possible to buy-and-hold tech stocks forever without semi-annual reviews of the technologies, competition, etc. To me, there is no question that EMC is one of the few tech companies that you have to own. The problem I have is the current valuations with these good companies. Any significant correction over the next three months (a la CSCO and EMC back to the 70's) is a screaming buying opportunity. Other than that, you'll have to make your own decision based on your short-term/long-term goals. (Using your mouse you can highlight, copy, and then paste any of the above message into your reply)

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