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The Much-Hyped PlayStation 2

by Chris Connor

Brimming With Potential

If Sony {SNE} had played its cards right, the PlayStation2 would definitely be in the driver’s seat as the Xbox and GameCube are set for release in the fall.  The dominant leadership in consoles and the chance to grab a substantially large user base for a full year was right there for the taking, giving SNE distinct advantage in the upcoming next-generation console wars. Certainly the PlayStation2 had a lot going for it: it is the sequel to the best-selling console of all-time, its graphics are at least four times better than its predecessor (128 bit versus 32 bit), it took advantage of the DVD player finally hitting the mainstream, game companies were lining up in droves to develop games for it, and Sega’s {SEGNY} Dreamcast was not a real competitive threat.

Ball Dropped

Although the PlayStation2 has sold about 10 million units world-wide thus far and enjoyed the biggest launch of any console ever in the U.S., it could be said that Sony has dropped the ball and left the door wide open for the upcoming Xbox and GameCube.   For starters, SNE was forced to slash the size of the initial PlayStation2 launch due to parts shortages, which created multiple frenzies at electronics retailers.  Everybody seemed to want a PlayStation but there was no way to get one unless you wanted to pay outrageous prices on eBay {EBAY}.  Six months later, prices for the PlayStation2 have dropped considerably on eBay, but it is still nearly impossible to the console at the nearest electronics retailer.  There has also been ample criticism over the quality of the console’s 26 launch titles.  Industry insiders feel that the games were rushed to meet the launch date.  Finally, rumblings that Sony has irritated game developers (making games for the PlayStation2 is reportedly a major challenge and Sony has been less than helpful to developers), publishers (lower than expected operating results because not enough PlayStation2 consoles have hit the market yet), and electronics retailers (Sony has allegedly threatened various major game retailers with less unit shipments if those retailers don’t remove Xbox ads from their stores)  have been surfacing.

Combined, these factors threaten Sony’s reign, especially if Nintendo {NTDOY} or Microsoft {MSFT} do a better job in execution.  That said, the SNE should get its act together with the Playstation2 once it can ship more units.  In addition, the quality of games for the market-leading console are already improving significantly with such leading titles as the Bouncer, Onimusha (the first million seller for the system), Gran Turismo 3: A-Spec, Dark Cloud, and Twisted Metal: Black.

Which Game Makers Will Benefit the Most from the PlayStation2?

So far, Activision {ATVI} has been the most prudent game maker and posted the best operating results, because it has seriously limited its PlayStation2 exposure from the start.  Nevertheless, don’t expect that the PlayStation2’s struggles will last forever.  If the PlayStation2 juggernaut ever does get finally rolling, several of the key game makers with large PlayStation2 exposure should reap rich rewards given the build up in demand for the console and quality games (see table below for the breakdown of PlayStation2 exposure of several publicly-traded game makers) .

Surprisingly, two out of the three game makers with the biggest PlayStation2 exposure, Interplay {IPLY} and 3DO {THDO}, are trading under $2 per share. IPLY appears to have at least two mega-hits on its hands: Run Like Hell and Baldur’s Gate: Dark Alliance.  Run like Hell intends to generate substantial unit sales by scaring gamers silly as they must constantly run from ultra-intelligent, relentless aliens seeking to kill them.  If Interplay can capture the same success that the Baldur’s Gate series has accomplished on the PC for the PlayStation2, it will definitely have a blockbuster on its hands and the top role playing game on the PlayStation2.  3DO will look for similar cross-platform success with its ongoing Army Men franchise and High Heat Baseball 2002, which are also big hits on the PC.  High Heat Baseball 2002 stands a good chance of being the top baseball title on the PlayStation2.

The other game maker with the most PlayStation2 exposure is of course Electronic Arts {ERTS}.  As can be expected, Sony has given EA special treatment because the company is the largest independent game maker in the world.  SNE also does not want Electronic Arts to have a major presence on the Xbox, so it will try to make the game developer as happy as possible.  The big blockbusters on the way from Electronic Arts are expected to be Sled Storm 2 and Medal of Honor Frontline (the original was the best-selling 3D shooter on the first PlayStation).

The other game makers may not have as many major PlayStation 2 games as the aforementioned companies, but Take Two {TTWO}, Eidos {EIDSY}, and Infogrames {IFGM} are worth watching.  Take-Two should attract controversy again with its latest installment of the notorious Grand Theft Auto series.  In the latest installment, crimes will be substantially more realistic because of the quantum leap in graphics for the game.  Infogrames will go after the top spot in vehicular combat, but this genre will be flooded with new titles in the near future.  Eidos’ Project Eden and Herdy Gerdy are two ambitious games in development that eventually become monster hits; however, the company has a reputation for not delivering the goods due to past disappointments such as Daiktana, Omikron, and Urban Chaos.  THQ {THQI} also should be watched for future WWF {WWF} wrestling titles.  Currently, THQ is focusing all of its PlayStation2 efforts on Red Faction, while its bread and butter has always been wrestling games.  Red Faction will likely be a hit, but the company is creating significant risk by placing all of its eggs in one basket.

The Ascent of the Video Game Industry

by Chris Connor

R.I.P. Old School

Long gone are the days of old school games such as Pong, Pac Man, and Donkey Kong.  The video game has evolved from a very simplistic experience into a multi-billion dollar industry.  In fact, only movies garner more of America’s entertainment spending than video games.  Video games (computer and console) now have the power to grip gamers with incredibly realistic graphics, involving story lines, addictive role playing, management capabilities (i.e. managing a person’s life in the Sims or trying to “level up” a character in Diablo 2 or Baldur’s Gate 2), and the ability to play against friends or against people all over the world.

Hello New Breed

Without a doubt this is one of the most exciting times in the history of video games. The long-awaited sequel to the best console of all-time (PlayStation) was launched in the fall and two more next generation consoles systems will appear on the gaming scene over the next year, Microsoft’s {MSFT} Xbox and Nintendo’s {NTDOY} GameCube.  Furthermore, Nintendo’s Game Boy will finally have a true upgrade (instead of just adding color) as the Game Boy Advance is set to be shipped in June.  If that was not enough, Sega {SEGNY}, a company famous for critically acclaimed games, decided to finally leave the hardware business and focus solely on making games for all gaming platforms.  This will benefit gamers by not forcing them to buy a Sega console to play the company’s massive library of quality games like NFK2K1, NBA2K1, Jet Grind Radio, and Sonic the Hedgehog.

Long Awaited Features

These next generation machines will usher in certain features that gamers have craved for years such as backward compatibility (Game Boy Advance and PlayStation 2), the ability to play games that are compatible with both a handheld and a console (Game Boy Advance and GameCube), and play console games over high speed Internet connections (each console will have a broadband adapter).  PlayStation2 or a Game Boy Advance will offer backward compatibility,  which allows gamers to play the games that they have owned for years without having to hold onto the old machine.  The Game Boy Advance is also set to make quite a tag team with the GameCube, because a gamer will be able to play the same game on both systems.  In other words, a gamer can level up his character in an RPG on his Game Boy Advance in the doctor’s office and then transfer that data to the Game Cube later in the afternoon to continue playing the game at home, in front of the larger television screen.  Finally, consoles are getting ready for the broadband era through the inclusion of a broadband adapter.  This prudent move allows for the consoles to be positioned for the eventual adoption of Internet networked gaming.

Investing in the Gaming Revolution

ADRs of both Nintendo and Sega are traded in the U.S., but as bulletin board issues.  This frees both companies from many of the regulatory requirements associated with a listing on a major exchange, thereby severely limiting the amount of readily available financial information.  ADRs of Sony are traded on the NYSE, but gaming only contributes a small portion to the electronic conglomerate’s total operations.  Similarly, sales of the Xbox are likely to pale in comparison to those of Microsoft’s operating systems and Office suite.

This leaves the only publicly-traded game makers as the only the way to gain direct exposure to this burgeoning industry.  Below is a list of the top publicly-traded game makers.

Data Banks of the Post-PC Era

by Chris Connor

Over the past year, makers of PC disk drives such as Western Digital {WDC}, Maxtor {MXTR}, Quantum Hard Disk Drive {HDD}, and even Seagate {SEG} have experienced difficult times.  All four of these PC disk drive makers have witnessed lackluster revenues and stock prices.  This trend will likely continue as PCs continue to decline in price.  However, other areas of storage do not look so dismal.  In fact, the demise of the PC is creating substantial growth opportunities in storage due to the overwhelming use of the Internet.  All of the data that traverses the Internet has to be stored somewhere.  Strong demand for non-PC storage also gets a boost from the increasing use of such handheld devices as Palm Pilots and cell phones.  This strong demand for non-PC storage will likely raise the fortunes of several key companies in several key areas of storage.

At first glance, it would appear that enterprise storage behemoth EMC {EMC} stands to benefit the most from the vast amount of data transmission that the Internet is facilitating.  However, there are other companies in other areas of storage that could benefit as much as, if not more than, EMC in the post-PC era.  Are these other storage companies unknown diamonds in the rough selling at inexpensive valuations?  Not really.  Wall Street has already started its love affair with such non-PC storage stocks as Brocade {BRCD}, Gadzoox {ZOOX}, Network Appliance {NTAP}, and Sandisk {SNDK}.  This attraction, however, unlike those based on a general affection for Internet stocks, is founded on some extremely solid fundamentals that are likely to continue to drive these stocks higher.  Basic exigencies fueling this growth include the aforementioned need to store Internet data, the need to manage all of this data more efficiently, the ability to store MP3 songs in MP3 players, and the ability to store data in handheld computers.

Companies like EMC, Network Appliance, and Gadzoox should benefit the most from the need to store Internet data. Investors should take note that these companies focus on three different architectures, even though EMC sells products in the other two storage architectures.  EMC is the worldwide leader in the enterprise storage system market.  EMC’s primary products store, manage, retrieve, back up and share information from all the major computing platforms such as mainframe, Windows NT, UNIX, and Linux throughout the corporate enterprise of customers, suppliers, and employees.  Network Appliance is the leading supplier of network attached data storage devices with a market share of close to 42 percent.  Network Appliance’s products reduce the retrieval time and increase the accessibility of data stored on a network.  According to the Internet Research Group, a market research firm, Network Appliance has the leading market share in Internet caching.  Cache products bring frequently accessed data closer to the end user, thereby reducing waiting times for user access to web sites.  Gadzoox, on the other hand, is a leader of a server-to-storage type architecture called the Storage Area Network, or SAN.  SAN has received an amazing amount of investor interest.  A SAN is basically a storage version of a LAN or Local Area Network connected by Fibre Channel.  Fibre Channel is a high-speed storage networking technology that serves as the backbone for SANs.  SAN represents the best performing networking storage technology today, as it eliminates bandwidth bottlenecks that were commonplace with older storage to server systems like SCSI.  Currently, no other storage architecture can claim the level of speed that SANs are capable of delivering.

Companies such as Legato {LGTO} and Veritas {VRTS}, as well as EMC, provide network storage management software to protect data, ensure the availability of that data whenever it is needed, and manage the data efficiently.  The beauty of network storage management software is that it is not limited to one storage architecture.  Network storage management software supports all three of the storage architectures previously mentioned - enterprise, network attached storage, and SAN.

Flash memory takes advantage of the Internet as well, but not as a means of storing the abundance of data that accumulates on the Internet.  Flash memory capitalizes on the explosive growth industry of portable devices such as Palm Pilots, wireless phones, and MP3 players.  In addition, flash memory can be used in digital cameras and then removed to transport the images to the Internet to send to friends, relatives, or business associates, etc.  Portable devices use flash memory products because of their small size and the ability to remove the memory whenever necessary.  Flash  memory is also non-volatile, which means that flash memory requires no power to store data.  Companies primarily focused on flash memory products include industry leader Sandisk, Silicon Storage {SSTI} and M-Systems {FLSH}.

Storage Area Networks: Are They Hyped or for Real?

by Chris Connor

Overview

Storage area networks (SANs) are basically storage versions of LANs or local area networks connected by fibre channel.  Fibre channel is a high-speed storage networking technology that serves as the backbone for SANs.  A SAN allows all storage devices to be available to all servers on a LAN.

The Choice of IT Managers

SAN represents the best performing networking storage technology today, as it eliminates bandwidth bottlenecks that were commonplace with older storage to server systems like SCSI.  Currently, no other storage architecture can claim the level of speed that SANs are capable of delivering, making it the storage architecture of choice for IT managers.

Advantages of SAN

The SAN storage architecture is still in its infancy, but it has already found a killer application in the short term with the back up of data.  Due to SAN’s broadband capabilities, it takes backup traffic off a company’s primary or non-storage network which enables a company to backup its data during business hours.  Computer professionals recommend that companies have two to three backups of all of their files to be prepared should some unforeseen disaster occur.  SAN also offers the advantage of distance.  In a SAN, storage devices can be placed up to 500 meters apart by using fiber optic cable.  The ability to separate storage devices by this much distance can minimize a company’s exposure to damages from a single catastrophic event.  In other words, by separating its storage devices by significant distances a company stands a greater chance of losing only one storage device instead of several should a disaster occur.

The Players in SAN

The first article in this series mentioned Gadzoox in the SAN area, but there are several other significant SAN players such as Brocade {BRCD}, Vixel {VIXL}, Emulex {EMLX}, and Qlogic {QLGC}.  Qlogic and Emulex focuses more on fibre channel than on the actual SANs - which means that it concentrates on the broadband aspects of storage technology.  Brocade, the SAN stock with the largest market cap by far, also focuses largely on fibre channel by providing fibre channel fabric solutions to the SAN backbone.  Gadzoox has become the leading SAN solution provider with a 66 percent market share in the SAN hub and switch segment and over a 98 percent market share in the SAN managed hub market.  Vixel is a major industry player that just went public in September.

Weaknesses of SANs

For all their potential, SANs are not without their problems. According to John William Toigo’s The Holy Grail of Storage Management, IT professionals must have extensive knowledge to manage SANs properly as SANs encompass both storage and networking technologies.  This combination of network and storage technology makes SANs more difficult to manage than traditional storage systems. Normally, network managers do not purchase SANs.  System administrators buy SANs, and they usually know little about LANs.  Another weakness of SANs is that they are completely dependant on fibre channel.  Fibre channel is largely a niche technology that is very expensive to integrate into a company’s larger network, which is usually Ethernet-based.

Summary

SANs are currently the best performing storage architecture - which makes them attractive to IT managers.  The SAN architecture also looks to be well represented in the stock market with such high flying SAN stocks as Brocade, Emulex, and Gadzoox.  However, investors may want to consider that SANs represent only a temporary solution for storage issues.  The biggest advantage of SANs is the speed with which data can be retrieved.  The SAN does not encumber other LAN functionality because the SAN is a network unto itself.  However, what happens when a company’s regular computer network increases its bandwidth so much that it can support storage devices on that network without any significant performance loss?

Network Attached Storage Versus Storage Area Networks

by Chris Connor

Overview

Although some of the differences of Network Attached Storage (NAS) and Storage Area Networks (SANs) have been discussed several times in this series thus far, a full, blow by blow analysis of these two rapidly growing storage technologies is warranted.  First, lets start with the basics.  SANs are simply storage devices and servers connected together the way that computers are connected on Local Area Networks or LANs.  A SAN uses fibre channel as its backbone while Ethernet usually serves as the backbone for LANs. On the other hand,  Network Attached Storage connects to the network instead of having a separate network devoted solely to storage.  An NAS appliance is not tied to a server like SANs are because it acts like a server itself - as an appliance linked to a network by an Ethernet card.  This appliance usually consists of a group of hard disk drives, a processor, and its own operating system.

Ethernet Versus Fibre Channel

When comparing NAS and SANs, it is extremely important to the know the differences between Ethernet and fibre channel.  Fibre channel is specifically targeted toward storage, while Ethernet is much more widely available as a network standard.  Because it is a specialized technology, fibre channel makes SANs much harder to install and maintain than a simple network attached storage appliance.  Only IT professionals with knowledge of both storage and networks should install and maintain SANs.  However, that is not usually what happens.  Most of the time, SANs are the responsibility of system administrators who are usually familiar with storage but not networks.  On the other side, an NAS appliance simply acts like any other server on the network and is installed only with a web browser and installation wizard.

The one advantage that fibre channel currently gives SANs over NAS is performance.  Because fibre channel is dedicated to storage, it currently offers higher speed than an NAS on an Ethernet network - since there are various other types of traffic on the network.  The presence of these various types of traffic on a network is the reason that storage has been directly powered by a server instead of resting on a network the way an NAS appliance does.  However, increasing bandwidth is changing all of that.  Soon, Ethernet will likely pass fibre channel in performance as companies such as Cisco {CSCO} and Lucent {LU} are working on improving Ethernet speeds.  Already, these two giants have created the fastest Ethernet so far - 10 gigabit Ethernet.

The Stocks

In terms of the sheer number of stocks with significant investment potential, the SAN market wins over NAS, hands down.  The SAN market boasts several companies with investment potential while NAS has only one, Network Appliance {NTAP}.  The SAN market consists of several components such as managed hubs, routers, adapters, and switches.  There is usually one company that dominates the market for each SAN component - like Gadzoox {ZOOX} with managed hubs, Crossroads {CRDS} with storage routers, and Brocade {BRCD} with fibre channel switches.  In addition, several SAN companies that make fibre channel adapters show investment potential - including Emulex {EMLX}, JNI {JNIC} and Qlogic {QLGC}.

However, some investors may prefer a single company that dominates its market the way that Network Appliance does in NAS.  Network Appliance dominates NAS because of superior technology like its Write Anywhere File Layout (WAFL) system.   WAFL enables efficient data storage of heterogeneous file formats from various environments such as Windows NT, Unix, and the Web.  In fact, WAFL is the closest thing to true data sharing that NAS offers.  The only way for true data sharing to become a reality would be if only one operating system were used - and that will likely never happen.

Conclusion

In a head to head battle, the simple NAS appliance should easily beat complex SANs over the long term as the superior storage standard.  There will not be a need for specialized storage networks if the general network can easily support key storage applications such as the backing up of data.  Are SANs doomed over the long term then?  Not necessarily.  Network Appliance and Brocade are spearheading the idea of a NAS-SAN combination to create a single, optimal storage standard.  John William Toigo, in his book The Holy Grail of Data Storage Management, says “Such an integration would be a step toward improving the scalability of NAS storage, while setting the stage for enterprise-wide storage infrastructure management via a back end Storage Area Network.”  Simply put, SANs will likely survive in some form over the long term.  With that being said, investors do not have to limit themselves to NAS, with just Network Appliance as the market leader, while there are several leaders in SAN that should continue to grow at amazing paces in the short term.  Pure SAN stocks like Brocade, Crossroads, and JNI have grown annual revenues in the 100 to 400 percent range.  To sum everything up, NAS should emerge from a battle with SAN as winner, but SAN stocks still possess long term potential due to a possible NAS-SAN combination.