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IBM Pays Big For Little Startup

Did IBM pony up to 100 times the initial investment for a startup? Why?

An Israeli news site says IBM paid as much as $300 million for storage startup XIV. Founded in founded in 2002 by graduates of the Talpiot program, Israel's elite military technology think tank, XIV makes Nextra, a grid-based SAN that runs on commodity hardware such as Intel-based servers and Gigabit Ethernet switches.

IBM’s purchase price is 100 times the $3 million investment made by XIV's chairman and other private investors. IBM declined to comment on these numbers, but if the $300 million figure is accurate, it seems awfully high for an obscure company with an unknown number of customers. (XIV's Web site only mentions one customer, an Israeli bank.)

So why the high price tag? I see several reasons.

First, off-the-shelf hardware can dramatically lower the cost per terabyte: $5,000 per terabyte for Nextra vs. $8,700 per terabyte for an EMC DMX-3, according to a column from Network Computing editor David Greenfield.

Second, XIV claims to eliminate the need for tier-based storage, in which data is stored to different mediums depending on its value or usage. A single tier eliminates costs of managing multiple platforms, and the expense and hassle of migrating data among platforms. As the No. 2 storage provider behind EMC, IBM obviously hopes to gain ground by undercutting EMC's flagship SAN.

Third is the effect of user-generated content on businesses. As if your employees weren't generating enough data, now enterprises have to manage content from customers, too. From simple feedback forms to hosted blogs to customer photos and videos, nearly every company on the Web today is a media company. Enterprises require cost-effective solutions to address this new reality.

There are other reasons as well. XIV holds six patents around its technology, and reportedly has filed for as many as 50. IBM, which routinely leads the technology industry in patents awarded, knows patents provide leverage for cross-licensing and litigation.

Then there’s the issue of fit. While IBM wouldn't describe its server offerings as "commodity," it certainly won't mind selling you IBM hardware for your Nextra array.

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