EMC vice chairman Bill Teuber sent an email to customers and partners stating the vendor has eaten price increases so far, but will begin to pass them along to customers after this month. He also wrote that EMC does not expect supply problems because it is the largest vendor of external storage systems, but it has to pay more for the available drives.

“EMC has absorbed the price increases that have been passed on to us and will continue to do so through the end of the month,” Teuber wrote. “Unfortunately we will not be able to sustain that practice. Beginning in Q1 2012 we will be increasing the list price of hard disk drives up to 15% for an indefinite period of time. While we hope that this increase is temporary, at this time we cannot forecast how long the flooding in Thailand will impact HDD [hard disk drive] pricing.”

Another email Teuber sent to EMC personnel said the price increases will be from 5% to 15%. He also wrote the increases will apply to all EMC product lines.

The shortage is expected to affect PC drives more than enterprise drives, but EMC enterprise storage rival NetApp lowered its revenue projection last month because of expected shortages.

Teuber referred to NetApp indirectly in his email, stating “Many of our competitors have already announced drive shortages and price increases and have stated that this will have a material impact on their ability to hit revenue expectations now and in the future.”

An EMC spokesman today said the vendor would give a full update on the supply chain issue during its earnings call in January.

The shortages are affecting vendors throughout the IT industry. Hard drive vendors Seagate and Western Digital have major manufacturing facilities in the flooded areas. Last month IT research firm IDC forecasted hard drive prices should stabilize by June of 2012 and the industry will run close to normal in the second half of next year. According to IDC, Thailand accounted for 40% to 45% of worldwide hard drive production in the first half of this year, and about half of that capacity was impacted by floods this November. Intel this week reduced its fourth quarter revenue forecast by $1 billion because the drive shortages will drive down PC sales.

Of course, NetApp isn’t the only company that will feel the sting of a hard-drive shortage. All storage companies will suffer from a shortage of drives, and customers will suffer too as prices go up. But NetApp also has other issues. Its revenue from last quarter was slightly below expectations, and NetApp is facing increased competition from rival EMC in clustered NAS and unified storage. There is also a potentially sticky matter concerning sales of NetApp storage into Syria for use of an Internet-surveillance system – a situation that NetApp claims it had nothing to do with.

NetApp Wednesday reported revenue of $1.507 billion last quarter, slightly below analysts’ consensus expectation of $1.54 billion. NetApp said its sales were lower than expected in nine of its 46 largest accounts, causing the miss. “The rest of the business was generally positive,” NetApp CEO Tom Georgens said, although he admitted the recent rollout of the vendor’s FAS2240 system prompted customers to hold off on buying entry-level FAS2000 products.

At least four Wall Street analysts downgraded NetApp’s stock today following its results and comments on next quarter, and the price of NetApp’s shares dropped 9% in pre-market trading. NetApp executives said they have adequate hard drive supply through the end of the year, but they have a difficult time predicting what will happen after that.

“The impact of the Thailand flooding can potentially be the biggest swing factor [over the next six months],” Georgens said. “Although enterprise class drives are considered to be the least impacted, we still anticipate some amount of supply and pricing complexity. We have all heard the predictions of the industry analyst and the drive vendors themselves. Some of the information is conflicting, and most of it is changing daily in regards to scope and ultimate impact.”

On the positive side, NetApp said its FAS6000 enterprise platform revenue grew 100% year-over-year, its midrange FAS3000 series increased 34%, and the E-Series acquired from LSI Engenio earlier this year increased 11% from the previous quarter.

Georgens said NetApp’s solid state Flash Cache product is becoming common on high-end arrays, and hinted that NetApp would add data management software for caching data on server-based PCIe flash cards. “I think you’ll continue to see innovation on the flash side from NetApp, both inside and outside the array,” he said.

Still, NetApp executives were forced to deal with unpleasant topics during their earnings call:

EMC Isilon
Isilon’s scale-out NAS platform sales have spiked this year since EMC acquired Isilon and put its massive sales force behind it. But Georgens said NetApp’s new DataOnTap 8.1 software allows greater cluster capability for FAS storage, and its E-Series (from Engenio) and StorageGrid (from Bycast) object storage platform also increase its “big data” value against Isilon.

EMC’s VNX
Georgens said NetApp’s problems haven’t been caused by EMC’s new VNX unified storage series, despite EMC’s push of its SMB VNXe product into the channel. “The VNX has not caused much of a change in dynamics in many accounts,” he said. “The VNXe in terms of EMC’s channel incentives is something that we’ve seen more of. That’s been the strongest part of our portfolio, so I don’t think they’ve slowed us down much. Nevertheless … that’s been something that’s generated more discussion within NetApp than actually the VNX itself. I think the VNX itself has been inflicting more pain on Dell than on NetApp.”

Sales to Syria
Georgens ended the call by addressing a news story reported by Bloomberg News last week that U.S. congressmen are calling for an investigation into the roles played by NetApp and BlueCoat involving sales of their products into Syria. According to Bloomberg, NetApp’s products appeared in blueprints for an Internet surveillance system being implemented in Syria by an Italian company. Georgens said NetApp did not support the sale of its storage to Syria and “we are just as disturbed that his product is in a banned country as anybody else.” He also pointed out that NetApp only sells storage, not the applications that Syria could use to intercept e-mails.

Georgens added that NetApp is helping the U.S. government in its investigation. “I can tell you we did not actively seek out, we did not choose to sell to the Syrian government, and we’re not looking for a way to circumvent U.S. law to sell to the Syrian government,” he said. “We have no interest in providing product to a banned country. I just wanted to make sure that was clear.”