Cisco CEO John Chambers and Intel CEO Paul Otellini (center) are flanked by other Cisco executives as they explain how the two companies will work together on servers. Photo: Cisco

Cisco's new servers use more memory and faster I/O connections than mainstream competitors, and they come loaded with management software. Photo: Cisco

John Chambers is known for delivering Cisco's sales pitch like a revival preacher, complete with a country twang – and he summoned plenty of true believers Monday as he outlined Cisco's plans to bust into the $55 billion server market.

In the Cisco CEO's amen corner were no lesser lights than Intel (INTC) CEO Paul Otellini, VMware (VMW) CEO Paul Maritz, and EMC (EMC) CEO Joe Tucci – the top guys in chips, virtualization and storage. During a 90-minute online news conference that doubled as a showcase for Cisco's (CSCO) high-end teleconference system, that CEO chorus testified that Cisco's new "unified computing" gear is the real deal: By building more memory, faster data speeds and new management features into its boxes, Cisco might shake up the status quo in corporate data centers the way the iPod and iTunes did in digital music.

Why does the world need another server technology? In a word, virtualization. Even during this downturn, efficiency-hungry companies are embracing the technology, which cuts down capital costs by squeezing more work out of less computing equipment. (For example, a single server might act like three different virtual ones.) But today's servers can have trouble pulling off the virtualization trick; split one into several virtual pieces and it's likely to run low on memory and struggle to quickly access data. Managing virtual servers is a challenge, too – you can't kick a virtual machine, or check it to make sure the right lights are blinking.

Cisco claims its new servers address these problems. Each will hold more memory than servers from competitors like Hewlett-Packard (HPQ) and IBM (IBM), and they'll use faster and more reliable Ethernet connections to move data. A control panel from BMC Software (BMC) promises to make it easier to keep track of virtual machines – the next best thing to kicking them and checking the lights.

How much will it all cost? Cisco isn't saying yet, but it won't be cheap. The company isn't trying to play in the commodity blade server market; it's going to market this product to folks like large manufacturers, healthcare providers and data hosting companies who spend a lot on servers and software.

Even if Cisco's new hardware works as advertised, it won't take the market by storm overnight. To see why, consider Bryan Doerr, chief technology officer at data center provider Savvis (SVVS). Doerr is among the first customers to get his hands on Cisco's equipment; he's been testing it for three weeks. Though Doerr says the Cisco gear has been performing well in the lab, he hasn't yet thrown real work at it to prove it can scale, and he doesn't have a detailed timetable for rolling it out in significant volume.

And while Doerr believes Cisco's gear will help him do more work without having to add more people, he also says it won't dramatically slash his costs in the near-term. After all, even if he starts buying a lot of servers from Cisco, he'll still have to run the equipment he already owns. (For the record, he bought much of that equipment and management software from HP.)

Not that the established server vendors can be complacent. Doerr says Cisco's unified computing package is the most groundbreaking new idea he's seen in the data center in years, and it he's ready to open his wallet to get it. It's still early, but it sounds like in the server world, John Chambers is already winning converts.

Cisco CEO John Chambers needs to try new things to keep his company growing while corporate technology budgets shrink.

It is the buzz of the tech world: Cisco Systems may soon try selling servers, those heavy-duty computers that companies use to run critical back-office applications. The prospect of router giant Cisco's entering the already crowded $55-billion-a-year server market is intriguing (imagine if LeBron James decided to try his hand at football) but also has the potential to disappoint. (Remember Michael Jordan's ill-fated effort to play professional baseball?)

With his server gambit, Cisco (CSCO, Fortune 500) CEO John Chambers appears to be targeting a very specific niche: the trendy "virtualization" segment of the server business, which is expected to grow 43% this year to $2.7 billion worldwide, according to research from Gartner. Virtualization basically is a way to make servers more efficient. Using specialized software, one computer with a hard drive and a network connection can act like several smaller computers and hard drives on different networks. When everything goes right, more work gets done with less hardware and electricity. Multiply that effect in a data center with thousands of servers, and you can see why corporate customers like it, especially in times of cutting costs. Computer maker Dell (DELL, Fortune 500), for example, believes it can cut its information technology budget 10% this year without sacrificing productivity.

Full story (CSCO) (IBM) (HP) (DELL) (VMW) (INTC) (AMD) (MSFT) (JAVA)

Bryan Cantrill and Mike Shapiro, Distinguished Engineers at Sun, dreamed up a new type of storage product and convinced executives to let them build it in relative isolation. Image: Sun

Maybe there's something about unconventional office space that gets Silicon Valley's creative juices flowing.

Bill Hewlett and Dave Packard worked their magic in a garage. Apple's (AAPL) Macintosh development team flew a pirate flag over the Bandley 3 building. Now Sun Microsystems (JAVA) hopes a young team that toiled in an unmarked — and reportedly unkempt –  San Francisco loft can spark a turnaround in a tough economy, and build a new billion-dollar business.

The pizza-fueled group, led by engineering whizzes Mike Shapiro, Bryan Cantrill and Jeff Bonwick, spent about three years developing a new type of data storage box that uses flash technology, off-the-shelf parts and open-source software to help companies store and manage information more effectively. Don't doze off, now – data storage may sound boring, but it's also lucrative. With the explosion in online video, social networking, Web-based software and online commerce, it's about as close to a recession-proof business as you can find.

Just think: Every stock transaction, YouTube video, and Facebook friend request gets stored somewhere. That's why market research firm IDC has network storage pegged as a $4 billion business in the second quarter alone, up 22% over a year before. Tech heavyweights like Hewlett-Packard (HPQ) and Dell (DELL) have recently bought storage outfits to gain a competitive edge.

For Sun, a respected Silicon Valley data center supplier that never completely recovered from the dot-com bust, this growing pot of money is too big an opportunity to pass up. Investment firm Southeastern Asset Management has recently accumulated a fifth of Sun's shares, and has hinted that it might start hunting for suitors whether Sun's board likes it or not. A hit product could buy Sun some time – or even convince investors that it can do just fine on its own.

Shapiro and Cantrill certainly had the brains to come up with something game-changing. The two college buddies, who had risen through Sun's ranks to become Distinguished Engineers, believed that by tapping software they have developed over the years, they could build a new breed of networked storage box that's faster, cheaper, and simpler to operate than the mainstream fare from companies like EMC (EMC) and Network Appliance (NTAP). They decided to bring the idea to top executives. "I honestly though we'd get laughed out of the room and just get told to go back and do our jobs," Shapiro said.

One day in the cafeteria the two cornered Greg Papadopoulos, Sun's chief technology officer, and made an unlikely pitch for resources to pursue their vision. They continued the conversation in his office — and to their surprise, he said yes on the spot. A project code-named Amber Road was born. "Some of our top engineers came and they said this is profoundly important, the time has come, and we want to go do it," Papadopoulos recalled. "I'd better have a good reason to say no."

Actually, he could have come up with several good reasons. Unlike high-fliers like Google (GOOG) and Apple, which have billions in cash and zero debt, Sun doesn't have money to burn on every engineer's pet project: Recently the company reported it had $2.6 billion in cash, $1.2 billion in debt, and enough potholes in its balance sheet that it has announced plans to lay off 350 employees in January. (That alone doesn't sound like much, but Sun has let go of 1,500 employees in recent months.) In the most recent quarter, sales slumped 7% to $3 billion. Sun stock also reflects the harsh reality: it's trading near $4 per share, where it was in early 1995. That's down 80% from a year ago.

If that weren't enough, the Amber Road team asked for its own office space, away from Sun's big-company atmosphere and product development protocols. Shapiro in particular felt that to design an easy-to-use storage system, the team would need to escape Sun's culture. "We build for engineers – lots of knobs and dials and gauges — and that's really anathema for ease of use," Papadopoulos admitted.

So he and systems group chief John Fowler agreed to the group's pleas for independence, under a few conditions. The space couldn't be as nice as Sun's official offices, and there would be no elaborate decorating budget; the team of about a dozen engineers painted it themselves, and found furniture at flea markets. "They love it, it's right across the street from the bus terminal," Papadopoulos said. "You just sort of slide pizzas under the door."

If it sounds like a startup, that's the idea. There's some history of this at Sun; legend has it that James Gosling left the company's offices to work on the Java programming language in rented space on University Avenue in Palo Alto — not far from where Facebook's headquarters is today. But the question is whether this infusion of outside-the-box thinking will be enough to make a difference for Sun's bottom line. "How fast it can grow to be a billion dollars plus, which is what it needs to be, is not clear," admitted Fowler, the systems group chief. But he's optimistic; customers who have seen the new storage product in action can't wait to get their hands on one, he says.

Analysts so far are skeptical. Sun will have to prove that its Sun Storage 7000 appliances are powerful enough to serve the needs of large customers, who tend to be comfortable with companies like EMC whose storage products have longer track records. But the fact that Sun has elegantly built flash-based solid-state storage technology into these boxes should help. IT managers are eyeing solid-state storage as a way to boost performance, and while all of the major storage companies are promising to include it in future systems, Sun is among the first to deliver.

"Can Sun get out there quickly enough and grab market share so they can grow their base before others arrive to the party?" asked Gene Ruth, analyst with Burton Group. "A year from now I suspect we're going to see all the majors out there with significant solid-state products. I always look at Sun as being a technically strong company. Whether they can execute is the question. I hope they do."

This may be one of Sun's last chances to prove it can get something going. For years, rumors have swirled around Silicon Valley that someone will swoop in and buy out the company. Granted, that seems mighty unlikely in this environment –- with scads of plucky startups for sale at bargain-bin prices, why buy a struggling giant? But if the stock stays this cheap, valuing the company at just $3 billion, it's a safe bet that antsy investors will make a move.

With a line of stylish new drives and a TV marketing campaign, Seagate hopes to make digital backup more popular than … well, flossing. Image: Seagate

Aaron Levie runs his own online storage and collaboration company, so he sounds a little sheepish when he admits that, before he founded Box.net, he didn't back up the files on his computer. He's not alone. Recent studies show that at most, 17 percent of PC owners use external storage for backup, slightly higher than the percentage of people who floss daily.

This statistic, as you might imagine, annoys storage executives as much as the flossing number annoys dentists.

That explains why Seagate (STX), the world's largest hard drive maker, is hoping to reverse the trend. Though the company traditionally had been content to sell raw storage to others for use in their wares (everything from Xboxes to data centers), executives are pushing to get their own branded backup products onto retail shelves. They were eager to show me stylish new plug-in FreeAgent drives for Macs and PCs that they announced this week, and to explain why they're launching a TV marketing campaign during football games and Oprah to tout them. (Seagate studies found that, once reminded of backup's virtues, people were twice as likely to say they'd buy drives.)

Honestly, backup's virtues are easy to appreciate. After all, what if you have a power surge that fries your home appliances, or your hard drive fails or a hurricane hits? Do you really want to lose all those digital photos and baby videos? Of course not. But as in that scene from Jerry Maguire, the storage industry's pleas to help us help ourselves seem to fall on deaf ears. "Even in Silicon Valley," says Box.net's Levie, "I think if you ask the average person at a tech company, they don't back up."

This reluctance hasn't stopped tech giants from getting into the consumer storage game. Just this year, enterprise heavyweight EMC (EMC) bought Iomega for about $213 million, and online storage provider Mozy for $76 million. Security specialist Symantec (SYMC) bought SwapDrive for $124 million. Hewlett-Packard (HPQ) launched its Upline online storage service this spring, and Dell (DELL) partnered with Box.net this summer to provide online backup on its Inspiron Mini 9 laptop.

Why the sudden surge into storage? In the age of broadband, digital downloads and online sharing, companies have noticed that more of the stuff people care about is getting stockpiled in bits rather than in boxes. Consider the proliferation of iPods, iPhones, Tivos (TIVO), photos, and video on sites like YouTube.

Analysts estimate that 70 percent of this content will be stored by individuals, not corporations – suggesting a market ripe for backup drives that often start at around $150, and paid online services that start at about $5. "We had to either decide we were going to ignore this whole thing," an EMC executive told me, "or jump in."

But the fact that big companies are leaping into online storage doesn't mean consumers will. New marketing campaigns notwithstanding, most PC users seem to have rejected the traditional plug-in, back-up process that Seagate and some others have begun selling. And it's not clear whether online backup services will fare much better; though Wi-Fi makes online backup easy to do, most home Internet connections are so slow that the first session can take hours.

Though no one has yet solved the backup hassle, the closest thing so far may be Apple's (AAPL) most recent efforts, Time Capsule and Time Machine. A wireless router and hard drive in one, Time Capsule works with Apple's latest operating system to invisibly archive your files, so that if you lose something, software called Time Machine lets you drive your computer backward, Back to the Future-style, to the day when you know you last had it.

When Apple studied backup habits a couple of years ago, it found that more than 90 percent of its customers failed to regularly copy their data for safekeeping – even though they were storing more sentimental content on their Macs. Why? "It's not because they didn't know that backup was important," says Jai Chulani, senior product manager for Time Capsule. "It was 'Oh, it's too hard to do. I have to constantly plug things in.' "

Apple says Time Machine is one of the most popular features in its latest operating system, OS X Leopard; and in Apple's online store Time Capsule is the 5th most popular Mac-related item, ahead of the Mac mini and Mac Pro computers.

But don't expect those features to become common for the masses of Microsoft (MSFT) Windows users anytime soon. Because Apple controls both the hardware and the software in its Mac universe, its engineers could more easily invent an automatic backup system. (UPDATE: A reader reminds me of Microsoft's Windows Home Server, which has many features of Time Capsule, plus remote access. Thanks for jogging my memory; I wrote about it here.)

For others, it would be more difficult to build – though one can imagine a Windows-based system that marries Google's (GOOG) desktop search program with a wireless external drive for automatic data protection. Such a solution would be nifty – and even easier than flossing.

SanDisk founder and CEO Eli Harari rebuffed Samsung's buyout offer, saying it undervalued the company. Photo: SanDisk

Politics, as humorist FP Dunne famously put it, ain't beanbag. If Dunne had spent his days observing Silicon Valley innovators instead of Chicago machine pols, he might have said the same about the flash memory business.

It's cutthroat stuff. Just look at the standoff between ailing flash innovator SanDisk (SNDK) and South Korean powerhouse Samsung.

On the surface, this seems like a straightforward buyout attempt: Samsung is the world's largest supplier of the chips that provide storage for gadgets like iPods, iPhones and digital cameras; SanDisk has a bucketload of flash patents worth a half billion dollars a year in licensing fees. SanDisk stock has taken a beating lately, so it makes sense that Samsung would try to buy the company out; it publicly offered $5.85 billion in cash for the company this week, or $26 per share.

Samsung, meanwhile, is doing fine. Though its stock is trading near 52-week lows on the Korea Stock Exchange, it has access to cheap financing through the South Korean government, and its broad portfolio of businesses selling cell phones, TVs, appliances and other electronics help to even things out. In its most recent quarter, it reported revenues up 24 percent from a year earlier, and profits that nearly doubled.

SanDisk didn't appreciate Samsung's buyout overture. Instead, it accused the company of trying to snatch its stock out of the bargain bin, an especially low blow at a time when the two are locked in patent negotiations. SanDisk founder and CEO Eli Harari issued a statement saying Samsung's offer is "opportunistically timed at the trough of an industry-wide downturn," and calling it a bum steer for his shareholders.

And he's right. Flash memory experts knows that the business moves in boom-bust cycles – that's why SanDisk's five-year stock chart looks like a hamster's EKG. (Flash prices typically rise at the end of the year, when gadget demand is high, then dip.) SanDisk has been in rough shape, but analysts I talked to expect the stock to come back.

Lately the flash industry has been in a deeper-than-usual bust, in part because of oversupply. Flash makers led by Samsung and Toshiba have poured billions of dollars into factories in a race to build the next generation of flash chips – chips good enough to pack the storage capacity of a PC into a gadget the size of a cell phone, or cheap enough to replace the hard drive in a mini-laptop. Meanwhile, the laws of supply and demand have gone to work. As Samsung, Toshiba and others have pumped more supply into the flash market, prices have fallen, profits have evaporated and SanDisk's stock has lost more than $6 billion in value. (SanDisk has traded as low as $13 lately, down from $55 last October.)

All of which provides an opening for Samsung to take a shot at SanDisk. With its unsolicited bid, it potentially accomplishes a number of strategic goals:

• Savings. Samsung pays SanDisk hundreds of millions of dollars a year in licensing revenues, because SanDisk invented many of the key technologies behind flash By acquiring SanDisk out, it could eliminate those payments.

• Dominance. Japan-based Toshiba is Samsung's biggest rival in the flash game, and for years SanDisk and Toshiba have worked together to build flash factories. (This must annoy Samsung to no end, since its licensing revenues are helping to feed a competitor's arsenal.) If Samsung can take SanDisk out of the picture, it will change the economics of flash, potentially making it impossible for Toshiba to compete.

• Leverage. As Harari noted, the two companies are negotiating over license terms. If Samsung's pressure tactics result in a better deal, it potentially means more money going into its own coffers, and less into SanDisk's joint venture with Toshiba. "Samsung wants to bolster itself up against Toshiba," says Tim Bajarin, who heads the Creative Strategies consulting firm. He doesn't think Harari and the SanDisk board are likely to accept a Samsung offer. "Eli is very proud of what he built there. I think they'll stand firm."

But really, SanDisk would be foolish to sell out – it's likely that regulators would reject a deal because of the power it would give Samsung. But more fundamentally, the flash industry is likely to head into another boom cycle in 2009, which could boost SanDisk's stock and get the target off its back. Samsung knows this, too – earlier this year, Samsung executives told reporters that they expect the flash market's volatility will get smoothed out as new PCs using flash storage enter the market and boost year-round demand.

If that pans out, companies like SanDisk can expect to see flash prices rise as thinner, lighter PCs ditch hard drives for flash – something that's already happening with machines like the Asus eePC, the Dell (DELL) Inspiron mini 9, the HP (HPQ) mini, and Apple's (AAPL) MacBook Air. That is, if SanDisk can convince its shareholders to hold out and ignore Samsung's overtures.

So far, SanDisk investors don't seem to be panicking. Its shares have risen to almost $21, still well shy of Samsung's bid – suggesting that many investors don't expect a deal to happen. That means for now, SanDisk probably has some time to play some survival politics, and save its skin.

(INTC)

There haven't been many tech IPOs lately – only three this year, in fact. People here in Silicon Valley have certainly noticed  – this place thrives on venture capital, so in financial terms, the mood has been a little like a maternity ward going without any deliveries. Yes, entrepreneurs have still gotten rich selling out to big companies like Google and Microsoft, but without the same kind of cigar-passing glee that follows a Wall Street debut.

So it's fair to expect some buzz on Friday, when San Antonio hosting company Rackspace takes a bow. As tech IPOs go, the prospectus on this one reads like a pretty safe bet: the ten-year-old company logged net revenues of $362 million in 2007, and a profit (yes, profit!) of $17.8 million. It's offering 15 million shares at between $12 and $16 per share in a Dutch auction format (what Google used for its IPO), and it's backed by some great names in venture capital, including Sequoia and Norwest Venture Partners.

Sounds good, right? But there are also some red flags to watch out for. We'll get to those later.

Rackspace's game is hosting, which basically means its computers manage other companies' internal and external Internet presence. This can be anything as basic as handling e-mail, or as complicated as serving up an internal sales tracking system. It's no easy business – hosting companies need lots of powerful servers to put their customers online, buildings to hold the servers, and cash to pay the outrageous power bills. Even tech darling Apple (AAPL) had some trouble with hosting; its new MobileMe service, designed to manage e-mail, calendars and other functions, belly-flopped on its debut, losing customer e-mails and intermittently going on the fritz.

The folks at Rackspace (they call themselves Rackers) pride themselves on their ability to keep customers happy while shrewdly managing real estate and equipment costs, and commanding top-dollar subscription fees for their white-glove service. "Our Fanatical Support culture serves as a competitive advantage that has allowed us to establish our position as the world’s leading hosting company," the Rackers brag in their prospectus.

For prospective investors, there's a lot to like about Rackspace. On the plus side, they've got healthy sales, growing profits, and a claim to some of the "cloud computing" and "software-as-a-service" mojo that, thanks to names like Salesforce.com (CRM), Amazon (AMZN) and Google (GOOG), are all the rage these days. From what I'm told, the cutting-edge companies that offer their services on top of Rackspace's system respect the way they run their business. And Rackspace executives say 15 percent of their annual growth comes from loyal customers who keep buying more services. That loyalty has formed the baseline for the company's 59 percent sales growth rate over the past four years.

"Rackspace is well-positioned as a provider of next-generation hosting services," said Bill McNee of Saugatech Research Services, a consulting firm. "The question is, what will they do to differentiate themselves in an increasingly crowded market?"

Which brings us to the red flags.

First, Rackspace is one of many hosting providers, and the field is getting more crowded all the time. Though the company has done a good job contending with competition from telcos like AT&T (T) and Verizon (VZ) and from others like Savvis (SVVS), The Planet and Terremark, the fight is about to get hairier. Big names like Amazon, Google, and most recently IBM (IBM), Yahoo (YHOO) and Hewlett-Packard (HPQ) have begun turning their attention to cloud computing, which is one of Rackspace's fastest-growing services. And as more big companies start looking to sign hosting contracts for their new online initiatives, who do you think they'll go with – Rackspace, or the big guys?

Second, Rackspace's hosting business is a bit like the real estate market, with similar pitfalls. Over the past few years, the demand for hosting services has outstripped supply, fueling meteoric growth in the category. In response, Rackspace and others have been massively building out data centers to serve new customers.  Like home builders during the housing boom, hosting providers are building out expensive data centers ahead of time, based on what they think demand will be later. If they're right, the hosting party continues. If they're wrong? Picture lots of big, expensive buildings with no tenants to help pay the rent.

Finally, one of those little things in Rackspace's prospectus bears mentioning – and it has to do with compensation. Specifically, bonuses. It's always interesting to see how a company goes about giving cash to its people, because cash awards are totally disconnected from stock performance. And if a company's board hands out too much of it, there's reason to fear that the executives (and employees) will end up marching to a different beat than the shareholders. So how does Rackspace handle cash bonuses? To start, the bonus range, between 40 and 70 percent of an executive's annual salary, isn't far outside the norm for public companies, which is good to see. Employee bonuses are also calculated on many of the same criteria that's used for bigwigs. From there, though, things get a little dicey.

The prime example came last year, when the company's equipment investments pinched profits. Figuring it wasn't fair for employees to suffer because the company had to make some long-term investments, the board tweaked the bonus calculation for the second half of the year. As long as profit levels held steady from one quarter to the next, everyone would get a full bonus. But then disaster struck: A wayward truck near Rackspace's Grapevine, Texas, data center crashed into a transformer, causing a power outage. Even though a backup system was in place, Rackspace had to take several servers offline and compensate customers for the resulting downtime. That meant a hit to Rackspace's profits, and thus its bonus pool – but the board decided to give full bonuses to everyone anyway, because their response to customer outrage was so "fanatical."

The right move? Maybe. You can't blame employees for a truck accident (though you could argue that a better backup system might have helped.) We'll just have to see how Rackspace management handles the inevitable disasters as a public company, and where the buck stops then.

EMC division president Mark Lewis says banks are slow to spend these days. Image: EMC

With the turmoil in the financial markets, it shouldn't come as a surprise that banks aren't going on a spending spree. That's one of the backdrops to Fortune's Brainstorm Tech conference in Half Moon Bay, where a handpicked group of tech luminaries have gathered to talk about the digital future.

In a side conversation near the bar here at the Ritz-Carlton, EMC (EMC) executive Mark Lewis drove it home. Financial services companies are "doing very thorough reviews" before buying tech gear, he said – that's a nice way of saying they're tight-fisted – and that's bound to have a real impact on companies that sell to them. (Think Dell (DELL), Sun Microsystems (JAVA), Cisco Systems (CSCO) and others.) Lewis, president of storage giant EMC's content management division, didn't seem alarmed. He said that because customers haven't recently overspent on technology, the buying pause isn't likely to last long. But for now, they're pushing for a faster return on their investment in technology, because budgets are tight.

Iomega's Rev drives compete with portable hard drives from Seagate and Western Digital; EMC hopes to buy the company and turbocharge the brand. Image: Iomega

What happened to Iomega (IOM)?

It was a gravity-defying technology stock during its best run a decade ago. At its peak in 1996, the company's nearly $6 billion valuation meant many investors were betting it would be the future of digital storage.

Iomega seemed to be at the right place at the right time; broadband connections and music downloads were not yet common, and few tech companies recognized that storage would be a growth market. Meanwhile Iomega's proprietary Zip disks and Zip drives provided the capacity of a computer hard drive and the portability of a floppy disk, making it a snap to move chunky files like digital images or huge spreadsheets from one PC to another.

It wouldn't last. Even before the dot-com bubble burst, consumers found reasons to ditch the San Diego company. New e-mail services were making it easier to transfer text files to another computer, and CD-burning drives were making it cheaper to swap images and music. By early 2000, when other tech stocks were just starting their slide, Iomega had already fallen to a quarter of its peak value. Its attempts to sell more standard fare like hard drives and MP3 players didn't help much; the stock's slide continued into this year, as SD cards, Apple (AAPL) iPods and flash drives redefined the storage game. Iomega has been trading near $4 per share, giving it a bargain-basement valuation under $250 million.

That's when EMC (EMC) smelled opportunity. The Massachusetts storage and security firm has a healthy business selling services to larger companies, but is clueless about how to attack the growing consumer market, which is generating 70 percent of new data. That's why EMC last month bid $213 million for Iomega, 20 percent more than it initially offered to pay.

EMC believes that the Iomega brand, paired with EMC's global reach, will be able to capture consumer storage market share in places like Asia, where Iomega is weak; and in the United States, where it has been out-dueled at retail by companies like Seagate (STX) and SanDisk (SNDK). EMC certainly has the financial firepower to make an impact with the Iomega brand –- its $32 billion market capitalization is three times bigger than Seagate's and five times that of SanDisk. But it's still not clear whether an EMC-backed Iomega will succeed where Iomega failed alone.

To improve the odds, EMC executives are already crafting a marketing plan to boost the Iomega brand, assuming the deal passes shareholder muster. (Iomega's management supports the bid, and EMC's tender offer for Iomega shares concludes May 21.) After that, we'll see if EMC's backing helps Iomega reclaim its old Zip.

The HP Mini laptop is aimed at the education market, but it could appeal to road warriors as well. Image: HP

Pick up HP's new $500 mini-laptop, and the first thing you notice is the aluminum casing. Though the thing weighs only about 2.5 pounds, what's striking is how its sleek skin makes it feel solid and professional – not at all what you'd expect from a budget PC.

I'm in a suite at the Palace Hotel in San Francisco getting a first look at Hewlett-Packard's (HPQ) latest machine, which the company hopes will help it steal share from Dell (DELL) and Apple (AAPL) in the education market. (Each of the three companies has just under 20 percent of the worldwide market.) HP's development team, I'm told, consulted educators as they designed the 2133 Mini-Note, and as I turn the laptop over in my hands that comes through in little details.

With the laptop open, the screen sits very low, so that students won't be able to hide behind it and avoid the teacher. The keyboard is spill-proof for up to an ounce of liquid. The standard version comes with built-in WiFi, an ExpressCard slot, and an accelerometer on higher-end versions that stops the hard drive from spinning if the machine is dropped.

"You're putting this in probably one of the toughest environments, which is 5-18 year olds' hands," says Robert Baker, HP's manager of product marketing. "You've got to build this thing for durability."

Fair enough. But what's also immediately evident in the 2133 Mini-Note (which HP will soon call simply "the HP Mini") is that its charms will extend far beyond the schoolyard. That same low profile that teachers crave makes it perfect for business travel; it would be usable on a plane even if the person in front of you reclines. Even on the entry-level Linux version (a Windows version is also available), the Firefox browser allows access to free programs like Google (GOOG) Docs, which could substitute for Microsoft (MSFT) Office in a pinch. HP says the battery lasts for 2.5 hours, or 5 hours with an extended battery. It's a lot like the diminutive ASUS EeePC, which has inspired a following among road warriors, only the HP Mini looks like a business tool, not a plastic toy.

To me, it seems the main question is whether HP will take full advantage of the sales opportunity it has with this machine. Yes, it's great for the education customers whose needs shaped its design; but school districts are notoriously hesitant to spend money in tough times like these. Also worth noting: The entry-level Mini uses a VIA processor instead of the standard fare from Intel (INTC) or Advanced Micro Devices (AMD), runs Linux rather than Windows, and uses 4 gigabytes of flash memory for storage rather than the hard drive on higher-end versions. Early adopters will appreciate these moves as smart ways to make computing more efficient and affordable, but some schools will be afraid to stray so far from the standard Windows laptop experience.

The key to HP's success with the Mini might be getting it into retail environments where customers can touch it, test drive it, and see that it performs as advertised. If HP does that, it might sell as many to the briefcase crowd as it sells to the backpack crowd.

Lenovo's critically acclaimed ThinkPad X300 laptop does without a hard drive. Image: Lenovo

While munching on a reuben at Birk's, a steakhouse in Silicon Valley, Seagate (STX) CEO Bill Watkins is explaining why he's not too worried about a these trendy new laptops that have everything but a hard drive.

On the surface, this would seem to be a big problem. Seagate, after all, is the world's largest hard drive maker with expected sales of more than $3 billion this quarter – so Watkins likes to see his wares go into more gadgets, not fewer. It's easy to see why he tends not to favor devices like Lenovo's sleek ThinkPad X300, which is winning raves for its light weight and silent operation, and its 64-gigabyte flash storage drive.

And the X300 isn't the only laptop that's doing without a hard drive in favor of a flash solid state drive, or SSD. A version of Apple's (AAPL) MacBook Air also comes with 64 gigabytes of flash. And there are other defectors, like the diminutive Eee PC from ASUS.

But the key thing, Watkins argues, is that SSDs are just too expensive, and will be for a long time. Just look at the MacBook Air. There are two versions of the Apple laptop, one with an 80 GB hard drive for $1,800, and one with a 64 GB SSD for $3,100. Why pay so much more for less storage? It's not a difficult choice.

"Realistically, I just don't see the flash notebook sell," Watkins says. "We just don't see the proposition."

But in case flash prices continue to plummet and the flash drives really do catch on, Watkins has something else up his sleeve. He's convinced, he confides, that SSD makers like Samsung and Intel (INTC) are violating Seagate's patents. (An Intel spokeswoman says the company doesn't comment on speculation.) Seagate and Western Digital (WDC), two of the major hard drive makers, have patents that deal with many of the ways a storage device communicates with a computer, Watkins says. It stands to reason that sooner or later, Seagate will sue – particularly if it looks like SSDs could become a real threat.

Watkins might want to keep his lawyers on speed dial. The price of flash has been dropping so fast that it's surprising even the pros. Intel CEO Paul Otellini had to promise investors earlier this month that he wouldn't let the losses from Intel's flash businesses sink the whole company's profits, after flash prices greeted 2008 by dropping almost twice as fast as the company expected, leaving Intel saddled with a lot of devalued inventory.

To shore up its flash business and boost sales volumes, Otellini said Intel will push more aggressively into the SSD market in the second half of the year – and it's not hard to imagine what could result. If Intel starts pushing low-cost SSDs for laptops, rivals such as Samsung and SanDisk (SNDK) could easily respond with a price war, with all of them competing to get Hewlett-Packard (HPQ), Dell (DELL) and other major laptop makers to buy up their flash inventories.

So if a more intense SSD price war does flare up, will flash prices drop far enough to rattle Watkins? It might be unwise to bet against it. In a presentation for media and analysts earlier this month at Samsung's Silicon Valley office, executives at the flash memory leader strongly hinted that they're willing to see flash prices drop even more steeply this year, if it means wrestling more laptop business away from hard drive makers.

This much seems certain: Things will only get wilder in the storage world this year, especially for laptop buyers and patent lawyers.