A startup popped out of hiding Monday with a surprise challenge that rattled the market for storage-area networks (SANs).

Nishan Systems Inc. http://www.nishansystems.com emerged from stealth mode to claim it is readying technology called storage over Internet Protocol (SoIP) that will allow SANs to run over native IP connections, without tunneling or encapsulation. If it pans out, Nishan's technique could streamline the implementation of SANs, opening up opportunities for carriers seeking to offer backup services to business customers.

The news didn't help the price of SAN stocks. The first effects occurred when Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray Inc. http://www.piperjaffray.com, changed his recommendation on Brocade Communications Inc. (http://www.brocade.com, Nasdaq: BRCD), the market leader in SAN gear, from "buy" to "neutral," citing the Nishan announcement as a hot alternative to fibre channel SANs. Brocade stock dropped a few points quickly as trading opened Monday--only to recoup later on.

Elsewhere, Nishan's announcement appeared to further tug an ongoing downward drag for several SAN vendors, including Ancor Communications Inc. (http://www.ancor.com, Nasdaq: ANCR), whose price slipped 10 percent to $30; Gadzoox (Nasdaq: ZOOX), down 13 percent to $23.50; and Vixel Corp. (http://www.vixel.com, Nasdaq: VIXL), down 14 percent to $8.09.

By the end of the day, however, Brocade had recovered, showing just .85 percent change to close at $109.31 per share. Apparently, the downgrade by Kumar wasn't an opinion shared by other analysts. "SANs may gravitate to IP standards in the future, but this announcement shouldn't affect the market at all," says Laura Conigliaro, computer analyst with Goldman Sachs http://www.goldmansachs.com. "Dozens of companies are working on doing things with gigabit Ethernet for SANs. But collectively speaking, these companies are in the very early stages, and individually they're working on different components of the technology." So product solutions are a long way off, she says.

Others agree. "To implement this technique properly, Nishan will have to put its stack processing into hardware, and that's going to take a long time," says Bill Miller, CTO at Storage Networks Inc. http://www.storagenetworks.com , a provider of outsourced storage services for business customers. "We'll be buying a lot of Brocade equipment between now and then." Presently, the preferred network for SANs is fibre channel, which delivers 1-Gbit/s over fiber-optic links. But standards for routing, provisioning, and managing fibre channel networks have been notoriously slow to emerge, thanks in part to well-publicized, ongoing disagreements among competitive SAN vendors. (See Fibre Channel Vendors Split On Standards for info on a recent spat involving SAN routing specs.) As a result, most SAN products are proprietary, and tailoring them to fit a carrier network requires expensive customization.

If successful, Nishan's technique could eliminate many SAN headaches. For instance, instead of having to buy into a SAN vendor's particular routing scheme, carriers could use existing IP standards like Open Shortest Path First (OSPF) to route SAN traffic over existing IP networks. What's more, they could use techniques like MPLS (multi-protocol label switching) to guarantee service levels--a feature that's largely missing on SANs today. And they could deploy existing IP-compatible provisioning and management systems.

But Nishan's SoIP may not save users from having to depend on Nishan and its partners--repeating the pattern of proprietary lock-in that has dogged the SAN market. "They're really introducing a third protocol for SANs, one that hasn't been proven safe and reliable," says Michael Byrd, vice president of finance and CFO at Brocade.

What's more, some prospective buyers question the value of SoIP at all. "It sounds terrific, but you have to ask yourself, is there a lot of value?" says Miller of Storage Networks. He points out that to get the benefit of existing routers and management systems seems to call for SoIP users to mix storage traffic with other transmissions over IP nets. But the security and reliability that storage demands make this an unlikely scenario.

Nishan also faces compeition. Gadzoox Networks Inc. http://www.gadzoox.com has devised schemes for running fibre channel over native IP--one or two of which have turned up in IETF documents. And Cisco Systems Inc. http://www.cisco.com also has weighed in with suggestions of its own at the IETF. "All the competition could make the environment a bit noisy for awhile," says Miller.

Nishan isn't rushing to the fray. Instead, its provocative announcement is really a preliminary to the real thing. According to spokespeople, Nishan will work with a series of as-yet-unnamed partners to roll out a family of adapter cards for servers and storage devices that will convert Fibre Channel and SCSI traffic to native IP. The adapters will work with a fleet of switches that also support the new tack.

Nishan refuses to say whether these products will come directly from the company or from its partners. And it won't name the partners until all agreements are signed--which could take another month. What's more, it's not clear when anything will be available. "Products will roll out from the date of the partner announcement through mid-2001," says Randy Fardal, vice president of marketing. He can't say what will ship first, however.

How well Nishan's plans play out remain to be seen. Meanwhile, though, it has captured sufficient support to generate $40 million in financing from Altos Ventures http://www.altosvc.com, ComVentures http://www.comventures.com, Discovery Ventures http://www.discoveryvc.com, Raza Ventures (no Web site yet), Sofinnova Ventures http://www.sofinnova.com, and Weiss, Peck & Greer Venture Partners http://www.wpgvp.com.

"We think this is going to have a lot of impact on the SAN segment," says Barry Eggers, general partner at Weiss, Peck & Greer. "It will help SANs become more a part of the carrier network. And it will bring gigabit Ethernet and IP compatibility to SANs."

But Miller thinks there's no rush for the wallet. "We find it interesting and we're tracking developments and talking to Nishan, but it's still pretty far from the marketplace," he says.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com