Enomaly is trying to sell big business on its open-source cloud management and provisioning software by renaming it and packaging it with enterprise-level support, a model popularized by Red Hat. The software, formerly known as Enomalism, will now use the Enomaly Elastic Computing Platform as its new moniker. The software sits between the servers and applications, allocating virtual resources to programs when they need them. Others offering similar management software include RightScale, Elastra and 3Tera.

The Elastic Computing Platform software — not to be confused with the actual infrastructure offered by Amazon’s similarly named Elastic Compute Cloud — allows an enterprise to create a private cloud inside its own data centers. It can also be set up to automatically link a company’s cloud with approved outside cloud providers if the enterprise suddenly needs more processing power.

The software includes security and compliance features necessary to make enterprises take it seriously. In addition, the licensing model allows business users to develop and change the open-source code for their own needs, without having to release that code back to the community. So far, Enomaly’s Elastic Compute Cloud only supports open-source hypervisors such as Xen and KVM, so I’m not sure how many big enterprises, which tend to prefer VMware, will actually find it useful.

Reuven Cohen, CEO of Enomaly, says support for VMware is coming. The competition is offering similar promises, backing up the notion that, to gain enterprise adoption, management software will need to be flexible enough to handle multiple hypervisors and multiple clouds.

Want to know more about the rapidly changing Cloud Computing landscape? Preview our Cloud Computing Briefing or purchase the full version.

The sharp growth in online video viewing, increasing availability of TV online, and proliferation of high-quality, web-originated content has made it easy to point the arrow for online video advertising up and to the right. But while video will probably continue to be a bright spot of growth in a dull economy, that’s mostly because it’s just getting started. The reality is revenues will be close to nothing for a long time, and the growing number of tech entrepreneurs and creative types in the space should probably be worried that industry watchers are now cutting their expectations for growth in online video revenues based on factors other than the shaky U.S. economy.

eMarketer, which has been putting out good research on online video recently, back in August chopped its estimate for 2008 U.S. video ad revenue by more than half, to $505 million from $1.3 billion. That’s a pretty significant downgrade more than halfway into the year, though eMarketer warned it was “more a change of methodology than of perspective.” But even with the methodology revision, eMarketer is forecasting growth to start declining after 2012.

In a market in which CPMs (cost per thousand impressions) for very similar ad formats can range from $10 to $100 depending on where they’re shown, it’s worth trying to pin down the factors affecting video advertising pricing. Everybody agrees that prices for video formats such as in-stream ads and overlays will stay at a premium vs. banner ads, but it’s not yet clear where rates will settle.

Jason Glickman, CEO of video ad network Tremor Media, attributes the major fluctuations in CPM prices for in-stream (mostly pre-roll) ads over the last two years to a combination of a few key factors. Initially, he says, there wasn’t much inventory, so CPMs were “north of $20 to $25 on a constant basis.” Then inventory started to increase, causing prices to drop to a range of $12-$20 about a year ago. They’ve managed to stay stable since then as budgets have started to migrate from television. Today, the most pressing factors affecting CPM prices are better accountability measures (a plus) and pullbacks on budgets (not a plus), according to Troy Young, chief marketing officer at competitor VideoEgg.

Video accounts for a tiny part of the $70-$80 billion spent on TV in the U.S. each year, and that’s barely starting to change. TV networks like CBS say they have always been able charge higher CPMs for the same shows online vs. TV, but that their digital revenues are not yet significant enough for that difference to be meaningful. Even by 2013, when eMarketer thinks advertisers will spend $5.8 billion on online video ads in the U.S., that will amount to just 7.6 percent of total TV ad spend and 9.8 percent of total Internet ad spend.

So going forward, what else might depress video advertising CPMs? First, online audiences in a post-TiVo world don’t much like ads, and in the “lean forward” online video-watching environment, they are more likely to reach for the mute button, employ ad-blocking software, or switch to another window. Second, the aforementioned demand for better tracking and accountability drives forward less lucrative performance-based ads. Third, while more intensive kinds of advertising like sponsorship and product integration are becoming increasingly popular, they’re even harder to measure. Fourth, the amount of inventory will only continue to rise, with more and better video being released and syndicated further out across the web.

“We recently brought down the average CPM again, to between $15 and $35, because of the development of video widgets,” said Brett Garfinkel, SVP of the original online content site maniaTV. “We can now reach more eyeballs for the same cost and afford to cut costs to advertisers and remain competitive.”

A big question for further growth is when advertisers will start to be comfortable with user-generated content. At this point brands are still extremely cautious about being associated with new content producers, perhaps unreasonably so, given that many of the big viral hits come out of nowhere. However, advertisers are becoming comfortable with a new kind of inventory — made-for-the-web content with high production values — and also with so-called professional content that is made for a lower budget so as to fit in better online.

But should advertisers accept UGC, it would open the floodgates for online inventory, which would surely come at a lower price. This is especially relevant for YouTube, which dominates the U.S. audience but only sells ads when it has a revenue-sharing relationship with the video’s creator, partly as a safeguard against profiting from unauthorized uploads. That means YouTube only makes money on an estimated 4 percent of its total videos. The site has recently been trying to milk that segment for more money by offering content owners the option to monetize copies of their shows and movies caught in YouTube’s copyright filter, and automatically playing post-roll video ads after partner videos end.

On the whole, video ads are still looking like a good market. But just like everybody else, online content providers would be well-advised to keep an eye on their balance sheets.

Being smart about legal matters can make a huge difference in the value of your company. Each legal decision you make — each strategic partnership, each trademark or patent filing — can add or subtract from it.

During the ’90s, my law firm worked with an internet software company whose proposed $400 million sale was stopped dead because of an ill-considered distribution deal it had signed for an Asian market. To the would-be acquirer, the deal was a fundamental obstacle to its own use of the startup’s technology. We eventually fixed the distribution deal, but not in time to save the $400 million deal. It took another 10 years to sell the startup at a favorable price.

Entrepreneurs aren’t typically well-versed in legal issues, and few have deep enough pockets to have lawyers evaluate the implications of every decision they make. That’s why I wrote a book that tells entrepreneurs what they need to know about technology law. As an example, here are five vital legal strategies every digital entrepreneur should know:

5 Vital Legal Tips for the Digital Entrepreneur:

1. Mix open-source with proprietary licensing. MySQL offers both open-source and proprietary licenses for the same code. Why would companies pay for free software? Some large companies want to create derivatives, but not disclose trade secrets, and so will pay for proprietary licenses. Red Hat supplies Linux under the GPL, but gives paying subscribers a suite of proprietary tools for installing and managing networks that run Linux.

2. Secure startup IP. Any code you wrote before you incorporated your startup is not automatically property of your company. You must formally transfer pre-existing code to your company to secure ownership. Failure to “tie down” IP to the business can be problematic, especially when early employees leave the company. It can also block a VC investment.

3. Police user-generated content. While valuable, such content can expose your company to copyright owners’ claims. Help yourself by adhering to “Notice and Take Down” procedures of U.S. copyright law. But these protections don’t apply if your company benefits financially from the infringing material, such as through download fees tied to it, or payments for ads that are played or displayed with the infringing content. Protect yourself by publishing FAQ for your users on how to avoid submitting infringing content. Terminate repeat offenders who regularly submit infringing content

4. Avoid “right of first refusal” clauses. Many licensees, customers and distributors want a “right of first refusal” (ROFR) on your company’s products, future opportunities — even the sale of your company. Don’t grant them. ROFRs assume you will fully negotiate a deal with one company, then offer it to the bearer of the ROFR. The problem is that no company will invest time and effort in negotiating a deal with you if there’s the risk another party could just snatch it away. ROFRs freeze out opportunities this way.

5. Register Multiple Trademarks. Technology is international, so you’ll need to register your trademarks in every market where your products will be sold. But be careful. Some English words may sound odd or offensive in other languages. The Chevy Nova automobile became a joke in Spanish-speaking countries because no va means “it doesn’t go.” In countries that don’t use roman letters, also register local language versions of your trademarks. In China, Microsoft trademarked the two characters, pronounced wei ruan, that mean “small and delicate” and “soft.”

Gene Landy is Chair of the Technology Business Group at the law firm of Ruberto, Israel & Weiner, in Boston, Mass. His book, The IT/ Digital Legal Companion, provides comprehensive guidance, including many more tips like these, for how you can use the law to maximize the value of your business.

The Virtual Goods Summit 2008 is a one-day conference focused on the emerging market opportunity for virtual goods and economies. This year’s conference will feature a blend of panel discussions and expert-led breakout sessions covering everything from getting started with virtual goods to maximizing the revenue opportunity around virtual goods and virtual economies. GigaOM readers can get $75 off a General Admission ticket by registering with the discount code “GIGAOM.” We’ll also be raffling off one free ticket. Tell us in the comments why you want to attend the conference and what you would get out of it. Leave us a comment by 8 p.m. PT on Oct. 6th and leave a valid email address so we can contact you if you win.

Earlier this week, Profy.com’s Svetlana Gladkova sent an email reminding me that Google’s Chrome Browser was one month old. How time flies, and how quickly we forget: or at least I did. After my initial few posts and thoughts, Google Chrome has fallen off my attention radar since it is not available for my preferred computing platform – OSX X. I typically divide my browsing time between Safari and Camino.

I have checked it out occasionally by booting it up on Windows running via Parallels on my MacBook. Apparently, I am part of the median: Svetlana has been tracking the usage using Google Analytics, Clicky and Net Applications has seen a gradual decline in the usage. Gone is the download Chrome link from the Google home page. She points out that there are some fixes the browser needs and as a result Google might be quietly taking a step back. (Related Post: Why Chrome isn’t a killer browser just yet.)

Svetlana is right in being cautious on the chances of the Google browser, though I am not sure how to view the fact that it now accounts for about 5.6% of the traffic to GigaOM and now ranks as the fourth most usage browser. Across our network, here Chrome’s share of total visits by site: 6.13% (jkOnTheRun), 5.78% (OStatic), 5.06% (WebWorkerDaily), 3.09% (NewTeeVee), 2.43% (Earth2Tech) and 2.24% (TheAppleblog). [If you want to share information about your website/service in comments, it would be pretty cool.]

Those numbers can of course mean many things, like I have a lot of readers at Google. Of course, they remind me that I need to use Windows more often. Jokes aside, I think Google isn’t likely to give up on this browser for anytime soon. There are many reasons why they won’t let it become their Waterloo.

Google has realized that web is no more a mere collection of plain web pages or simple interface to databases. If not today then sometime in the near future we would expect equality in the experience (if not feature parity) between desktop and web applications. It is a future where browsers can’t be just html renderers but containers for a runtime environment. Anyway follow Svetlana – I have a sneaky suspicion she would be following Chrome’s progress (or lack of it) for a while.

The post Big-Dig Boston is actually a pretty and lovely town – I walked around in what could best be described as weepy October rain, looking at some of the older buildings and near empty streets. Unlike New York or London or New Delhi, Boston doesn’t pulsate with energy; instead you can feel the weight of its history.

There were a lot of fantastic people I met on this trip, reminding me why I got into this business in the first place: people. Of course, it was also a great refresher in the economic reality of our times. When you walk around the Boston financial district and find two people sitting in a massive Starbucks and no one waiting to pick up their coffee, you know there is an economic slowdown happening. Out here in the SF Bay Area we are living in a cocoon and don’t really have a grasp on the magnitude of the problem.

It was a refreshing trip, reminding me that we need to build a presence in Boston and bring better stories from that part of the world. Meanwhile, if you want to keep in touch with what is going on in the Boston area, I would recommend reading Jeff Bennett, who is the founder of NameMedia. He was one of the five panelists on the panel put together by Charles River Ventures. Thank you guys for inviting me to your event and being great hosts, and hopefully I will see you soon.

Looking back, the short enjoyable visit brought home the message – flying cross-country on a Red Eye is not an option for me. It was a good reminder why the doctors have me on a strict travel diet and I need to conserve my and our planet’s energy.

Of course, you can’t blame me from getting out of Beantown as quickly as I wanted to – after all the marauding Red Sox keep reminding me of the feckless 2008 Yankees. They are crushing the LA Angels, a team that has tormented the Yankees forever.

Now if the Tampa Bay Rays win (and they should), it would be a great American League championship game. An ideal end to the 2008 Baseball season – Manny versus Red Sox in the World Series with Joe Torre’s Dodgers emerging victors. Even FOX can’t write a better script that that.

Anyway the trip left little time for me to catch up with my web reading. Regardless, here is an absolute gem from David Galbraith, one of my absolutely favorite people/thinkers. On the current economic meltdown, he argues that sending CEOs of errant banks to the jail makes absolute sense and keeps the shareholders of the newly nationalized banking system happy.

In addition, when you effectively nationalize banking, the shareholders are the country’s voters and they need to be kept happy. Creating a mechanism to put people like Wachovia’s Robert Steel in jail makes both good business sense and keeps the shareholders in a country happy.

Of course, David is a Scotsman and hence he was born with the gene for irony. Too bad he doesn’t write more often – he is missing his true calling.

Photo courtesy of Danielle Walquist via Flickr

Daniel Meyerov, OnlyBusiness.com

I was crazy enough to start two businesses at the same time — OnlyBusiness.com and Polaris Blue. My partner and I run them concurrently, and fortunately both have done well. No doubt we got lucky, but I want to share a concept critical to our success that might help other founders, especially in this uncertain market. Create three versions of your strategic plan, one each to address a different potential outcome for your business: the overnight success, slow-but-steady growth and survival mode.

OnlyBusiness.com is a community platform that offers web tools and services to small businesses. My partner and I developed a multi-outcome strategic plan, detailing how the operation would perform under three, clearly defined scenarios. The exercise gave us more options for coping quickly with surprises that might ordinarily have caused big problems.

I’ll show you what I mean, by sharing how we staged three critical budgets for each potential outcome.

I. Marketing

PLAN A (Overnight Success): If sales growth is 120 percent of target per quarter, consistently, we’ll know our marketing is working and plan to ramp it by 30 percent to 50 percent, but in a graduated manner, in case growth isn’t sustained.

PLAN B (Slow Growth): If sales growth is 80 percent of target in that time, we adjust up, but only where minimum marketing-to-sales ratio of 1 to 5 is still met (i.e., $10,000 of marketing generates $50,000 in sales.)

Plan C (Worst-Case Scenario): If we aren’t meeting minimum performance, we slash marketing by up to 50 percent, cutting generalized magazine and newspaper advertising, but not highly targeted web programs like PPC and SEO.

II. Payroll
PLAN A: If sales growth is 120 percent of quarterly goal, we expand aggressively, first by doubling ranks in the mission-critical areas of sales, marketing and customer support, with incremental expansion each quarter thereafter. Second, we add staff in production and project management, limited to 50 to 75 percent growth.

PLAN B: In slow growth, we maintain current payroll as long as possible, ensuring that no particular staff member is overburdened while all business aspects are covered. Any incremental additions are evaluated for their impact on profitability.

Plan C: We radically cut payroll, simply to keep the operations functioning. The owners take on more direct sales and marketing responsibilities. Our goal is to maintain sufficient financial reserves to operate at a bare-bones level for 12 months, in case income during this time is zero.

III. R&D
PLAN A: We ramp the engineering base by 200 to 300 percent over three months. New coders and maintenance teams are dedicated to additional system/module development, with dedicated project managers. A group for Q&A and testing is also implemented.

PLAN B: In the slow growth scenario, we meld a single team to handle all development, project management and testing. New product features are added in order of priority, and additions are interspersed with testing and maintenance activities.

Plan C: We cut engineering teams to focus on maintenance and system stability. Only new features that are extremely light, easy to implement and test, and that benefit a majority of customers are considered.

No starry-eyed entrepreneur wants to seriously consider worst-case scenarios, or even so-so performance outcomes. But entrepreneurs need options to trouble-shoot effectively under pressure. We had our initial budgets set for Plan B. Happily, OnlyBusiness.com adhered mostly to a hybrid of Plan A and Plan B, but at points we leveraged strategies mapped out in all three plans. When you stage your cost commitments and plan for ‘what if’ situations in advance, you prepare yourself to respond swiftly to the challenges of running a company. Giving yourself clear options increases your chances for success.

Daniel Meyerov is founder and CEO of OnlyBusiness.com.

Today’s launch of a $400 touch-screen e-Reader from Sony had me eager to whip out my credit card, but the mess on Wall Street stopped me cold. Even with the $700 billion bailout, there are going to be some serious consequences for companies — among them layoffs, lackluster earnings and the chance they won’t be able to raise that next round of capital. On a personal level, I hope my family and friends won’t see too much fallout, but I’m still spending cautiously. That means everything from buying generic food brands to deciding I don’t really need a new pair of boots. It also means I’m having second thoughts about picking up both a Roku box and an e-reader.

I tried the Roku out and loved it, but couldn’t justify spending $99 for a box with such a pathetic amount of content (I’m cheap that way). Now that Netflix is expanding the number of titles it has available for streaming, I’m once again inclined to buy it, but the thought of spending the equivalent of two tanks of gas or a week’s worth of food on entertainment is a painful one.

As for the e-reader, I’ve wanted to play with a Kindle ever since it was launched, but again, I’ve had a hard time justifying the $359 price tag. I had settled on asking for one for Christmas, but in light of the past week on Wall Street, I’ve struck it from my list. Check out the interview below to see how Amazon will try to convince people like me to shell out anyway (it didn’t work for me). Although once we’re feeling flush again, that touch-screen Sony Reader might be my eventual choice.

Is anyone else out there rethinking their gadget purchases in light of the crisis, or am I just too cheap for my own good?

We’d like to say thanks to this month’s GigaNET sponsors:

Nintendo held a media summit here in San Francisco yesterday, and while the biggest buzz was centered around holiday games and the upcoming DSi, I’m way more excited by the announcement that a Wii Speak Channel will launch this November. I’m calling it “Skype for the living room.”

The Wii Speak peripheral, a multidirectional “community microphone” with a reception radius of up to 12 feet, was mentioned this summer, but only in relation to the upcoming online game Animal Crossing: City Folk. Now Nintendo tells us they’re also going to sell Wii Speak separately, and that it’ll come with its own non-game Wii Channel, where you can communicate simultaneously with up to three other Wii owners. (Assuming they also have Wii Speak, and you’ve all exchanged friend codes.) You’ll also be able to use the channel to leave voice mails and exchange image files.

The reason I’ve dubbed the Wii Speak Channel Skype for the living room, however, is because it’s a VoIP communication device that doesn’t depend on a computer or a headset mic. If it works as billed, it could be used not only to make free person-to-person calls, but to hold conversations between entire rooms full of people. Of course the Nintendo exec who briefed me kept emphasizing the gameplay possibilities, and those are nice. But considering the tens of millions of people around the world, from every walk of life, who already own the Wii (it’s forecast to be in 30 percent of all American homes by 2011), the Wii Speak Channel has the potential to become a popular communication alternative over the next decade. Throw in a large enough networking effect, and it could even wind up as pervasive as Skype itself. That’s on the highly optimistic end, of course; at the very least, it’ll be a fun-and-games speakerphone for Wii owners.

Image: Geek.com.

Our big NewTeeVee Live conference is fast approaching, and you’ll need to act fast if you want to snag some tickets at our deep-discounted rate. Special Early Bird tickets are only available through this Sunday, October 5th. Buy now and save $200 off the regular ticket price!

The show is lining up to be bigger and better than ever. Confirmed speakers include:

• Jason Kilar, CEO of Hulu
• Reed Hastings, CEO of Netflix
• Jesse Alexander, writer and producer for Heroes
• Fred, the multimillion-plays YouTube sensation

And more to come. For more details, visit the NewTeeVee Live page, and while you’re there, pick up your Early Bird ticket by Sunday, Oct. 5th.

Watching this legislation to bail out Wall Street and banks clear the House has shaken my faith in true capitalism. I thought Wall Street was good at one thing: making and managing money. But like the folks in Washington D.C., most of them are just incompetent. With this headline from The New York Times I’m reminded of the Holiday Inn Express ad below.

Need I say more? Anyway, if you’re looking for sharp, incisive and understandable commentary on the current credit crisis and the nationalization of Wall Street, I recommend three bloggers — each one exceptional in their own unique way: Paul Kedrosky, Barry Ritholz and Cody Willard. Cody, despite his email blasts, has totally won me over with his witty, precise and scathing commentary. He speaks what I think.

For all the outrage over the Chinese government spying on Skype users, when it comes to privacy, consumers value the talk rather than walk the walk. We often don’t want the inconvenience that security requires (sometimes even re-entering passwords is too much), which can be a difficult line to walk for entrepreneurs seeking to entice users to their online services.

Jason Devitt, founder of mobile bill tracking software maker Skydeck, told me recently that the company dropped its requirement that users download a browser toolbar. It also tweaked some other settings, trying to make life easier for consumers and by extension, attract more users. The catch? Those features were there to protect users, to give them the ability to hang onto and control their own data. Turns out, that’s a bit too much work. Devitt explained:

Rather than ask you to trust us with the username and password for your cell phone account, we forced you to download a browser toolbar. When you put your credentials into that they never left your PC - the toolbar logged in to your cell phone account to fetch your data and relayed it to Skydeck. Again, some people appreciated this. But most people told us that installing a toolbar was just too much work.

So Devitt is still committed to keeping data secure, but Skydeck now asks new users for their credentials directly and logs on for them. Users like it, and Devitt has learned a bit more about the value of usability over privacy. This is a bummer for those of us who think that perhaps a slight lack of convenience is a small price to pay for keeping your data safe. Any other startups out there finding it hard to walk this line?

Incidentally, I have been using Skydeck for a couple of months now and really like it. It’s gone from being a gimmicky way to see who I called most often to a useful tool to track sources and my daily communications.

If you’ve ever seen a Mafia movie, you know that playing nice with the mob is like having the tiger by the tail. It is no different for companies who do business in China, whether on their own or through partnerships. The latest one to experience the downside of this is eBay’s Skype, which has been taking some flack for privacy breaches in the region. 

Citizen Lab, an Internet research group at the University of Toronto, released a report that shows text messages of Chinese Skype users were monitored and their messages blocked if they included political words such as the Chinese Communist Party, the Falun Gong, Tibet, and the great milk scandal.  As a quick background, Skype and TOM teamed up in 2004 and in 2005 released a special software version, TOM-Skype. Since then Chinese users — some 69 million of them — have become a major part, roughly 20 percent, of Skype’s total install base of 338 million.

The report got so much attention that last evening Skype decided to respond. In a blog post, Josh Silverman (Check out my interview with Josh) tries to defend Skype and downplay its role in the China fracas. Here is my translation of the sanitized message he wrote:

•  This is a TOM Online problem, since they distribute Skype in China.
• TOM has to play ball and do what the Chinese government asks its to do. (aka regulations that include monitoring and blocking instant messages that the government doesn’t like.).
• Grow up, censorship is part of life in China.
•  Hey, don’t blame us. “In April 2006, Skype publicly disclosed that TOM operated a text filter that blocked certain words in chat messages.”
• This is a China-only problem. On the rest of the Skype network, none of this security breaches and blocking happens — or at least that we know of.

Our challenge is to bring this valuable service to people all over, including China, while being transparent to our users and staying within the boundaries of the local laws. We are committed to meet this challenge.

• China is so big and important to our installed base that’d we rather not tick off folks there.

As I said, this is what happens when you’re married to the mob. Seriously guys, these compromises are routine and will likely be commonplace. For for-profit entities (despite their slogans), China is a big, growth market and the promise of millions in future profits keeps them from making the right decisions for their shareholders. Sad, but true!

Related link: The Security Breach Report.

The Wall Street Journal says today that Sprint may have found a few private equity buyers or a Latin American carrier to take its Nextel network off its hands. The paper names Cerebus Capital Management and NII Holdings, a carrier with operations in Argentina, Mexico, Brazil, Peru and Chile, as bidders for the Nextel iDEN network. NII also operates an iDEN network. The paper says other private equity firms have expressed interest as well.

However, the deal to acquire Nextel’s assets faces some complications, among them Sprint asking buyers to take $5.4 billion in debt off its hands. That could be a hard sell in today’s tight credit environment, and current Sprint bondholders may step up to block a sale. Other issues include undoing the back-end billing and customer service integration that Sprint spent years to complete.

But if Sprint can unload Nextel, the short-term pain might be worth it for the carrier. The deal to acquire Nextel back in 2005 for $35 billion was one of the largest screw-ups in corporate history. In February, Sprint wrote down almost $30 billion from the failed deal. If Sprint can somehow walk away from such a flub and still remain a viable business, it would be the stuff of history. So let’s see if they can pull this off.

Other than the availability of bigger boxes (or clear, plastic ones) it’s hard to point to big changes in the way we store our stuff. Shifts in data storage are similarly mundane. But like the physical storage industry, which has seen slight innovations in recent years, business-class data storage is quietly making its own incremental improvements — with support from venture capitalists.

Enterprise storage companies raked in $237.7 million in venture capital during the first half of this year, up from $145.9 million during the same period a year ago, according to data from the National Venture Capital Association. That’s the highest level since the first half of 2002.

Three trends are making storage startups…well, if not sexy, then at least a focus for IT managers: virtualization, the incredible increase in data, and the opportunities offered by cloud computing. Paul Gottsegen, a V-P of marketing for HP’s enterprise server and systems group, told me that companies building out large-scale computing systems to deliver software as a service, and even computing clouds, are far more interested in better storage features than tweaks for servers. And they’re willing to pay extra for them. That focus on storage is one of the reasons that HP said on Wednesday that it had agreed to spend $360 million to buy LeftHand Networks, whose software can be used to create virtualized storage clouds on an Ethernet network.

We’re not talking about online backup services, which include players like Carbonite or Mozy, but rather software and systems that offer businesses a way to filter and keep data in a place that makes it easily accessible. Backup is only a small aspect of the storage equation, where the real solution is managing the onslaught of data. IBM, which in September launched 30 new storage products, estimates the amount of data saved for the average business user will rise to more than 16 terabytes by 2020 from just one terabyte today.

Companies want to store this data more compactly, get to it faster and provision it quickly. To reduce the amount of redundant data stored, the big vendors have pushed a technology called “deduplication,” which intelligently scans the data to be kept and only stores changed files. Pushing that idea further are venture-backed startups Ocarina Networks, which has raised an undisclosed amount of money from Kleiner, Perkins and Highland Capital Partners, and Storwize, which received $19 million in April from Sequoia Capital and Bessemer Venture Partners. Both offer a way to further compress each individual file by using proprietary algorithms.

Getting to the data faster means adding more disks, speeding up processing power or upgrading to faster networks. Or there are some startups peddling appliances that can help. Gear6 and Atrato both claim to work with existing equipment to cache data that’s likely to be needed so it can be accessed quickly. Atrato raised $18 million in February from Aweida Venture Partners, and Gear6 raised $10 million in March from Horizon Ventures, U.S. Venture Partners and InterWest Partners.

Rapid provisioning, and making it easy to tie storage to a cloud of virtualized servers, has been a focus for some time now; LeftHand Networks and EqualLogic, which was acquired by Dell last year for $1.4 billion, both offer tools for those tasks. Most startups are steering clear of direct competition with the large disk-drive filled storage boxes sold by the likes of HP, IBM, EMC and NetApp, and are instead trying to focus on markets or areas of the data center where the big guys don’t play, or where they can add more value.

Others are taking to the clouds. Greg Gretsch, a managing director at Sigma Partners, says he’s interested in the idea of cloud storage offerings for small businesses delivered through a managed service provider. To that end, he’s backing Zetta, a startup trying that model that’s still in stealth mode. Gretsch also funded EqualLogic; Zetta, he says, draws on the experience of EqualLogic founders to sell into the small- and medium-sized business space.

“Virtualization and the amount of data has been the biggest thing in the last 18-24 months for storage, but the next thing is a move toward cloud storage,” says Gretsch. “Cloud computing will require cloud storage, and [Amazon's] S3 has some limits to it.”

Last year, other VCs backed a direct competitor to S3, Nirvanix, another cloud storage service sold to programmers, with $12 million in funding. An enticingly named startup called CloudSwitch also appears to targeting cloud storage, and is backed by Matrix Partners. So while data storage might be the computing equivalent of a garage, sometimes that’s the place where great companies are built.

This article also appeared on Businessweek.com.

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