From Computer Business Review, a sister publication.
Just three years ago, SyQuest was to high-capacity removable storage what Microsoft is to operating systems. Iomega meanwhile was a smaller, niche vendor of tape back-up systems for customers such the US Department of Defense. But the fortunes of the two companies since then could not have been more different. SyQuest’s future is uncertain following eight successive loss- making quarters, including the third quarter figures announced this month. In that time, the company has bled more than $200m and been forced to persuade creditors to reschedule or convert debt to equity to prevent administrators being called in. Figures for the year to the end of September 1996 were bad enough: Revenues fell by a third to $200.4m. But the decline accelerated in the first and second quarters of the current financial year. In the first quarter revenues fell 39% to $48.3m and in the second by 65% compared to the same period a year earlier to only $16.8m. In contrast, the biggest difficulty vexing Iomega’s management today is how to satisfy demand for its popular 100 megabyte capacity Zip drive, which is similar to a standard 3 1/2 floppy unit but which holds much more data. Agreements with Apple, AST, Compaq, Gateway 2000, Hewlett Packard, IBM, NEC and Unisys, as well as standalone sales, have driven Zip sales to seven million units since the product’s launch in November 1994. While there are several technologies bidding to replace the 3 1/2 floppy installed as standard on the 75 million desk-top PCs sold every year, Iomega is leading the pack.
By Graeme Burton
As a result, it busted the $1bn revenue barrier during 1996. At the end of July the company posted record second quarter revenues of $400.2m, up 41% compared to the same quarter a year ago and 660% compared to two years ago. Now that SyQuest is at its most vulnerable, Iomega has taken the battle between the two companies to the courtroom and issued a writ at the end of last month (CI No 3,215 ) claiming that SyQuest’s removable storage products infringe its read/write protection scheme patents and those covering the design of its Jaz storage cartridges. It also wants SyQuest to stop using ‘syJet’ in its advertising material, claiming that Jet is a Iomega trademark. So what did SyQuest do wrong and what is Iomega doing right? The newly installed management at SyQuest blames the old order, including former chairman and founder Syed Iftikar, for neglecting the company’s core product line of removable Winchester hard drives in preference to a swashbuckling head-to-head battle against Iomega’s Zip drive. SyQuest, complacent from years of virtual monopoly, was swept aside. Its EZ135, launched in 1995, cost $199 to the Zip’s $200, but despite performance advantages, was poorly marketed. When the company belatedly cut EZ135 prices it only diverted sales away from the company’s profitable $500 removable Winchester range. We did not do a very good job of making people understand the difference between floppy drives and hard drives, laments executive vice president of marketing Gary Marks. SyQuest’s recovery strategy has involved two basic strands. First, to re-build confidence in the company, the old discredited management team were dismissed last year and replaced with experienced staff from well-known companies such as Connor, Western Digital and even Iomega. Led by Edwin Harper, formerly of Colorado Memory Systems (which was bought by Hewlett Packard), the new team persuaded SyQuest’s unpaid suppliers to convert up to 85% of their debt to equity, arguing that they would be unlikely to see a cent of payment if the company was put through the wringer of Chapter 11 bankruptcy protection. The second strand involves re-focusing the company back onto its core business, supplying professional customers who are prepared to pay a premium for performance and reliability, instead of trying to compete directly with Iomega for consumer dollars. We’re really not trying to get in every computer because we believe we have a different solution, says Marks. A raft of new products will be announced in the autumn, he promises. Iomega, by contrast, has been supremely well focused. The company dramatically changed course with the appointment of Kim Edwards as chief executive in 1993. Back then the Zip drive was just a laboratory experiment which Iomega’s executives did not know how to market. The mainstay of Iomega’s revenues derived from the Bernoulli tape drive, named after a seventeenth century Swiss mathematician. Edwards made the decision to popularize the company’s products. Following extensive market research, Edwards decided to focus Iomega’s products around one overriding factor – price. Our research showed that price was the most important factor to consumers, says Randall H. Scott, product line manager for Zip business in Europe. To that end the company closed its Iowa factory and shifted manufacturing to its facility in Penang, Malaysia, where labor costs are lower. Products were also given catchy, consumer orientated names. Out went obscure mathematicians and in came Zip, Jaz and Ditto. Despite the focus on price, gross margins are a respectable 31.5% and operating margins approximately 10%. But the company is not without its problems.
Sighs of relief
Key new products intended to make Iomega technology ubiquitous have been delayed. Compact Zip drives designed for the lap-top market will not appear until the fourth quarter, missing the lucrative Christmas sales season. And the company remains silent about the n.hand project to bring credit card sized 20 megabyte Zip style storage devices to hand-held computers. No doubt providing sighs of relief at Syquest’s offices in Fremont, in May, Iomega was forced to recall 75,000 cartridges used in the $399 one MB Jaz removable Winchester hard drive, which competes directly with SyQuest’s core 1.5 MB SyJet product. Although Iomega blamed faulty component suppliers, it was slow to act, causing several months of bad press. This raised concerns that it was trying to build and sell its products too cheaply. Robert Abraham, vice president of Freeman Associates, a research group which focuses solely on the storage arena, believes that SyQuest has turned the corner financially in the short-term but is unsure whether the company has a long-term future. The key to SyQuest’s future lies in the hands of its three million worldwide customer base. If they choose to stick with what they know when they upgrade, and SyQuest makes it worth their while, it is likely to have a safe niche for some time, or at least until expensive recordable optical technology drops closer to the $500 mark. Iomega meanwhile, is well on its way to joining Microsoft and Intel as a supplier of one of the most important base components of the desktop PC.
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