Is competition returning to the removable storage market?
In Christmas 1994, SyQuest based in Fremont, California, was celebrating one of the most successful years in its history. Through a combination of innovative technology and clever industry maneuvering, the 12-year-old company had established its 44M cartridge as the standard recording media for the exploding desktop publishing industry. With revenues exceeding $200m and plans for a new 270M cartridge underway, the company’s lead in the high-capacity removable storage market seemed unassailable. Meanwhile, 600 miles away in Roy, Utah, Iomega was struggling to find a breakthrough technology. Its strategy of selling its Bernoulli, removable floppy drive to the OEM market had borne modest success, but the company’s revenues were still half that of SyQuest. CEO Kim Edwards decided to pin the company’s hopes on a new, but ‘backwardly compatible’, 120M drive that Iomega had been developing with Matsushita and 3M, but he was being troubled by questions. What if customers do not actually want backwards compatibility? What if, by eliminating that requirement, Iomega could make a simpler drive at a lower cost? Finally, and most fundamentally, what did customers actually want? In early 1995, after some intensive market research, Edwards made a decision that was to completely transform both his company and the industry it occupies. Iomega pulled out of the 120M drive project and threw its weight behind a new 100M format which has been aggressively marketed under the consumer friendly name of Zip. It costs $200.
Stunned
When the Zip drive emerged in the second half of 1995, SyQuest was stunned. Iomega’s cheaper, smarter product completely changed the competitive landscape, rendering its 270M design redundant. As a short-cut to market, the company decided to redesign the 270M, recording data on one side only, and launched it as the EZ- 135 for $199. The result was a disaster. For the first two quarters of 1996, the bottom line loss for the company was bigger than its total sales. Poorly marketed and more expensive to produce than its rival, the EZ-135 nearly pulled the company under. From the time of its release until today, SyQuest has not made a profit. Iomega’s progress, meanwhile, has gone from impressive to truly staggering. By the end of 1996, revenues were $1.2bn and the company’s stock showed the biggest increase in value of all computer stocks for that year. Lucky investors who bought Iomega stock in late 1995 and held it until early in 1997 made a 100 times return on their investment.1997 was a similar story. In the first three quarters of the year alone, Iomega equaled its $1.2bn figure. Then, in November, it announced the historic shipment of its 10 millionth Zip drive.
Competitive threat
But having had the market virtually to itself for two years, Iomega now faces serious competition once more. First, SyQuest has re-stabilized. The company has completely changed its management and overhauled its product line, and now offers a range of powerful, competitively-priced products aimed at reasserting its high-end storage strength. Last week, the company announced its intention to concentrate its efforts on the SparQ drive, which is both faster and cheaper than Zip, and has done well in the marketplace since its introduction late last year. Second, a small French company, Nomai, has appeared on the market offering a cheaper line of Zip-compatible 100M XHD cartridges. The move is highly threatening to Iomega, which has been able to sell its Zip drives at such low prices only because it can recoup its money on the follow-on cartridges sales. In this market, the most important technical specification is price, quips Jim Porter, president of storage market research specialists Disk/Trend. For Nomai to arrive on the business scene and start to sell cheaper cartridges constitutes an act of piracy to Iomega. Iomega has responded accordingly. In November, it obtained restriction orders prohibiting Nomai from making or selling its cartridges in the US and throughout Europe, claiming that, in two independent studies, Nomai’s disks were found to be incompatible with Zip drives, causing serious head damage in some cases. Nomai has responded by claiming that the tests were carried out using Iomega’s new laptop Zip drive which has been intentionally modified to reject Nomai’s disks, and that its disks were subjected to unrealistically harsh conditions, such as being ‘cooked’ for 15 days of read-writes. We want to answer these accusations, says Delphine Blin, product communications manager for Nomai. We are going to bring evidence to show that our cartridges do not hurt the drives. Nomai has, in fact, won a partial reprieve. In December, a panel of judges in Paris overturned the preliminary injunction that had been ordered in France. It still leaves Nomai with five other judicially-imposed bans in Europe, however, and a temporary restraining order in the US. The $29m Nomai may be dwarfed by Iomega, which announced revenues of $431.7 m for the quarter ended September 1997, but there is no doubting the seriousness with which the smaller company is approaching the market. In September, it acquired a 60,000 square foot manufacturing plant specifically to make removable media. There will undoubtedly be others who will now target the market, which will be worth $4.3bn by 2000, according to analysts Disk/Trend. High-capacity floppy drives have already been announced by Mitsumi and Swan, Sony and TEAC. Even so, Christmas 1998 still looks set to be a happy time for Iomega.
Computer Business Review
