From Computer Business Review, a sister publication.
A recent report from market analyst Dataquest forecasts that the worldwide server storage and RAID market will approach $20bn in 1997. What is more, strong growth is set to continue for the rest of this decade and, by 2000, says Dataquest, spending will surpass $25.6bn.
With this in mind, it might be assumed that the manufacturers of the high-end disk drives that are used in servers and RAID systems are set for a blockbuster period of growth and profitability But the fact is leading vendors in this area are struggling to achieve either. When the market leading disk drive maker Seagate Technology reported its fourth quarter results in July, CEO Al Shugart admitted to stockholders that the quarter had been crummy. One of the principle reasons: erosion at the high end, he said. But he dismissed the poor results as merely a run of bad luck in a seasonally slow quarter. However, any hope that the company’s fortunes would quickly recover were comprehensively dashed in October, when Seagate reported a first quarter net loss of $240m, including charges, compared to a net income of $129m a year earlier. Revenues slipped 8% to $1.9bn, forcing Shugart to admit that the quarter had been disastrous. Again the high end business was to much blame. The problems are, however, not unique to Seagate. A number of factors are contributing to a significant decline in margins in the once wildly profitable high-end disk drive sector. First, as increasing amounts of data are being stored, manufacturers are struggling to keep up with user demands, even though disk capacities are being pushed up at rates of 60% per year. Second, vendors are constantly reducing prices in an effort to be more competitive. And to add to supplier problems, the rate of technology change in the industry is forcing up R&D expenditure dramatically while product lifecycles are shortening. As a result, vendors face serious problems in predicting demand, and often find themselves with excess inventory. Over the past 18 months, the high-end disk drive market has become less robust, less appealing, says Alexa McCloughan, a disk market analyst with IDC.
Until recently, Seagate dominated that high-end disk drive market with a 60% share. Eighteen months ago, Seagate only really had one competitor, and that was IBM, says Jim Porter of market tracker Disk/Trend. Now, he says, it is facing competition from a number of strong companies. Furthermore, a failure to optimize its Barracuda and Cheetah products to fill a gap in the lower section of its high-end product line allowed IBM, and later Western Digital and Quantum, to penetrate its traditional enclave, according to McCloughan at IDC. In 1996, both Quantum and Western Digital entered the high-end fray, lured by the prospect of buoyant growth rates and seemingly attractive profit margins. As yet, the two company’s market shares remain comparatively small – according to IDC, Quantum has a 7% share, while Western Digital has a 5% share. However, the effect of this extra competition has taken its toll on Seagate, whose own share has now slipped to around 53%. Seagate is getting a smaller slice of a smaller pie, concedes a senior spokesman from the company. As a direct result of the high level of competition in the market place, vendors have been locked in a fierce price battle in the last few months, in which prices have declined at percentage rates in the low double digits, according to Michael Brown, CEO of Quantum. And neither Quantum nor Western Digital have remained immune to the effects of price erosion. In the most recent quarter, high-end disk drive sales accounted for 9% of overall revenues at Quantum, down from 15% in the previous quarter. As a result the company’s high-end business lost around $2m after tax in the quarter, and the company decided to cut back on production.
Sufficient success in other areas
Similarly, Western Digital has also been forced to adjust its production plan for the remainder of 1997, despite reporting that its Enterprise business had shipped a substantial quarter-over-quarter increase in unit shipments. Unlike Seagate however, both companies are seeing sufficient success in other areas of their business to offset the effects of problems at the high-end. In the desktop hard disk drive market, Seagate, Quantum and Western Digital are fairly evenly matched, each enjoying shares of between 20% and 25%. But although Seagate did see 11% growth in sales of desktop disk drive products, in its most recent quarter, a 29% growth rate in desktop sales at Quantum made Seagate’s progress look paltry. Seagate’s tape business, meanwhile, was in decline, with sales shrinking 5% in the quarter to $72m. By contrast, Quantum, which also makes tape storage, doubled sales of its digital linear tape storage products. Both Quantum and Seagate are now talking of restructuring their high-end business divisions in a bid to make them profitable again although neither has yet outlined specific plans. Seagate has, however, volunteered that a charge of between $50m and $98m may be seen next quarter. Similarly, Quantum has said it may take a third quarter charge of up to $35m for restructuring. In the long run, this is going to be good for us, Shugart told investors when Seagate’s first quarter results were announced, we’ll come out of it even stronger. But despite the outward show of confidence, investors will be looking for a big improvement in the next set of figures. The latest Seagate figures were hit by some one-off charges: $214m for its August acquisition of Quinta and a $62m currency-loss that resulted from turmoil in the money markets of South East Asia, where Seagate has major manufacturing facilities. However, price erosion and other currency fluctuations have hit other vendors in the disk drive market without denting their performance. In its most recent quarter, Quantum reported net income of $103.8m, compared to $4.6m a year earlier, on revenues which rose a healthy 38% to $1.55bn. At Western Digital, net income rose 91% to $62.7m, on revenues up 23% to $1.09bn. That has many in the industry wondering whether the descent from crummy to disastrous indicates more fundamental problems at Seagate.