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Even Seagate (NYSE: STX ) will tell you that it needs to innovate its way out the trouble it's in. "Capital investment going forward will be targeted primarily at technology transitions," Chief Technology Officer Robert Whitmore told analysts during the company's second-quarter conference call.
At least one reader sees Seagate transitioning well. "If [new CEO] Steve Luczo can change this dynamic and re-introduce the importance of technology -- I really believe that Seagate can be a leader within the next 9 months. Do not dismiss Seagate because it still has all the right ingredients and has been awaiting for a master chef to put them together -- go for it Steve," wrote Fool boutaghou.
Let's assume both are correct. Let's assume that Seagate is, in fact, transitioning to new technology that will lift its fortunes. Trouble is, storage is shifting to an entirely new paradigm -- solid-state technology -- that could obviate much of Seagate's current product line. Flash technology leaders like SanDisk (Nasdaq: SNDK ) and Samsung are already working to bring about that day.
The good news: Transition never happens quickly. VHS tapes are still in use today, and more than 300 million CDs were sold last year. And while Blu-ray is the up-and-comer, Netflix (Nasdaq: NFLX ) still generates most of its revenue through DVD rentals. My point? SSDs won't replace disk drives till the cost to produce one drops dramatically, and that's likely to take years of research and development.
Nevertheless, Seagate faces what author Clayton Christensen has aptly dubbed an innovator's dilemma: Milk profits from existing drive technology via incremental improvements like perpendicular storage, or break the existing paradigm and risk losing revenue.
My guess is that Seagate won't be any different from the other incumbents facing technology transitions; it will preserve its existing technology while embracing necessary changes to the technology landscape. It'll be like Sun Microsystems (Nasdaq: JAVA ) , adopting Linux as it hawks its Unix-based Solaris server operating system. Or, better yet, like Microsoft (Nasdaq: MSFT ) , whose software plus services strategy aims to preserve Windows as researchers toy with cloud computing.
Tech is a disruptive business. That's good for investors -- every few years, a new opportunity comes along to challenge the status quo and make early investors rich. But this opportunity also comes with a cost that I've dubbed the two truths of tech investing:
- Your best ideas will always be under assault from something newer.
- Occasionally, these newer ideas will overtake your best ideas.
Solid-state technology is a new idea that has optical and magnetic disk drives in its sights. Now, Seagate needs to invent the next paradigm beyond that.
Good luck, sirs.
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