Quantum Says, "Can't We All Just Get Along?" Dale Wettlaufer (TMF Ralegh)
August 12, 1999
Stop the madness! That's the message from disk drive company Quantum Corp. (NYSE: HDD) CEO Mike Brown. Today's Wall Street Journal quotes Brown as saying the disk drive industry is in "self-destruct mode," blaming industry leader Seagate Technology (NYSE: SEG) for the irrational pricing. Brown has been calling publicly for a change in thinking for months, having made comments on the issue of pricing at Dataquest's Storagetrack '99 conference in June. He's not alone, either, as executives at Western Digital (NYSE: WDC) and Maxtor (Nasdaq: MXTR) have also issued calls for rationality.
For its part, Seagate turned a profit last quarter, reporting consolidated gross margin of 22.5%, operating margin of 5.3%, and EPS of $0.30 (before an extraordinary credit) in the quarter ended July 2, 1999. Though gross margin by product line varies, with enterprise drives carrying better margins and desktop drives showing worse margins, even high-end drive programs at Seagate last quarter didn't go smoothly due to some production glitches and shifts in original equipment manufacturer supply-chain demands. While competitors have made incursions into the enterprise sector, Seagate is still the undisputed champ here.
Extreme pricing in desktops might not be the result of companies pricing for market share, however. Hearkening back to late 1997 and early 1998, one will recall that inventory clearances from cash-starved Asian manufacturers were a significant factor in price declines. And it's not like Compaq (NYSE: CPQ), the world's leading PC company, has its distribution chain in order. One might have a tough time knowing what's sell-in versus sell-out (into or out of the channel) in looking at market share data on Compaq. One might also look at distributor inventories and conclude that under four weeks' inventory supply is healthy, but channel data doesn't always include the smaller value-added resellers and distributors that are one more step down the line from the big distributors such as Ingram Micro (NYSE: IM).
In short, inventories all the way through the channel to the end-customer ebb and flow, and the ebbs hurt the disk drive companies. While Seagate turned a profit last quarter, it was lower than expected, and the company is currently expected to report a loss for this quarter. It's probably safe to say that the executives at large disk drive companies aren't on a megalomaniacal quest to grab as much unprofitable market share as possible. And old-world supply chain pulling through the output of industries that are able to produce high-tech goods at rapidly declining prices is a bad fit. If all the PC manufacturers were like Dell (Nasdaq: DELL) or Gateway (NYSE: GTW), where supply and demand signals are about as good as it gets in the PC industry, then the disk drive industry would probably be more rational. Thus, Quantum's CEO might want to look as hard at his customers and the way they do business as he's looking at his competition.
See also: Western Digital cuts Singapore operations