Dear Joe: Thanks for your interesting posts. I appreciate your candor about being short. As Ken, Young and some of the other Iomega veterens on the board will tell you, we still believe there are good reasons to be long. To address some of the points you made...
* Where do you hear that Iomega is currently "component and production constrained...?" That's an old saw that reemerged last week when Reuters or some other news service pulled out a section of a weeks old S3 filing. Kim Edwards has publicly stated in the last few months that component shortages are easing. The number of Zip and Jaz drives that are appearing on the shelves of the major vendors bears witness to this. From "channel check" evidence supplied over internet, my impression is that Iomega product is being sold in record numbers. I spoke to MacWarehouse just last week while ordering another procuct and the saleswoman told me that her computer showed me that MacWarehouse had sold over 2000 Zip discs that day alone. Also, while considering your short position, don't ignore the massive advertising campaign that Iomega is about to unleash. The current newsweek has a five page (!) Iomega ad. You can bet tie in media campaign to follow. Remember, Iomega Chairman Kim Edwards was trained in GE consumer products division. He understands price points and he understands creating consumer demand. I wonder if the people at Western Digital have thought much about creating consumer demand?
* R&D. I would say the point of R&D is bang for the buck. I don't think that anybody would argue that Iomega hasn't done well here. If you talk to Ken Marcus, he will tell you that Iomega developed the Zip around a four part business plan. The Zip circuit is succesful because it is simple and inexpensive, has a nice upward migration path (in other words, the 200 megabyte Zip, etc isn't far off), and is now well protected by patents. Also, anyone who owns a Zip (and if I were a short, I'd make sure I had one on my desk) can tell you that unlike Winchester or hard disc technology, the media is virtually indestructable. People do go on about DVD, Optical, etc, but the hard disc industry will tell you that good old magnetic media is still the ultimate bang for the buck, and from what I understand (I am not an engineer), the Zip is a very clever marriage of hard disc head technology, and floppy media. By the way, Syquest DIDN'T come up with a competitive product by trying to use reject hard disc technology. They lost a lot of money.
* He who gets to market first... Iomega has an incredible lead in this business. One can argue now whether it's overwhelming. To me it looks better everyday. Kim Edwards just placed his secondary and has between $175 and 225 million to grow his company.
*The disc annuity. "Tie ratios" is one of the things that got my attention when I bought the stock. No one knows yet how many discs the average Zip owner will consume. Right now I have six. We do know that there is a hefty profit margin built into each disc. The disc sales should begin to show an impact in Iomega's next quarterly report. Will you be short in July?
* Global vision: Kim Edwards thinks big...very big. He has made strategic deals in Asia, Europe and of course USA. He has thought this way from the very beginning. Again, anybody looking at competing with this front runner better have the 'vision thing' down. Sourcing parts, producing drives, logistics...Iomega is looking at this on a world wide basis. That means volume and cost basis can also be addressed at this level. This creates a whole new equation in production scale.
* The aftermarket. One of the more clever things that Iomega did, as a byproduct of their small size, was create tremendous excitment about their product in the aftermarket. The company is consumer driven, and has been from the start. The fact that the 350 million installed pc's are all potential Iomega customers creates a massive argument for the Zip becoming the standard. Anybody who thinks that they can ignore this and simply sell to OEM's is missing the boat. I believe you must sell an aftermarket product if you are to create a new standard.
Anyway, things to think about. I look forward to reading more of your posts.
Best,
MGSAM |
