STRATEGY. Are rebates a slick strategy to boost 2Q sales, simply part of KE's long term strategy toward $99 to create an industry standard, or a desperate attempt to stem declining sales?
Some have suggested here that the rebates will boost 2Q sales but lower 3Q earnings since earnings dilution will be delayed as rebates are sent in during the 3Q. This logic only makes sense if dealers have been loaded prior to July 1 with the anticipation that the rebates were coming. If so, then shelves were full by July 1. Since reports from Iomegans here show that to be the case, the company should be able to show massive sales increases for 2Q in light of the apparent supply problem it has suffered until now.
But is this phantom sales? And what about earnings? Does anyone know what the dealers have been offered in terms of promotional deals and discounts in order to load up on inventory? If the dealers' purchasing agents were aware of the decline of PC sales (as we have only recently become aware of at the manufacturer level...DEC reported not meeting targets, etc.) they needed something to make up the sales and earning shortfall for their own 2Q. Iomega comes along and gives them a deal to load inventory at no cost (I'm making this part up). Will Iomega then be able to report real-time 2Q sales? Will the revenue stream from inventory loading really come in during 3Q? Will the deals Iomega made to load the dealers hurt sales/earnings ratio? Which quarter will the rebate effects be seen?
Given the numerous uncertainties, its impossible for us to sit here and guess 2Q effects of the rebates (although Iomega most certainly has thought this through). However, if it is a tactic to manipulate the stock price, I'm glad it is designed to move the price up. The only concern is for the "Long on Iomegans" as management spends time trying to keep the investors happy rather than technology and beating competition.
Is the rebate part of KE's strategy for setting the industry technology standard? Given the time parameters of KE's plan to move the Zip price to $99, previously reported here (Young recently reposted the interview--thanks, I missed it earlier!), a $50 rebate now seems to be about right. KE gave a clear market signal of what was planned, and actual behavior timed about now would be needed to build strategic credibility. So why not a real price drop? Why the games with a temporary rebate? The objective of all rebates is to give urgency to buy. Iomega needed a sales boost now to goose 2Q sales. Simply dropping the price by $50 would give a signal to competitors but would not necessarily get consumers to buy immediately. Technology purchases, especially at $149, is going to be postponed. However, to maintain competitive credibility, Iomega will have to permanently drop the price to $149 by Xmas---in time for the 4Q sales push. So what will happen to prices in 3Q? If PC sales continue to stagnate, will this force an earlier price drop in the 3Q?
As a matter of fact, is the rebate simply an acknowledgment of stagnant Zip sales and there is not really an increase in manufacturing capacity but increased simply a build-up in inventory? The above discussion gives KE a lot of speculative credit. Which is more likely: brilliant strategy or business fact? The business fact is that PC sales are in trouble. Why shouldn't this also affect Iomega? Perhaps IOMEGA IS IN TROUBLE, like the rest of the PC industry. This is the most parsimonious explanation for the rebate.
Or is it? Could the Zip and Jazz actually be countercyclical to PC sales? Built-in hard disk storage increases with each generation of PC. How much of the Zip market is buying for extra storage (plus a few for backup storage use) vs. portability? Premise: Any mass market household can use extra storage, but few mass market household CURRENTLY need high capacity transportable storage. As long as there is sufficient hard disk storage space, the mass market will not need extra storage. As long as PC sales increase, the mass market will get extra storage via increased capacity HHD; there will be little need for Zip. We know that most PC sales are replacement rather than new household penetration. However, if PC sales level-off, the installed household base of PCs will fill-up their hard disk storage and be willing to buy a cheap device for extra storage. Hence, access speeds and reliability comparable to hard disk will be very important. The real competition to Zip (not Jazz) will be PC hard disks. Validity check: Does anybody know the percentage of sales of Zip going to low end vs high end PCs (Hypothesis: A greater percentage PC owners who have less than 1 G of hard disk space bought Zip than those PC owners who have 1 G or more). A survey of Iomegans would obviously not be valid. Techies were the original market segment but now the market must be driven by the masses (see Moore's Crossing the Chasm book).
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Glenn |
