Gus, Techmeister, Roger Held, Other industry Insiders.-Would be interested in your views on whether you believe Quantum should exit the leading edge, high end (Atlas, not Viking) disk drive business, whether this is even a feasible alternative given commitments the company might have made to MKE and, if so, whether you believe this possibility is being given consideration. Is it possible that the $35 mil write-off Quantum is considering would be sufficient to terminate this business? Reviewing the situation, one must conclude the following:
1) The attraction (potential profitability) of the high end has diminished dramatically with the onslaught of new competition which portend lower gross margins on a permanent basis. It would further seem that the gross margin differential between Seagate and Quantum in the high end is much greater than in the low end if Quantum concluded it didn't make sense to sell more high end drives and SEG must have made something close to 20% margins on the high end last quarter.
2) Objective assessment of Quantum's strengths and weaknesses would have to consider that Quantum has never been successful in the high end despite numerous attempts over the years. Such attempts have been extraordinarily costly, bringing the company dangerously close to the edge a couple years ago. The high end business has been equally unfriendly to others in the past.
3) The high end logically requires economies of scale which Quantum does not possess. The rapid move towards 10,000 rpm drives and Fibre channel are clearly upping the ante for all players in this environment.
In comparison with IBM and Seagate which have major commitments to this market, Quantum lacks their technological leadership, vast financial resources, established customer base and economies of scale.
3) The high end is a relatively small part of Quantum's revenues which consume a disproportionately large amount or R & D spending and management attention (distraction).
Further, many of the same conclusions can be drawn with respect to the heads business which has objectively failed to come around on schedule on a perpetual basis. The joint venture does not have the necessary economies of scale and clearly falls outside the core competencies of either company. Any idea whether Quantum or MKE might conclude that the heads business is not the place to be?
Would appreciate your thoughts on these two perpetual sources of red ink and disappointment. Thanks, Z |
