The September quarter was the first full quarter of tape media sales.
20% of DLT revenues, if I recall correctly, and this correlates to an installed base of about 500,000 units.
Quantum is reselling tape made by Fujifilm which is based on the same magnetic media technology used in Zip drives. See below.
Fujifilm's ATOMM Technology - its application and future
thic.org
The Chairman and CEO of Breece Hill makes an interesting point about tape sales and also provides an interesting look down the road in this article on the tape library biz.
Getting Respect
Once Seen As A 'Third-String Player' In the Investor Arena,
Today's Tape Library Business Has Earned A Starting Spot
breecehill.com
"......Today, an estimated 2.5 million DLT cartridges are in use inside data processing centers. At the current rate over the next five years, there will be an additional ten million cartridges inventoried. Existing companies, already committed to DLT, will be looking for tape libraries and near-line capabilities that build on these technological and cost savings advantages. Newcomers will no doubt follow the lead of these existing DLT-committed companies....."
The surprise is not really in how lucrative the tape media biz is, but in how long it took QNTM to couple the torrid growth of DLT with tape media sales. To see how valuable this part of the business can be for a tape drive vendor, one only has to look at the way the tape business has allowed Exabyte, the former owner of the mid-range tape standard (8mm) with an installed base of over 1.0 million units, to survive while it restructures itself from a hardware company into some kind of storage solutions company.
'...Given what has occurred to date, it is clear to me that DLT, in particular, will be the data library choice for at least three more years. In particular, the potential of integrating this technology into near-line applications is also showing increasing promise. During the next five-year period, I foresee three to four years as extremely strong for the industry, followed by two or more years that will be less bullish, but nevertheless still growing...."
2 things to keep in mind when assessing DLT growth:
1) Given the kind of bandwidth that is going to be introduced into the networks in the next five years and given the way that bandwidth stimulates tremendous growth in storage requirements, the automated backup scene is going to be very interesting and in some ways, unpredictable. Already, IBM and STK are shaking up the mainframe tape library segment with their Virtual Tape Servers, which not surprisingly lever off their own proprietary tape formats.
IBM introduced its Virtual Tape Server earlier this year and it has clearly stimulated the growth of its Magstar libaries (IBM only sells the 2 types of Magstar drives as part of an integrated libary solution with 2 drives as a minimum) from 10,000 libraries in March 1997 to 20,000 libraries in October 1997. STK's Virtual Tape server, which supports the Timberline (linear) and Redwood (helical) drives, is about 6 months behind and is due in the March quarter. It's too early too tell what the implications of this enterprise storage paradigm shift and other product announcements (see Philips NCTP; also, see Sony and SEG do the Sony/Aiwa routine with a major channel push next year) are when it migrates from the mainframe to the mid-range open systems market but it is clear that the tape library innovation war has just gone nuclear.
2) QNTM still derives 80% of its revenues from disk drives and nothwithstanding the price action of the last two days, there are legitimate questions about QNTM's disk drive biz.
It is losing money in the enterprise segment and this is amplifying the losses of what was thought to be an improving (read: narrower losses) head manufacturing biz. The prospects look dismal at the rate that IBM and Seagate are squaring off and launching one technology innovation after another to separate themselves from each other and an increasingly larger field (XOR, 10000 rpm, fiber channel, fluid-bearing motors, GMR, MEMS, integrated suspensions etc).
Also, one has to keep an eye on Fujitsu and Hitachi, both of which can be expected to use their currency-advantaged cost structures to grab market share. Fujitsu in particular is grabbing volume in the desktop segment and has an impressive first-generation lineup that overshadows Quantum's next-generation enterprise drives. WDC may yet prove to be the sleeper in this segment with the way it has smartly narrowed its focus on the low to mid-sized NT market, the fastest growing enterprise segment where the margins may be approaching that of the top tier desktop segment. I read an interesting article in the Singapore Business Times where an industry observer remarked that there may be room for 3 or 4 players in the enterprise segment, which only accounts for about 25% of the total DD industry, in unit terms.
The desktop, though, is what could make the disk drive supply chain extremely volatile. The fact of the matter is that there is just too much capacity in the system, with more coming online. It is true that you have fewer players now, but these are much bigger players, each of which has to go after volume. Seagate, for example, is looking to add about 1 million of incremental desktop drive sales EACH of the next 4 quarters, at least, to make up for the reduced margins and market share in the enterprise segment. SEG lost 200,000 enterprise units but added 900,000 desktop units in the September quarter. Complicating the picture is the fact that in order to make their DD businesses profitable, Maxtor, Fujitsu, Samsung and the others have to cross the 10-12% market share threshold before they can make any money. Remember now, this is the commodity desktop segment where low cost is paramount, the range of innovation and differentiation is relatively narrow, and the drives are of relatively similar quality and reliability.
In retrospect, the glut in platters that started earlier this year and continues today, as well as the developing overcapacity in head capacity are clear signs that much of the developing overcapacity in total disk drive capacity may be strategic Korean and Japanese capacity complete with their legendary stubborn focus on the long term strategic value, in this case, computer/convergence storage. This should come as no surprise. The Japanese and the Koreans already control most of the currently depressed DRAM industry and the about-to-explode-again optical memory industry. Why shouldn't they participate more vigorously in a DD industry that is expected to go from $34 billion this year to anywhere from $55-74 billion in 3 years?
Success is NOT guaranteed, of course, and the historical odds are against them, but the prudent assumption to make is that this sector is going to be extremely volatile for the next few quarters. That has to affect the risk and reward equation for most people, which in turn is going to change the demand and supply of these stocks. As someone on MF said, the only correct position in this sector for a while may be a nimble, switch-hitting, trading position. Food for thought. |
