Rocky,
price/platters...
re: Iomega/removable drive sector,
I think that the removable drive sector is not going to be that price sensitive to the drive manufacturers, as long as they maintain a 1.2 pricing ratio. Another way to state it is that if you can buy a 1 gig hard disk, for $79, and a 2 gig hard disk for $129, then a gig cartridge can cost $95, and a 2 gig cartridge can cost $155, which is pretty close to what IOM is pricing their product at right now.
HOWEVER, you are right that the prices for higher capacity drives are much lower in terms of cost/gig, like $185 for a 6 gig drive. That comes out to $31/gig.
If you compare the cost/gig at higher density hard drives to removables, then you get a 1 gig cartridge selling price of $36 and a 2 gig cartridge selling price of $72. This is for low end pricing. High end pricing at a normalized $50/gig places 1 gig cartridges at $60 and 2 gig carts at $120.
So lets look at the jaz cartridge: 1 plastic case, 2 rotary covers, 2 platters, 1 metal slide, some screws, and some labels. 80% of the cost is in the platters. Using TFI technology, the density of the platters is a high yield process. Thus the cost curve is low already. The downside is that yields may not get any higher, and cost reduction may be limited to 30% of currect production costs. My guesstimate of current (variable) production cost of the 500mb/platter technology is around $4 each to HMTT. HMTT probably sells them to IOM at abour $6 each. so the Jaz 1 disk will cost about $15+ material cost and another $4 for manufacture, shipping, storage and all.
thus the margins will still be there for IOM on the jaz1 , if they lower prices to $36, $60, or $79.
the Orb 2 gig platter costs about $10 or 20% less than the jaz 1 2 disk TFI platters. All in manufacturing costs (without company overhead), is about $16 (guesstimate). so Markup for castlewood at $29 is still a healthy $13 or 81%. margins will be 44.8%. Again all numbers are guesstimates.
The jaz2 cartidges have HMTT platters. HMTT probably sell these platters to IOM for $8-9 each. again, these are lower technology platters, at 1 gig density. Current mass manufacturing is for 2.1 gig MR platters. But the easier to build, higher yield TFI platters are cheaper, and have more availability from second sources. But say they cost IOM about $23 right now to build and assemble.
it would be difficult for IOM to compete with the $29 Orb price, but the margins are there to support a traditional pricing scheme of $72, $120, and $155 (lo/mid/hi)
your comments about Orb hit the mark. It is indeed a paradigm shift in the removable AND hard disk market place.
If Castlewood continues this trend, and prices the 7 gig cartidges with only an 81% markup (from an estimate $20-25/platter cost), then you can see a 7 gig cartridge for $55 by year end 1999. I am using HMTT's annoucement of a 7 gig platter as the basis for this calculation.
HOWEVER, there could be a problem with Castlewoods pro forma model at sales revenues below their fixed costs. You need to factor in their distribution costs as part of their true fixed costs. Just because there are only a few engineers, and staff right now, you get a sense of a lean management structure. but Just Like IOMEGA faced when they ramped up jaz, there will be components shortages, and yield issues. These secular revenue and cash flow problems essentially raises the fixed cost bar.
My guess is that Castlewood needs to sell $100 million in revenues of drives and disks to break even, given a global distribution and global sourcing model. This is with a gross margin of 45% and an operating structure of $45 million in the first year.
Given a $29 cartridge sales price at 1/2 of revenue, this equates to 1.72 million cartridges and 250,000 drives for a tie ratio of 7:1.
You see rocky, there is something the the pro forma that doesn't make sense. The "razor blade" strategy only makes sense when tie ratios are going to be high. Gillete's ANNUAL tie ratio is in the TEENS, not the single digits. This is IOM's and Castlewood's problem.
IMO, zip is the correct strategy at 100mb, not Jaz, Not Orb. These other two technologies will exist to limit the pricing of zip 1 gig blocks to 1 x the orb cartridge price or $29 for a gig block.
the rationalization of having 10 disks to organize at 2x the price is easy, if you want to keep files separate and discrete in physical format rather than electronic format.
For example, keeping 1040 forms for past year filings on a zip disk, rather than a backed up version on a 2 gig hard drive, crammed full of other information. Or a disk with driver updates downloaded from the web. or a disk with your Netscape/Microsoft browser preferences loaded, so you can carry your bookmarks around without buying a laptop.
So, in conclusion, I believe that Jaz in in the run for its life in September when Orb is in production quantity. I believe that the retail $/gig will drop down to $30/$50 level for removable storage by summer. I believe that Jaz/Jaz2 will be priced about 30% higher than Orb because of its installed based. I believe that zip gig blocks will be priced equivalent to jaz 1 cartridges. I believe that variable manufacturing costs are low enough to support a price reduction.
I agree with you that IOMs cost structure is currently out of whack with a low cost producer model. That is because they are transitioning from a premium pricing model (see Pre-Pfeiffer Compaq margin models) to a low cost pricing model. This transition should take 12-18 months.
I think IOM is a great long term buy, but short term, may be cash flow negative for 6 months.
Can't help with picking the bottom, but if it hits your $4.50 target price, it would look extremely attractive.
If you have an 18 month horizon, i think $6 is a good price. I think if you have a 3 month horizon, your short at $7.25 will work very well.
How is that for not having an opinion?
:)
BL |
