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Technology Stocks : EMC How high can it go? -- Ignore unavailable to you. Want to Upgrade?

To: Arrow Hd. who wrote (14309)	6/12/2002 5:36:34 PM
From: Gus	Read Replies (1) \| Respond to of 17183

I think IBM had no choice. They had to get rid of the disk drive division because of all the red ink that it was generating. Technically, IBM was 2-3 years behind Seagate in terms of rotational speeds (10k rpm, 15k rpm, 22.5k rpm). The rest of the industry had also narrowed the areal density lead that IBM enjoyed since it became the first manufacturer to shift to magneto-resistive recording in 1994. The prospect of more red ink (~$300M-$600M a year) in the next few years was very real despite the fact that IBM continued to dazzle some of the more impressionable members of the trades with pixie dust-gathering millipedes cavorting in nanospace.<g> This was not a very cheery prospect for the new IBM CEO (only the natural 9th CEO in its history) adjusting to a post-Enron environment. The whole certainly can't be greater than the sum of the parts, a la GE, if you have bloody divisions like the Disk Drives Division. I don't think that it is any coincidence that the price war in the high-end segment started to moderate in anticipation of the IBM decision to jettison the disk drive unit. See article below. For much of the 90s, 50% of the street price of a high-end storage system was typically attributed to the cost of the disk drives plus a modest margin. The other 50% of the price of the storage system was typically attributed to the cost of the controller technology plus a modest margin for everybody else and a generous margin for the leading box (Symmetrix). What made this situation sweeter for EMC was the increasing percentage of software revenues -- from less than $50M in 1995 to $1.4B in 2000. Many people may not realize that the higher software margins allowed EMC to plow back all its hardware profits into its services division which is now very well positioned to capitalize on what is expected to be a $24B Storage Services market in 2004 (IDC). This did not escape IBM's attention so when IBM rushed Shark to market in 1999, it made no bones about the fact that it was giving away its controller technology to the open source movement and relying on its bundling prowess (including its disk drive price advantage) to recapture market share as well as defend its mainframe upgrade cycle, which started in December 2000. While IBM gained market share in servers, storage, databases and middleware last year, a lot of people in the storage industry knew that IBM couldn't sustain its scorched earth pricing policies without its disk drive division. This division probably gave IBM something like a 10%-20% edge in the bill of materials. This cost edge partially explains the kind of discounts that IBM was reportedly offering -- anywhere from 60%-90% excluding the cost of the rubber fins that IBM shipped free with every Shark. EMC was able to weather IBM's pricing strategy in 1999 and 2000 (when EMC recorded its best fiscal year ever) by methodically gaining more market share to compensate for the abnormal price erosion induced by IBM and encouraged by HDS, another conglomerate which continues to use its money-losing disk drive division to subsidize its disk array biz. EMC, however, couldn't capture enough market share in 2001 to compensate for IBM's scorched earth pricing policy and HDS' dogged market share inroads. Put simply, the erratic compression of most IT budgets throughout 2001 didn't leave much market share to be taken. Recall that the 2001 storage hardware market dropped by around 20% to appreciate the magnitude of EMC's dilemma. Not surprisingly, in 2001 EMC shipped 50+% more storage (in terms of terabytes) but generated 50+% less storage hardware revenues. But what has passed has passed, what is already is, and what will be will be. The trials and tribulations of the recent Quantum/Maxtor merger suggests very strongly that Hitachi is seriously underestimating the difficulties of merging two money-losing disk drive operations. Quantum and Maxtor were already the two most efficient volume manufacturers of disk drives on the planet and they couldn't make a go out of it. What makes Hitachi thinks that it can do better? The significance of this is that IBM and HDS' primary source of disk drives is going to be quite unreliable for some time. I don't think a private Seagate would be receptive to expanding its manufacturing capacity to tide over IBM and HDS when it knows that IBM and HDS clearly intend for the merged operation to supply most of its enterprise drives as soon as possible. Certainly not, one would think, after the prolonged and debilitating slump suffered by the disk drive industry as a result of the reckless addition of manufacturing capacity. But then again that type of logic has typically been beyond the reach of this industry. Check out those PSRs.<g> Anyway, I agree with you that EMC is poised to capitalize on the missteps of its rivals and any rebound in IT spending. Networked storage continues to be a high priority spending item because of its smart ROI. EMC has reduced its break-even point to around $1.4B-$1.5B so the higher percentage of software sales and the greater percentage of low-end and midrange manufacturing outsourced will contribute to higher-quality revenue and earnings growth. Post-GAAsP, valuations will be whatever it will be. Storage vendors call for truce in pricing war By Steve Ranger [06-11-2002] Prices may not fall as fast now Suppliers are calling a truce in the storage pricing wars and storage hardware prices will stop falling as fast as they did last year, according to analysts. Hardware prices have fallen by over 50 per cent in the last year, but Meta Group said this was now falling back to around 35 per cent, especially in the sales of 3TB or more of storage. "The fierce competition between IBM, EMC, and HDS is still driving a more 'traditional' 35 per cent annual price decline, led by IBM," said Meta. Sean Derrington, Meta's senior programme director, said: "The dramatic price declines have been on the hardware side. A lot of customers are looking at a firefighting approach to buying storage hardware because of flat IT budgets, and look at small one-off storage acquisitions. This will continue throughout the year." Derrington said the price of high-end hardware had fallen to almost the same level as the low-end storage hardware. "There is still a differential but it is much, much less than it was," he said. *Meta said customers should move to a six- to nine-month capacity planning and purchasing cycle, because the previous 12- to 15 -month procurements cycles are no longer economically justified.* Analyst and research firm IDC predicts that companies will spend $71bn by 2004. Software and services will be the fastest-growing areas of the storage market, accounting for $9bn and $24bn. vnunet.com