PC storage market climate teaming disk, tape firms

Electronic News, Nov 2, 1992 by Daniel Holden

MOUNTAIN VIEW, CALIF.--Recent acquisitions or proposed acquisitions of tape drive manufacturers by disk drive makers have stirred the storage industry, which sees the activity as a race for broad-line market share that may even precipitate a tape drive price war.

Hewlett Packard last week completed its acquisition of Colorado Memory Systems (CMS), a deal industry insiders characterized as "friendly" and worth perhaps as much as $200 million in cash. Also, Conner Peripherals said it would purchase Archive for roughly $150 million, although details are being withheld until the deal's scheduled closing next week. Questions include the proposed acquisition's effect on Conner Technology Inc., a new Conner unit that is designing its own quarter-inch cartridge (QIC) tape drive (EN, June 22).

Meanwhile, although Seagate last week denied rumors that it wants to acquire Rexon Inc.--the holding company for Wangtek, WangDAT, Tecmar and Sytron Corp.--a Seagate spokeswoman said the company "continues to look at storage products, including tape." A Rexon spokesman said there are no plans to sell the company, but added, "For the right price we're for sale to anybody."

"There's definitely a trend...the big are getting bigger," said Fara Yale, a Dataquest analyst. "The disk drive companies are expanding into new markets, trying to create a one-stop-shopping kind of approach."

While that objective alone would be sufficient to get big disk drive makers into the tape market, other forces are at work. Observers said the market for tape backup of data-intensive systems is growing faster than ever, with higher storage capacities in workstations, PCs and even portable systems generating the need.

In addition, tape drive technologies are attracting Winchester companies looking for additional edges in OEM bids. Data compression, for example, is making software a high value-added differentiator in several disk drive segments. Decreasing disk margins, precipitated by aggressive pricing strategies and by the increasing push into commodity applications, also have played a role in the search for alternative opportunities at Winchester firms.

Lee Elizer, president of Data Storage Concepts, said margins in the disk drive market currently are around 20 percent. In the tape drive market, margins were said to be 28 to 35 percent.

Tape drive manufacturers also are seeing the need for such consolidations as the costs of product ramps increase. CMS was purchased on the same day it was supposed to make an initial public offering, and Archive has shelved a planned secondary stock offering that would have been used to ramp tape manufacturing.

"This will be the first time in quite a while that the low-end tape drive companies have been well financed for a rampup," said Mr. Elizer. "They've not been at death's door, but they also haven't had the kind of money that companies like Conner and Seagate can provide. In the case of Archive, I think they perceived a chance to really dominate the market if the funding was right. Their planned offering was only on the order of about $5 million, which wouldn't exactly make them cash-rich."

The melding of disk and tape drive suppliers is expected by some to trigger price wars reminiscent of those in the Winchester market. An HP spokesman disagreed, however, saying such an outcome is "not a given."

Nevertheless, the acquisitions could spell trouble for smaller tape drive suppliers with single-product solutions or less cash on hand for manufacturing. This could result in still more consolidation and an eventual shakeout.