Seagate's complacency blasted away - what now?

During 2008 Seagate became a technology follower. Business results at the end of the year tore the veils from its executives' eyes as they looked a half billion dollar loss in the face. Now there is a new CEO, and a determination to get a strong grip back on the business.

Seagate sold $3.42bn worth of hard drives, 50m units, to its customers in the final quarter of 2007, profiting to the tune of $403m. It was riding high and knew it. The hard disk drive market seemed predictable and the main suppliers stable. The company decided to relax from its constant drive to improve absolute areal density, and use the density levels it already had to optimise disk drive revenues across the markets it was in.

This was a misstep. It underestimated the market for small form factor (SFF) or 2.5-inch drives as the desktop PC market declined in favour of notebooks. Competitor Western Digital did not. The recession struck and, in the final quarter the depth of Seagate's mistake was exposed for all to see. It sold just 37m drives, 23 percent lower than the previous quarter, with revenues of $2.3bn and a net loss of half a billion dollars, $496m to be precise. The price competition had been intense and the average selling price (ASP) per drive slipped from $68.40 a year ago to $62.16.

Returning CEO Steve Luczo did not mince his words at the Q4 '08 earnings call: "After demonstrating sustained areal density leadership through a number of product generations, we decided to manage areal density growth in an attempt to optimize our product portfolio and R&D investment.

"This decision resulted in products that were less competitive in some markets, as (head) technologies advanced at rates greater than our estimates... we haven't executed at the level that we are capable of."

Read/write head technology was the key area where Seagate lost leadership. The company lagged behind in two product cycles and according to Luczo, "internal execution issues were compounded by the macroeconomic environment, which we believe will continue to be challenging through calendar 2009 and potentially into the first half of calendar 2010".

The result has been the restructuring that started early on in 2008 and which was accelerated this month with a six per cent worldwide headcount reduction and salary cuts.

Luczo wants Seagate to get back to being undisputed numero uno in the disk drive... but not just the disk drive business. Here is what he said: "We are committed to implementing actions that will result in Seagate being the clear leader in storage devices across all markets, providing our customers with the industry's leading technology, highest performance and highest quality products, and using our scale and technology to be the most advanced and lowest-cost manufacturer in the industry."

Being 'the clear leader in storage devices' means that Seagate's rush into solid state drives (SSDs) is going to continue.

New chief operations officer (COO) Bob Whitmore added more detail about the product technology area: "We have not been satisfied with the consistency of our product and technology execution. We recognized this several quarters ago and have been addressing it directly."

The company has regained areal density equality with its competitors/ Whitmore said: "Last month we successfully launched the industry's first 7200 rpm 500 gigabyte per platter 3.5 inch product... our 5400 rpm 250 gigabyte per platter 2.5 inch drives have been shipping in volume for over a quarter and match the leading capacities in the industry today... in the Enterprise market we have now completed the refresh of our 2.5 inch product line, doubling capacity to 300 gigabytes."

300GB per platter enterprise SFF drives? This ought to refer to Savvio drives, with the current 10K.3 generation, introduced in June 2008, offering c150GB/platter and available as 146GB or 300GB products. It can't mean Momentus 5400 FDE.3 2.5-inch drives as they are laptop drives and offered in 160GB and 320GB versions, meaning 160GB/platter, at 5400rpm. Momentus 7200.4 drives have 250GB/platter and come as 250GB or 500GB product.

This means that it looks as if Whitmore has effectively pre-announced a Savvio 10K.4 drive with 300GB/platter and 300GB and 600GB products spinning at 10,000rpm. The extension of that areal density to Momentus drives indicates a possible Momentus 7200.5 product offering 300GB or 600GB or, as density can be increased with slower drives, 320GB/640GB.