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QUANTUM: Merging, Shifting Focus

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DQI Bureau
New Update

As the Internet creates new opportunities for the storage industry, Quantum

restructures its business to make an impact. A mega merger, an enhanced product

portfolio and improved designs–the company is driving hard to gear up

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The rapid pace of growth in the infotech industry may have

meant immediate gains for many, but for the storage industry it has been a tough

struggle. Vendors have been finding it difficult to keep up with the

ever-increasing demand, and shortage in supplies has led to surging prices.

Market sources indicate that shortage of hard disk drives (HDDs) recently caused

its prices to zoom by about 25%. Fortunately, however, the Internet boom has

come as a boon for the storage industry. The explosion of data on the Web has

suddenly created more demand for storage products. In such a scenario, Quantum

has put its act together to face the challenges and make an impact by taking

full advantage of the new opportunities that the Internet has brought in.

"The industry has seen its ups and downs and only the

stronger players will ultimately survive and thrive. The Internet has made so

much more information available. There is suddenly a need to store these huge

volumes of data floating on the Web. We’ve been working to continuously bring

down cost. From technological point of view, it means more capacity and higher

performance at lesser cost," explains Michael A Brown, chairman and CEO,

Quantum. Besides enhancing the performance of existing products, Quantum has

joined hands with Maxtor Corp, creating one of the biggest mergers in the HDD

industry.

Creating an HDD giant

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As part of its strategy to improve its market position,

Quantum recently decided to merge its hard disk drive group with Maxtor in an

all stock transaction valued at $2.3 billion. It is estimated that the merger

will generate annualized cost savings of $120 million to $200 million within 18

to 24 months following completion of the transaction, which is expected by

February next year. The transaction will create an enterprise with annual sales

of approximately $6 billion.

"We expect to reduce duplicative expenses and with

operational efficiencies resulting from the transaction, we will be able to fund

expanded research and development," said Mike Cannon, president and CEO,

Maxtor. Brown of Quantum, who will join the new company’s board of directors,

said, "By joining hands with Maxtor, we will be in a much stronger position

to face the challenges. What that means for us is very strong balance sheets,

lots of financial flexibility and being able to mobilize resources in a much

better way. We will be able to invest in some other product lines where we see

high growths."

To be named Maxtor Corporation, the combined company, which

will be led by Cannon, is expected to have a combined ship rate of more than 50

million hard drives annually for use in a broad range of desktop personal

computers, Intel-based servers and consumer electronics applications. In

addition, Maxtor’s network systems group, which is currently shipping a family

of network-attached storage (NAS) products under the MaxAttach brand, will be

part of the combined company.

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The Net impact

With the $3.3 billion HDD business being merged with Maxtor,

Quantum will now focus on its $1.4 billion DLT and storage systems group. Brown

explains that even after the merger, Quantum will continue as a sizable company

with its other product lines such as DLT tapes, ATL and Snap server. "The

market for these will grow at a very fast rate from a few million dollars to

several billions. It’s a huge growth opportunity for us," he says. IDC

figures also indicate that while the demand for traditional server attached

storage products will remain more or less constant, the market for network

storage products is expected to rise at a CAGR of 67%. And the whole storage

market is expected to grow from the about $32 billion to touch $50 billion in

the next 4-5 years.

The company hopes to leverage on the increasing opportunities

that have been created in the market. "Because of the Internet,

organizations are generating far more data than they used to. We like that

because they will need more storage products to keep it," says Kevin Daly,

president, enterprise solutions division, Quantum.

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From the mainframe era, when data was centralized, the

industry moved to a point where the data was distributed all over, but was not

well controlled. Now the data is still physically distributed, but experts feel

that the centralized management of this data needs to come back again. And the

Internet is not just driving storage requirements, but is also acting as an

important tool in meeting this new demand. It is emerging as a very powerful

tool for managing storage resources. "Most large organizations find it

difficult to efficiently manage their data. That expertise is hard to come by,

especially in organizations that have many locations. The Internet allows remote

management of such storage," says Daly.

Interestingly, it is not the large organizations that are

driving storage requirements, but the newer and smaller ones that are growing

much faster. For instance, it took Citibank 20 years to get to a terabyte of

data in their storage. And a company like Driveway.com reached 40 terabytes in

two months. "What we have seen in traditional organizations is that while

they have large data processing complexes, they’ve grown over a relatively

long period of time in a paced manner. But the Internet has brought in a whole

new set of organizations that are data dependent and have enormous need to grow

up very quickly," he says.

Expansion drive

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More capacity, faster growth and complex data processing

needs among enterprises–all these have meant newer architectures for Quantum’s

products. The open storage network (OSN) initiative was a significant step to

provide open storage networking for continuous access and availability of data

within network environments. Says Daly, who’s an expert on the subject,

"The convergence of storage and networking is upon us. The continued

decline of storage technology costs, emergence of high-bandwidth networking and

the development of access-dominated applications have led to the emergence of

new storage architectures."

Brown further elaborates on the company’s expansion drive,

"The Internet is driving the need for new computing architectures to get

people connected to processing power anywhere. We are taking advantage of this

impact of networking to design products for storage area networks (SANs) and

NAS, the two new architectures that are ways of deploying storage." IDC

forecasts that 50% of all server storage purchases in 2003 will be either NAS-

or SAN-based. Both product categories will have high sales growth during the

next few years as end-users struggle to find ways to manage the storage capacity

growth. SANs will provide LAN-free and application-server-free backup, flexible

virtual storage, and eventually, application accelerators.

Today, Quantum is addressing each of the three broad markets

that have emerged to serve enterprise-class storage requirements:

server-attached storage, through its DLT and ATL product offerings; NAS, through

the Snap! Server and LanVault products, and SAN through, again, both ATL and DLT

products. "We’re addressing these growing markets for storage in two

ways. One is through our continuing focus on the DLTtape back-up technology that

is preserving and archiving so much of the world’s enterprise digital content.

The other is through our expanded focus on providing complete storage solutions

for networked computing environments ranging from the workgroup to the

enterprise," explains Brown.

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Although Quantum’s strength in the enterprise storage

products has made it a key player in the global market, it has not been as

strong in the Asia-Pacific region. While it is globally positioned next only to

Seagate at number two, in the Indian market it lags behind and is perched at the

third position. According to IDC, in 1999-00, Seagate dominated the Indian

market with 63% market share and Samsung with 11% market share ranked second.

The India focus

To take on the leading storage device manufacturing

companies, Seagate and Samsung in India, Quantum plans to invest about $5-10

million for setting up its operations in the country. Seagate does not have a

subsidiary in India and may not set up one in the near future, but Quantum has

intentions of establishing a subsidiary here later. Both Seagate and Quantum

presently do not have a liaison office in India and manage the market through

resellers out of their Singapore offices.

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Quantum’s domestic and international distribution network

includes commercial and industrial distributors located in over 50 countries.

Although the company has been active in other countries such as Hong Kong, China

and Taiwan in the Asia-Pacific region, it has not been a very prominent player

in India. "Earlier we were focused on other Asian markets and our

priorities were different. About 4-5 years ago we went to China; now we have

three offices there. Now we are starting a major push in India it is an

incredible market in terms of potential and growth," explains Brown.

Quantum has projected an ambitious net revenue of $55 million

from its Indian operations during the current fiscal. The company claims that

its operations clocked a revenue of $28 million during the year ended March

2000.

"India and China are now definitely our attention as the

high-growth potential markets," says Brown. "At present we have no

offices in India and initially we will be working in association with Ingram

Micro to strengthen our distribution and sales network in India. Gradually, we

want to have some local representation. It will be important to have an

efficient technical support system."

The inflection point

Narrow profit margins, short product life cycles that require

high R&D investment, managing overheads and changing customer requirements–the

industry has always had to deal with many such issues that have created ups and

downs in growth. "The year 1999 was particularly tough and there was

incredibly aggressive pricing. Prices were declining at a rate of 50% year on

year and at the same time the capacities were doubling. That’s a very

difficult environment for anyone to make money and no one made money on desktops

during that period," says Brown.

However, the industry is today at an inflection point. A

plethora of new applications have emerged and are driving growth. Besides

networking, another important factor that is driving storage requirements is the

need to store richer forms of content. Earlier you had to store mainly text or

graphics, but now you have more images. "As we apply our storage

applications to consumer electronics, we’ll have audio and video, which are

much more storage intensive. A number of other applications such as voice

recognition and e-mail will be driving growth. Quantum has entered into

alliances with electronics majors such as Sony, Philips, Panasonic, JVC and so

on." he says. According to IDC, the HDD market witnessed a modest growth

from Rs 732 crore in 1998-99 to Rs 790 crore in 1999-00. The situation is

expected to improve further with a projected value of Rs 1,282 crore next year.

Quantum hopes that its drive to restructure and reposition itself will enable it

to take advantage of this growth and emerge as a player to reckon with.

SHWETA VERMA



in Singapore

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