QUANTUM: Merging, Shifting Focus

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

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

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.

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.

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

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.

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.

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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