Seagate One-Ups Competitors

Now that the disk-drive maker has extend edits warranty term, will others follow suit?

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Between cutthroat pricing, revenue and margin declines, and oversupplies of inventory in the channel, disk-drive makers have taken a spanking this year. Seagate, however, appears to be weathering the storm better than most.

Make no mistake, the forecast calls for battening down the hatches. With a share price one-third of its 52-week high, Wall Street has a sell rating on Seagate and many of its rivals. Standard and Poor's, for example, is forecasting a 10 percent revenue decline for fiscal year 2005, which began July 1, with gross margins falling below 20 percent and an earnings-per-share decline of 63 percent.

But Seagate, the leading supplier of desktop and enterprise disk drives, is going for broke. The company recently pulled off the largest product rollout in its history, extending its role in the enterprise as well as entering new markets, including media and the rapidly growing consumer-electronics segment (see "New Offerings," center).

"They've got one of the broadest product portfolios in the [disk-drive] industry," notes David Reinsel, an IDC analyst.

And in a move that clearly is putting its rivals on the defensive, Seagate has changed the warranties for its internal desktop hard disk drives (HDDs) from one year to five years. That move signifies a 180-degree turn from just a few years ago, when Seagate, along with other HDD makers, slashed their three-year standard warranties down to one. Seagate's new mandate affects all HDDs shipped through distribution as of June 1, says Joe Cousins, Seagate's senior director of global channel marketing.

On the surface, bumping the warranties up to five years sounds like a marketing gimmick--after all, what are the chances a customer is going to return a drive after four years?--but the move is more than symbolic. For one, it shows the quality of Seagate's drives is at the point where failure rates are extremely low. While, clearly, it adds overhead at a time when disk-drive manufacturers are looking to wring out costs, it addresses a move critical to many channel partners, particularly white-box systems builders.

That's because systems builders themselves typically offer three-year warranties on all but their bare-bones PCs; VARs who serve the public and educational sectors often must offer five-year warranties. Kirk Sipes, vice president of marketing and business development at white-box distributor and VAR AOpen Center, Dallas, points out that since all the HDD vendors slashed their warranties down to one year, VARs have been forced to take out insurance to effectively cover the drives--or eat the cost of replacing those that go bad in the second or third year.

What will VARs and systems builders do now that they can take that level of cost out of the equation? They can either feed it into their own profit margins or pass it onto their customers. Given that Dell and HP are using every opportunity to drive pricing down, "obviously these white-box VARs are going to do the same thing," Sipes says. "It's a great selling point for VARs," adds Rob Reby, director of purchasing at D&H, Harrisburg, Pa.

All things being equal, a VAR will certainly opt for a five-year warranty over a one-year warranty. "If you're choosing between a Seagate drive and a Maxtor drive, and they cost the same but [Seagate] has a five-year warranty and the other has a one[-year warranty], there's a tremendous incentive to buy a Seagate drive," says John Samborski, president of Ace Computers, Arlington Heights, Ill.

It was shortsighted of Seagate and others to slash their warranties in the first place. If manufacturers can't build drives that will last at least three years and back them accordingly, then perhaps they should exit the business. Systems builders can vote with their wallets.

New Offerings
Among the 12 products Seagate is rolling out this quarter and next are:

  • The Cheetah 15k.4, a drive that offers Fibre Channel, SCSI and serial-attached SCSI (SAS) with a subsystem that will house serial ATA (SATA) drives;
  • The Fibre-Channel-based NL35 series, billed as the first half-terabyte drive designed for nearline storage to fill the gap between primary and archived storage;
  • The SATA-based Barracuda 7200.8, for entry-level storage; and
  • The ST1, aimed at the iPod or similar devices that support up to 5 GB of capacity; the offering marks its foray into the 1-inch drive space.
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