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A Sea Change at Seagate

Editor's Note: An earlier version of this story had the name of former Seagate executive Jim Druckrey misspelled. Additionally, he left Seagate to work for Bose, not Palm.

With its stock dropping like a brick in a barrel, hard drive giant Seagate Technology (STX) surprised few people when it announced plans to lay off 10% of its workforce in a bid to reduce costs. But what wasn't expected was that among those getting pink slips would be CEO Bill Watkins and Chief Operating Officer David Wickersham. In a surprise move on Jan. 12, Chairman Steve Luczo reclaimed the CEO position, which he also held from 1998 until 2004.

Luczo, an investment banker by training, was a senior managing director at Bear Stearns in the early 1990s and the driving force behind the deal that took the company private in 2000. Seagate returned to the public market two years later. Analysts say he's unlikely to remain in the CEO's office for long, keeping the post on an interim basis until operations are turned around. "Luczo does not want to do the day-to-day operation," says analyst Krishna Chander of market research firm iSuppli. "He'll want to reposition the company and then hand it off to someone else."

Seagate didn't return calls seeking comment.

Computer Crater

There's plenty of work to do. Seagate's stock price has fallen more than 80% from its 52-week high of 24.11, and dipped nearly 16% on news of the shakeup on Jan. 12, finishing at 4.76. Part of the precipitous drop in 2008 can be explained by the cratering of demand for personal computers. Still, rival Western Digital (WDC) has seen its stock drop by only two-thirds, while the shares of other key PC suppliers like chipmaker Intel (INTC) have lost only half of their value or less.

Seagate is still the largest hard drive manufacturer in the world, and owes that in part to its $1.9 billion acquisition of Maxtor in 2006. Of the roughly 694 million hard drives sold in 2008, about 178 million were sold by Maxtor, giving it a roughly 30% share of the market, Chander says. Western Digital sold about 149 million units for a share of just under 25%. Hitachi, Samsung, Toshiba, and Fujitsu make up the balance of the market.

But the hard drive industry has been changing along with the nature of the computer business, yet Seagate has by many measures failed to change as needed, Chander says. For instance, as sales of notebooks have outpaced desktops for the first time ever this quarter, Seagate's share of the notebook business has dropped, while Western Digital and Japan's Hitachi have taken advantage. "Seagate fell short on the 320- and 500-gigabyte models for notebooks and Western really ramped up and took over in that business," Chander says.

Lack of Flash

Seagate under Watkins had also made some noise, but ultimately took no action on the latest trend in hard drive technology known as solid state. Traditional hard drives store data to a rotating platter of glass. Solid state drives use NAND-type flash memory chips of the type manufactured by companies like Samsung and Toshiba. Although they're more expensive, they're useful in notebooks because they resist drops and consume less power, extending battery life.

Solid state drives are also making inroads in servers used by large corporations and in data centers because they consume less power. Samsung and Toshiba, while both smaller players in the hard drive business, are major players in flash and could easily produce hybrid drives. Chander says Seagate has missed out almost entirely on the solid state trend. At one time the company was rumored to be interested in buying out Intel's share of IM Flash, a NAND-flash joint venture with Micron Technology (MU), but such a deal never materialized.

Another miss: The popularity of consumer-grade external hard drives. Consumers looking to quickly and easily add storage capacity for music and video files snapped up more than 12 million external drives last year, according to iSuppli estimates. Of those, 3.7 million carried the Western Digital brand. Those carrying either the Seagate or Maxtor brand: a combined 600,000. "It's not a very big business, but it's a high-margin business, and had [been] until consumer spending slowed, growing fast," Chander says. This after Seagate launched an effort two years ago to make hard drives more appealing to consumers. The company brought in Jim Druckrey, a former Gibson Guitar executive, to execute on the strategy, and launched its FreeAgent line of external drives. The drives are small, light, and store large capacities, but haven't come close to dislodging Western Digital as the market leader. Druckrey, however, didn't stay long, and left for a job at high end audio company Bose in mid-2008.

Consolidation Ahead

So what does Luczo do to get things back on track? The hard drive industry probably has to consolidate, says Ashok Kumar, an analyst with Collins Stewart. One likely target: Fujitsu's hard drive business. "Until we see some consolidation or rationalization of all the capacity that's out there, we can't expect to get a return to balance in the industry," Kumar says. With only about $1.1 billion in cash and short-term investments, and credit markets tight, Seagate isn't likely to acquire its way toward a sustainable market, as it did when it bought Maxtor. "Maxtor had been a marginal player and Seagate decided to take one for the team and eliminate some of its excess capacity that had been upsetting the apple cart with pricing," Kumar said.

When Watkins joined in the mid-1990's, Seagate was much bigger, with more than 110,000 employees. Its last head count was 54,000, and it has announced plans to cut another 10% of its workforce. Watkins is not the first CEO to be replaced by Luczo. In 1998 he took the reins of Seagate from founder Alan Shugart, who is generally considered the founding father of the hard drive industry. Shugart started the company in 1979, and died in 2006.

Hesseldahl is a reporter for

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