How Iomega Lost Its Zip

Disk-drive sales are flat. Its CEO is out. Can it reboot?

In recent months, enraged customers of Iomega Corp. have been filling homegrown Web sites with angry tales of the "click of death." That's the sound that Zip drives, Iomega's popular computer storage devices, make when they malfunction. But Iomega Chief Executive Kim B. Edwards downplayed the trouble, saying it affected fewer than 1% of Zip drives.

Bad call. The click of death is the sort of operational snafu--along with other production and service lapses--that led to the kiss of death for Edwards. The hard-charging salesmeister--considered by many the top consumer marketer in the stodgy PC peripherals business--shocked the computer industry when he resigned on Mar. 25. "We want to grow this company to $10 or $20 billion, not just go to $3 billion. To do that, you need to do things differently," says Chairman David J. Dunn, who named director James E. Sierk interim CEO while the company searches for a permanent chief.

Edwards' fall came even quicker than Iomega's rise. In just four years since he joined as CEO, Edwards had transformed Iomega from a dying, $140 million outfit into a $1.7 billion highflier that grew 43% last year. At its peak in May, 1996, Iomega had a market capitalization of $7 billion. Today, it's less than a third that. Now, just three months after the board approved Edwards' 1998 growth plans and gave him a $641,000 bonus, he's gone.

What happened? It's a classic high-tech story. Edwards simply skimped on the basics--fine-tuning production and tending to customer complaints--in his hurry to put Iomega on the map. Edwards was in many ways a victim of his own success. The more Zip drives consumers snapped up, the more critical became such mundane tasks as customer service and supply-chain management--not his strong suits. "Kim got Iomega to where they are, but maybe it's not all about flash and sizzle anymore--it's about reducing scrap and improving manufacturing yields," says analyst Crawford Del Prete of International Data Corp.

But Edwards leaves at a critical juncture. The company's goal of establishing the Zip drive as the floppy of the future is far from done. Competition is rising fast. Once-moribund Syquest Technology Inc. has sold 300,000-plus of its rival SparQ drive, Sony is set to unveil a Zip-like model, and a consortium that includes Compaq Computer Corp. and 3M spin-off Imation is pushing its SuperDisk technology as the standard for portable computers. "The risks are higher than they've been," says Hambrecht & Quist analyst Todd D. Bakar.

Edwards, an 18-year General Electric Co. marketing veteran, came to Iomega with a bold idea: He figured PC owners frustrated by the slim capacity of floppy disks would buy a $199 storage device that would let them take up to 100 megabytes worth of files or images with them on a single disk. He set Iomega, formerly a maker of high-end corporate drives, on a crash one-year process he called "managed chaos" to develop the Zip drive. A year after it debuted in March, 1995, Zip sales passed 1 million.

To rake in the sales and establish itself before a bigger rival stepped in, Edwards shifted Iomega into overdrive. He admonished Iomega's production people to keep well ahead of demand by ordering parts in high volumes to meet future demand. And he primed the pump with edgy ads in national publications, with taglines like "It's hip; it's Zip." His latest salvo: a $100 million advertising campaign--upping the 1998 budget to $200 million, double last year's. Iomega has sold more than 12 million Zip drives. And PC powerhouses like Dell Computer Corp. and Compaq now include Zip drives on some of their PCs.

POTHOLES. But Edwards was not able to keep Iomega on the fast track without hitting potholes. From the start, the company struggled with suppliers to get quality parts to fill demand--a problem exacerbated when Iomega started up a new factory in Penang, Malaysia, in 1996 without installing up-to-date information systems.

Iomega also couldn't keep up with its growing number of customers. A breach-of-warrantee suit was filed last July by angry users, citing long waits for telephone service and hefty charges for the calls. On Feb. 17, the company agreed to settle. Should a federal judge approve the agreement, Iomega will install an online help site, extend warranties for many customers, and pick up $650,000 in legal expenses.

But the biggest problem of all for Iomega could be quality control. A year ago, the company announced a recall of 75,000 diskettes used with its higher-capacity 1-gigabyte Jaz drive, a follow-on to the popular Zip. That glitch was the result of a bad batch of components. And last December, Iomega delayed introduction of its just released 2-gigabyte version when it became clear the product wasn't performing up to snuff, say suppliers.

As for the Zip, the company insists its quality meets industry standards--but admits that's not good enough to satisfy the PC makers who must bundle it for the Zip to become an industry standard. With PC prices falling to historic lows, computer makers can't risk a wave of returns just to fix a sub-$100 part. "It's one thing for a consumer to return a Zip drive. It's another to return an entire PC," says Bakar.

Those issues didn't appear to deter Edwards. Analysts say the CEO figured he'd get the chance to plug Iomega's leaks as he pursued his high-speed plans. He had hired former Dell operations boss L. Scott Flaig, who was overseeing installation of software that would help manage production. And directors okayed his $100 million ad campaign at a January board meeting.

But Dunn was growing concerned that the company had outgrown Edwards' go-for-broke style. So when Lawrence A. Bossidy, CEO of AlliedSignal Inc., told him that just-retired Sierk might be looking for a directorship, Dunn invited him to join the board. Sierk, a proponent of Six Sigma quality techniques, accepted in October. He quickly began an informal audit of Iomega's production processes. "Quality is Jim's lifeblood," says Dunn.

Dunn soon had other concerns. After two years of rushing to catch up with demand, sales growth was slowing. Asia's economic woes and soft sales of Zip diskettes hurt revenue. On Mar. 16, the company said sales would be flat from the year-before quarter at $360 million. Worse, since these $12 diskettes provide much of Iomega's profits--they carry 50%-plus margins, vs. 15% for the $199 drives--the company expects to lose $10 million to $25 million in the quarter that ended Mar. 29.

Company executives say they haven't yet determined the cause of the slowdown. But the Asian flu hurt. The company posted $50 million less than expected in Asia in the fourth quarter, and Iomega Chief Financial Officer Leonard C. Purkis now doesn't expect much sales growth through the first half of 1998.

Push came to shove when revenue growth slowed. Edwards, convinced only more marketing could increase Zip disk usage, stuck by his fast-growth plans. The board asked for his resignation, say analysts. Dunn insists that Edwards' departure was unrelated to first-quarter problems. But others don't buy it. "Kim would have been fine so long as there were no execution accidents--but they had a major collision," says J.P. Morgan Securities analyst Daniel Kunstler.

Neither party will discuss details of Edwards' resignation. Says Edwards: "We've had a fantastic run for four years. I'm as proud of our production ramp as I am of our marketing."

For Sierk, the solution lies in adding heavy doses of East Coast management theory to Iomega's West Coast spirit. By tightening requirements on suppliers and improving its information systems, he hopes to avoid glitches. "We have to improve our processes so that everything is not accomplished through heroic last-minute measures," says Sierk.

Will Sierk's textbook approach be enough to establish the Zip as a must-have feature of tomorrow's PC? Company executives insist they're not about to ease up on the gas pedal. "Sometimes when people leave, the course changes 90%. Our course will change 5 to 10%," insists Dunn, who says the plan is to proceed with Edwards' ad blitz until May, when the company will measure the campaign's success. By year-end, the company hopes to hire a new CEO.

He'll no doubt be a nuts-and-bolts executive, but he may need a touch of Edwards' panache, as well.

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