System Builders Weigh In On Seagate's Maxtor Buy

Seagate, the No. 1 provider of hard drives in the United States, this week snapped up Maxtor in a stock transaction valued at about $1.9 billion. System builders said that in the last several years Maxtor, once an industry powerhouse, hadn&'t been considered one of the top providers. Seagate and Western Digital have been the two dominant suppliers in the system builder channel, followed by Hitachi, Fujitsu and Samsung, they said.

"This will mean less choices for us," said Doug Phillips, senior director of emerging technologies at Seneca Data, Syracuse, N.Y. But he noted that Seagate, with its five-year product warranty, has been a primarily supplier along with several other manufacturers. Maxtor drives aren&'t used often in Seneca products, he said.

Brian Dexheimer, a Seagate executive vice president who runs the company's channel operations, said the acquisition was less about acquiring specific technology from Maxtor and more about adding manufacturing capacity, particularly in China, and tapping Maxtor's retail prowess. Maxtor makes about 60 percent of its own media but buys its heads from other suppliers, he said, adding that Seagate makes most of its own components. Seagate will decide which Maxtor products to keep based on customer input, but Seagate won&'t be releasing that information until after the deal closes in about six months, he said.

Seagate will need the new manufacturing assets as consumer electronics makers continue demanding more storage. Dexheimer said the hard-drive industry has been growing at 15 percent for the past three years, while storage products for the consumer electronics segment has been growing at 60 percent for the past three years.

"The growth is where it traditionally hasn't been before, and we are being asked to make different types of products in these spaces," Dexheimer said.

Todd Swank, director of marketing at Nor-Tech, a Burnsville, Minn.-based system builder, said he has seen no shortages resulting from the growing demand by consumer electronics manufacturers but added that advances in technology will increase pressure for products. He said. more manufacturing capability from Seagate, one of Nor-Tech's main suppliers, would be welcome as consumers start gobbling up digital video recorders and other technology that allows them to store gobs of movies, pictures and music on a various devices.

"Video will be huge demander of digital storage," Swank said.

Moving forward, Seagate plans to focus more R&D efforts on rugged one-inch drives with high storage capacities, as well as on drives for cars that can withstand high temperatures and drives with security features like full-disk encryption, Dexheimer said.

According to researcher iSuppli, Seagate is the leading manufacturer of hard drives worldwide, with 28.1 percent of the market in the third quarter. Western Digital had 18 percent of the market in the quarter, followed by Hitachi at 15 percent, Maxtor at 13.8 percent, Toshiba at 9.5 percent, Samsung at 7.7 percent and Fujitsu at 6.4 percent.

Maxtor had been suffered significant losses over the past few years. For its third quarter ended Oct. 1, the company reported a net loss of $17 million on revenue of $927 million, compared with a net loss of $95.1 million on sales of $927 million a year earlier. For its fiscal year ended Dec. 25, 2004, Maxtor reported a loss of $182 million on revenue of $3.8 billion, and in 2003 the company generated $103 million in profit on $4 billion in sales.