Frustrated by Losses and Glitches, IBM to Exit Hard Drive Biz

by Timothy Prickett Morgan

So it looks like the future disk drives you might buy inside your iSeries server might come from Seagate Technology, IBM's current alternative supplier of drives for its servers, or from the as-yet-unnamed Hitachi-IBM partnership. But those disks will not bear the Big Blue moniker. This is a stunning change of events, and one that points to the fact that all of the major and minor disk drive makers are being squeezed by increasing development costs and nearly insane price competition. If a disk maker trips up--as IBM did with the design of its 10K RPM disks, which caused the 15K RPM disks to come late to the market--it is very difficult to get back into the race.

Under a preliminary agreement worked out by IBM and Hitachi that was announced just as IBM was getting ready to post its financial results for the first quarter--which were not so hot in many respects but were particularly bad for disk drives--IBM will transfer unspecified assets and intellectual property related to the disk business to a partnership that will be 70 percent owned by Hitachi. IBM is the number-three disk supplier in the world, behind Seagate and Maxtor; Hitachi is ranked fourth. The combined Hitachi-IBM company should be somewhere between Seagate and Maxtor in size, provided revenues hold up. Forming a partnership with Hitachi allows IBM to save face, instead of simply selling out the disk portion of its Technology Group to Hitachi--head, arm, and platter. Both IBM and Hitachi seem to be betting that their combined size and technological prowess in disks can help them beat Seagate and Maxtor. We'll see how big a bet they are making when the financial details of the partnership are announced, if and when negotiations are concluded around May 15, as expected. The combined venture will encompass the research, development, manufacturing, and sales units from IBM and Hitachi. All of these assets will be controlled by Hitachi, not IBM.

IBM invented the disk drive--the RAMAC drive--at the dawning of the mainframe era, in 1956. The company was the first major IT supplier in Silicon Valley. Hewlett-Packard was founded there, but it was not really an IT player at the time. The reason HP could stay in Silicon Valley was that IBM's disk business, riding along with its mainframes, brought in hot technical talent, which was amplified by Stanford University and the University of California at Berkeley. IBM bought a walnut grove outside of San Jose, California, cut it down, and turned it into a disk factory. From that facility, IBM made some of the most sophisticated mainframe-style disk drives in the world and set the pace for this technology for decades. When disk drives started to shrink, IBM's Rochester labs set up a team to create new technologies, and they invented magneto-resistive heads and sophisticated magnetic material sputtering techniques that were years ahead of the competition. The Corsair drive, which is the great-great granddaddy of the current UltraStar disks, was born in the Rochester labs and gave IBM a fighting chance in the OEM disk market.

That OEM disk market is an unforgiving one, however. If you ship a bum drive, as Seagate did in the late 1980s and IBM did last year, it can take years to recover. IBM's problems with its 10K RPM UltraStar disks and delays in getting the 15K RPM UltraStars into the field were not the end of the world, at least from a business perspective. IBM still rakes in about $3 billion a year selling disk drives to its server and PC units and to other manufacturers. But IBM is losing hundreds of millions of dollars every quarter it stays in this business, and it must have come to the conclusion that this was not going to change. If the PC and server markets were booming, like they did in the late 1990s, IBM could have stayed in the game and still probably made money.

The insurmountable problems that neither IBM nor Hitachi can fix alone seem to be increasing sales volumes and getting better economies of scale and scope. These are the problems that all IT suppliers face in a commodity business, and it explains why IBM has outsourced its PC manufacturing as well. There just ain't any money to be made here at the sales volumes IBM can generate. And if Hitachi wants to be number two in the world when it comes to making and selling disk drives, IBM seems content to let it do that, so long as it has an inside track on the hottest disk technologies for its PCs, servers, and disk arrays. That's the main reason IBM created and maintained a disk drive business all these years. And now, if there is a problem with a disk drive, IBM can point the finger at someone else and freely and openly get alternate disks from Seagate, as it is secretly doing now.