Hard-drive makers weaken warranties

PC makers have been pulling back the warranties on their computers in an effort to reduce costs, and hard-drive makers Maxtor, Seagate and Western Digital are about to follow suit. The three drive companies, which combined have about 85 percent of the drive market, will alter their warranties from three years to one year. The changes will only be for drives sold for desktop PCs and some consumer-electronics products, which traditionally have one-year warranties or less, according to representatives from all three companies.

"We're following the trend in desktop PCs, where they've all switched to one-year warranties," said Stephen DiFranco, vice president of marketing at Maxtor. "This should have no effect on consumers because we hardly ever get returns in the second or third year and it frees up cash that we have to reserve to cover the warranties."

The companies will maintain three- to five-year warranties for drives used in large businesses such as banks and companies that keep track of financial transactions. Western Digital will offer extended warranties directly to customers, while Maxtor and Seagate expect retailers to have extended warranty programs for consumers.

The move should have little effect on consumers, according to Dave Reinsel, an analyst with research firm IDC. However, the move emphasizes how hard drives are becoming more and more of a commodity as margins become smaller and smaller.

"Back when ASPs (average selling prices) were around $175 and margins were around 15 (percent) to 20 percent, those warranties were justified," said Richard Rutledge, vice president of marketing at Western Digital. "But now, with ASPs around $65 to $75 and margins around 12 (percent) to 15 percent, we're no longer able to afford to provide that as a standard feature."

It may not even matter to consumers that warranties are shorter; it would simply make more of component warranties on par with one another, Reinsel said.

"More than 50 percent of failures occur in the first 90 days of a product's use and even then that rate is less than 0.8 percent," Reinsel said. "This move is yet another lever (for manufacturers) to improve their bottom line...there is no degradation in quality; if anything, reliability keeps going up as the manufacturing process matures."

The only consumers who may be affected are those who buy drives in retail or after they buy a PC. Those consumers will have a shorter warranty period, but Reinsel estimates that market is comparatively small to drives sold with PCs.

More than 37.5 million desktop drives were sold in the second quarter and about 1 million were in the retail category.

The warranty changes come as hard drives are finding their way into a broader range of devices, such as digital video recorders and game consoles. However, consumer-electronics devices are expected to account for less than 10 percent of worldwide hard drive shipments in 2002, according to market researcher IDC.

Changing the warranty was something all the manufacturers wanted to do, but no one wanted to be first, Rutledge said.

"We were all basically playing chicken to see who went first," Rutledge said. "Maxtor took a leadership position...and we're supporting it."

The desktop hard-drive business is one where profits are lean, if present at all, and some, such as Fujitsu, have jumped out of the space opting to concentrate on server or notebook hard drives, where margins are better. Seagate went back to being a private company after it was bought by Veritas Software and an investment group for a $20 billion deal in 2000.

At the time, slim margins and intense competition had decimated profits for Seagate. The highly competitive desktop hard drive industry has not changed much.

"Prices continue to go down and this change in warranties is a response to the competitive nature of the market," Maxtor's DiFranco said.

"We were giving customers something we couldn't afford," Rutledge said.