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The struggling storage sector

How tough is it for computer disk-drive makers? So bad that the industry leader pushed out one of its technology pioneers to let the COO take charge.

How tough is it for computer disk-drive makers? So tough that the industry leader today pushed out one of its technology pioneers to let the chief operating officer run the show.

Seagate Technology today ousted chief executive Alan Shugart, a founder and pioneer of the computer disk drive, and replaced him with Stephen Luczo, a former investment banker who had been president and COO. Shugart left "at the request of the board," according to a briefly worded statement (See related story).

Seagate is not alone in struggling to turn itself around. The industry--led by Seagate, Western Digital, and Quantum--is suffering from a prolonged malaise much like that being experienced by the semiconductor market, one brought on by sluggish computer sales and intense competition. The Asian economic slump only has made matters worse.

Seagate, for one, reported better-than-expected earnings last week, thanks to cost-cutting and tightened-up inventories. But many Wall Street analysts remain skeptical about the industry's ability to break out of its slump.

"I think inventory has gotten better, but competition has increased, so I don't see an end in sight," said Brian Goodstadt, a technology analyst with S&P Equity Group.

Added John Monroe, chief analyst for rigid disk drives worldwide at GartnerGroup's Dataquest research firm: "I just think it is taking longer than most people expected to achieve proper supply levels."

Goodstadt said Seagate, Western Digital, and Quantum have managed to cut back production. But at the same time, smaller players such as IBM, Fujitisu, and Hyundai subsidiary Maxtor have jumped into the market--stepping up competition. Maxtor filed to go public last month.

"IBM has made big strides in the higher-end space," Goodstadt said. "They've really cut into Seagate's market share."

Goodstadt estimated that Seagate's server and workstation market share stands at about 40 percent, down from 60 percent just a year ago. Luczo's stated battle plan: beef up the company's research and development efforts and increase its market share in the desktop business for its disk drives.

Other related industry players are taking action to combat the slump as well. As reported, SyQuest said yesterday that it has retained investment bank CIBC Oppenheimer to assist with its ongoing review of strategic and financial alternatives. SyQuest said CIBC will advise the company as it negotiates strategic partnerships and joint ventures with other companies, including potential acquisitions.

"I think there needs to be more consolidation before this industry can really recover," Goodstadt said. "Now there are too many disk drives being made by too many companies."

Added Dataquest's Monroe: "There are too many well-funded, well-equipped, and technically able players. There needs to be a change in behavior, or fewer players, or both."

Monroe said drive makers typically have supplied the major PC makers with disk drives in price range of $130 to $160 per unit. But now, he said, they are "demanding" entry-level disk drives for less than $100, which makes profitability difficult.

"Part of the problem is the [storage] industry itself. It's done so well in being able to advance technology and bring it to market quickly," he said. "Only those companies that exercise strict inventory controls and simultaneously achieve cost-effective advances in their technology will be able to weather the storms of chaotic change."

In addition, disk drive makers, like chipmakers, are facing intense competition and demands for lower-cost components as the sub-$1,000 PC becomes more commonplace.

"Certainly the biggest problem is in the desktop segment, where soft sales have been exacerbated by pretty intense pricing pressures," Dzialo said. "If I buy a $1,000 computer I'm not so sure I need to have the best [disk drive]. Whereas if I have a mission-critical server, I may be more interested in performance and capacity than price."

Still others say the desktop storage space could rebound by year's end

"We're seeing some early signs of recovery for the disk drive sector," said Michael Dzialo, director of research for Olde Discount brokerage. "I think it'll be [the fourth quarter of] this calendar year before we see any tangible improvements when we see the traditional year-end corporate buying."