Questions linger for Iomega

Although SyQuest's collapse has been a boon, Iomega still faces upcoming threats in the computer storage market.

3 min read
With SyQuest suspending operations, Iomega becomes the undisputed king of the computer storage market. Unfortunately, the kingdom's fraught with problems.

Although SyQuest's termination of operations has clearly been a boost for the Utah-based drive-maker-- Iomega's stock has risen over 25 percent to 8 since SyQuest's announcement--analysts caution that Iomega still needs to address lingering issues about its own business model as well as upcoming threats from recordable CD-ROM and DVD-RAM formats.

"It's a combination of good news and bad news for Iomega," said Jim Porter, editor of industry newsletter DiskTrend. "The good news is they lost their only competitor in the hard drive market. The bad news is the market isn't as big as they thought it was."

Iomega and SyQuest were the primary manufacturers of removable drives for PCs for backup of important information. Now that SyQuest has dropped out, Iomega is the only major manufacturer of both consumer and professional removable drives, with its existing Zip and high-capacity Jaz drive. Iomega also has an upcoming Clik drive for mobile devices.

"They are the only ones in the removable hard drive market," said Bob Amatruda of IDC. "Iomega understands the market pretty well."

SyQuest's removal from the market will not add much in terms of market share, because Iomega already accounted for the lion's share of drive sales, according to Howard Rosencrans, an analyst at HD Brous. "I don't think it's that big a deal, and I think the market is overreacting. SyQuest is a $40-50 million company. Iomega is 10 times its size."

But SyQuest's customer base, small though it may be, has little choice but to go with Iomega from this point on, Porter noted. "Iomega has a good shot now of picking up some of the folks who stayed loyal to SyQuest, even if there were only a couple hundred thousand of them out there. They'll probably pick up some of those folks."

Iomega declined to comment.

Still, despite an incremental opportunity in market share, Iomega has to come to grips with larger strategic issues. Iomega could be hurt by its strategy of making up for low-cost drives with high-profit margin disks, Rosencrans said. "Their whole business model is not working. They essentially give the drives away for no profit, and sell the disk for big profit--like the razor and blade model."

"They need a big installed base of razors to sell the blades," Rosencrans explained. "Their business model may prove to be fundamentally flawed-- they can't raise prices on the drives." Zip drives currently go for about $120, and Jaz drives are priced at $299.

That same strategy hurt SyQuest, according to Amatruda. "SyQuest went after a larger base with its low cost [drive], but it became increasingly difficult to sustain it, as we all know."

Iomega also faces a threat from CD-R drives, which are currently gaining in popularity, and DVD-RAM, which has not yet been rolled out in large numbers at consumer price points. On yet another front, Sony will begin shipping its 200MB High Capacity Floppy Disk Drive later this month for $199.

"Competition comes from all over--you could make the case that all kinds of removable storage compete with each other," Porter said.

However, Iomega's Zip and Jaz drives may hold significant advantages over these newer media, especially when it comes to speed.

"Even when DVD comes along, there's always going to be a need for high-capacity removable storage," Amatruda said. "DVD is going to write a lot slower than [Zip or Jaz drives]. Things like write-time could become an issue."

Iomega is looking to broaden its existing markets with its upcoming Clik drive for mobile devices, but Rosencrans cautions against assuming the non-PC world will be a panacea for the drive market.

"So far, they've only made an announcement [about drives for non-PC devices]. The success or failure of the company depends on the PC," Rosencrans said.