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EMC dumps $3 billion deal for IBM disk drives

In a serious blow to IBM?s struggling disk drive business, EMC backs away from a $3 billion, five-year commitment as part of a patent dispute settlement.

In a serious blow to IBM?s struggling disk drive business, EMC has backed away from a $3 billion, five-year commitment as part of a patent dispute settlement.

In March 1999, EMC agreed to buy $3 billion worth of disk drives from IBM over five years. The deal was ended on Friday after the two parties agreed to settle a patent suit from 1994.

EMC spokesperson Mark Fredrickson said the patent dispute settlement was a good opportunity to step back from the five-year deal, as IBM has had some supply problems in its hard drive division.

"It was related in larger part to some of the difficulties IBM is having with its storage division," he said.

During the first quarter, Armonk, N.Y.-based IBM?s hard disk business declined by more than $350 million as the computer giant missed a crucial transition to 10,000 rpm drives. In addition to memory sales problems, component sales to OEMs (original equipment manufacturers) dropped 19 percent.

Lou Gerstner "We were late; we screwed up the design," IBM CEO Lou Gerstner told financial analysts in a conference call last week. "It cost us in the first quarter, and it's going to cost us again in this quarter."

Fredrickson added that EMC will continue to buy hard drives from IBM, which remains an EMC supplier.

Hard drive sales to OEMs had been a growth business for IBM, which makes the component for use in notebooks and servers as well as PCs. Big Blue last year pulled in $4.3 billion in direct OEM storage sales and had 40 percent of the notebook hard drive market.

Industry observers say any misstep in a market where there are few suppliers and only large unit shipments can guarantee profits could cost IBM precious market share.

IBM?s recovery in the storage market is still at least a quarter away, Gerstner said last week. EMC may just be the first of many customers that could take their business to other suppliers.

The patent settlement ended a bitter dispute that had its beginnings back in 1994, when server rival Data General accused IBM of infringing on its patents. EMC acquired Data General last August, and inherited the suit.

In December, IBM countered with its own suit against EMC.

As part of the settlement the two companies agreed to dismiss counterclaims, extend their patent cross-licensing agreements and refrain from patent infringement lawsuits for five years.