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Iomega, Nomai stymied in court

The companies chalk up another round over whether Nomai can sell Iomega-compatible disks in the United States. Both came away empty-handed.

    Iomega (IOM) and Nomai headed back to court today, chalking up another round in the battle to determine whether Nomai can sell Iomega-compatible disks in the United States.

    Both parties are embroiled in various trademark and patent lawsuits, and both walked away from today's proceedings empty-handed.

    Iomega, which last month filed for a temporary restraining order against France-based Nomai and its U.S. subsidiary Nomus, today was told it would be taken under submission by the judge. He also requested the company to submit additional documents by January 7.

    Nomai, which was seeking to overturn the temporary restraining order, had its request denied. Iomega wants to prevent Nomai from selling its cheaper XHD cartridges, which are designed to work with Iomega's 100MB drive, and also from advertising them as Zip-compatible.

    The hearing was a small piece of a larger puzzle for Iomega. Today's courtroom face-off with Nomai may cut into the core of Iomega's high profit margins on its disks.

    Iomega's popular portable Zip drives carry a profit margin of 10 percent. But it's the Zip disks that reap most of the profit--about 50 percent, Brian Goodstadt, a technology analyst at S&P Equity Group, said.

    Those disks are estimated to kick in about 70 percent of Iomega's total gross profit this quarter, analysts said.

    Iomega last month filed for a temporary restraining order against France-based Nomai and its U.S. subsidiary Nomus. Iomega, in this trademark and patent lawsuit, wants to prevent Nomai from selling its cheaper XHD cartridges that are designed to work with Iomega's 100MB drive and from advertising them as Zip-compatible.

    Meanwhile, an appellate court in France earlier this week lifted a temporary injunction against Nomai in this dispute. A separate hearing on the French case is also expected today.

    But despite the threat to Iomega's cash cow, analysts say even if Nomai is able to start selling its products by January, Iomega won't feel the effect until the second quarter at the earliest. Nomai's capacity to produce disks is small, analysts say.

    "They will have to sell those disks cost effectively and in mass production," Crawford DelPrete, a storage analyst with International Data Corporation, said.

    He added that Nomai will need to produce enough disks to fill store shelves, if the competitor is to take market share and revenues away from Iomega.

    Iomega, however has brand recognition on its side. If Nomai moves into the U.S. market, Iomega will try to educate people about the importance of buying an Iomega approved disk, analysts say.

    "Iomega has an incredibly strong brand. Some people do buy on price alone, but most people do look for Zip compatibility or Zip certification," DelPrete said.

    And analysts note that when new industry players step into the market, the question of quality and compatibility will arise. Nomai could sell disks cheaper, but, are they as good? asked Stan Corker, an analyst at Emerald Research.

    The natural progression of any industry is to eventually have more than one player. And that will be good for the consumers because everyone's prices will have to come down, Jeff Kingston, Nomai's attorney, said.

    "Iomega has been raping the consumer with its monopolistic practices. We are going to bring lower prices to the market and give consumers a choice," he said.

    And that could put pricing pressure on Iomega--cutting into their profit margins for the drives.

    But Corker said even if competitors enter the market, the demand is growing so rapidly that there is almost a need for a second manufacturer of Zip media disks to satisfy the market requirements.

    He predicts that the 1998 market for Zip cartridges to be 100 million units, compared to just under 50 million units in 1997. In 1996, 22.5 million units shipped.

    Corker predicted that Nomai would not be able to produce more than 10 percent of the 100 million units expected to be produced in 1998. That leaves 90 million units for Iomega, an 80 percent increase in unit shipment growth.

    Iomega's stock fell 2-1/2 points yesterday with almost twice its daily volume after the company reported that its new Jaz 2GB drives and disks, scheduled for shipment in the fourth quarter of 1997, are now expected to ship in the first quarter of 1998. The company said the products needed to go through additional quality testing.