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Storage

The face of a kinder, gentler Seagate

newsmaker The disk drive maker's CEO, Bill Watkins, explains why hard drives are profitable again.

Bill Watkins, CEO of Seagate Technology, vividly remembers his first staff meeting at the hard-drive maker back in the '90s.

For several hours, the company's top executives screamed and swore at each other before giving out an award: the stuffed head of a dog. Nothing got accomplished.

A lot has changed since then. The largest drive maker in the world, Seagate is consistently reporting profits and branching out into consumer electronics, cars and home storage systems. Part of the turnaround can be attributed to a tighter focus on customer needs, and another part can be attributed to a teamwork culture instilled by Watkins and his immediate predecessor Steve Luczo.

Watkins spoke recently with CNET News.com about the drive industry, price cuts and the problems facing corporate America.

Q: Seagate and some of the other companies in the drive industry are making money right now, but it's always been a difficult place to be. Why is that?
Watkins: The industry has always had sort of cloud of over it--the "best house in a bad neighborhood" thing--and I think part of that was what happened during the '90s. Storage was growing, but we were increasing capacity quickly, and there were 30 disk drive guys. Revenue was flat, just flat. Think about living in a world where your revenues are flat, but you're increasing the number of units you're shipping. Total revenue for the industry at one time was $24 billion, $25 billion. By 2000, it dropped down to $20 billion.

The industry has always had sort of cloud of over it--the "best house in a bad neighborhood" thing.

Then two things happened. First thing: Our ability to increase increase areal density slowed. For a long time, we'd come out with new products that would double the capacity every year. One year, you have a 10GB single disk, and next year, it would be a 20GB disk at the same price. Well, the technology to do that got harder and harder, and so we started increasing areal density at 40 percent a clip. So the pure storage needs began to outstrip our ability to design higher-capacity drives.

Then the other thing was a big kick in consumer, which started around 2001. It started with things like DVRs (digital video recorders). Then you had the Apple iPod, which was a storage device. You had Xbox. All of a sudden, industry revenues are up to $30 billion.

How big is consumer right now for you guys?
Watkins: From a unit standpoint, we did 6.5 million drives in the last quarter, which is up pretty dramatically from the year-ago quarter.

A little while ago, you bought Mirra to get into home servers. How is that going?
Watkins: We bought Mirra more for the technical ability of the people. It was a very small acquisition. We're shipping our products, but really we wanted that expertise for the future generation of products. We think there is going to be home business. You're going to back up your data. You will want to be able to access files remotely, and we think that not only the hardware, but some value-added software in that space is going to be a pretty good business. The real key for us is to get more and more content unlocked.

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When people talk about the war between flash and hard drives, we don't see it as a war between flash and hard drives. We see it as a war between physical distribution and electronic distribution, and so what we are really battling is DVDs and CDs and tapes and films.

If you put a TV show or a movie on digital, you've got to put it on an enterprise system somewhere. So there is a big enterprise play, too. For one video, you've got an enterprise drive, and you've got a backup. Then you've got a PC. Then you've got a backup to the PC, and then you've got an iPod. You've got five drives. You've just sold in the ecosystem, five storage solutions that are all hard drive-based. Cameras are another place we're trying to get a lot of traction.

Really? It feels like the camera has always been part of the flash world.
Watkins: But once you get into moving videos, the storage capacities are great. We're selling our 8 and 12 gigabyte drives to Sony for a video camera. If you want to be able to put 30 to 40 hours of video on a video camera, you need a lot of capacity.

The flash guys are talking about getting into notebooks. How realistic is that?
Watkins: Here is the problem you have: Flash has some power advantages and to some extent, it has a size advantage. But to be honest, in both cases they're kind of minimal to the real issue, which is cost per gigabyte. In notebooks, less than 10 percent of power is used by the hard drive. You could put a flash device in, but you're not going to save a lot of power because of the screen.

Right now, the average notebook shipment drive we're shipping is 80 gigabytes, and it's growing about 7 or 8 gigabytes a quarter. If you talk to an Apple or Dell or HP or someone like that, they're going to tell you in 2010, 2011 they're looking for the average notebook to be more like 250GB, because there is going to be a lot of content. How is flash going to get there?

It is also funny about the flash guys--the three largest flash suppliers are all making heavy investments in drives. Look at Toshiba.

How did you adjust to selling into the consumer market, as opposed to selling drives to PC makers?
Watkins: Back in, let's say, 1998, '99, 2000, that time--I probably had six to seven products that covered just about the whole market. Today, I have eight very distinct markets, and I have 48 unique products now. We realized we had to get a lot more vertical, so we reorganized the company into business units.

Are the drives substantially different, or are they similar but tailored for different segments?
Watkins: The difference is in the consumer (sector). Take an Apple iPod. The group (inside Seagate) that does Apple iPod is not the same group that does their Mac. There are interface issues, there are different requirements for the brand. What we found was that we had to have our own marketing, and focus on each of these units, because they were getting so different.

We were coming in like experts on drives, but we were not experts on the consumer in this particular thing, and so we didn't get the business.

Somewhere in 2000, we went into a meeting with Scientific-Atlanta. We made a 7200rpm (revolutions per minute) desktop, and we no longer made 5400rpm desktops because no one in the desktop space wanted the 5400. They (Scientific-Atlanta) wanted the 5400. We didn't understand how important noise was in the bedroom. When you put in a cable box in a bedroom, noise is a big deal. On a desktop, it's not a big deal.

The other thing was the power within the boxes. They have a lot of heat, and so they kept telling us, "Well, we have got these issues." And we kept telling them "No, you want 7200rpm because that's the best-performing hard drive," and we are not listening. We were coming in like experts on drives, but we were not experts on the consumer in this particular thing, and so we didn't get the business. What we really needed was a lower-rpm drive. That really got me to change my organization.

Even though the drive industry has been good lately, it seems it might get ugly again. I saw in your earnings release that you warned about unnamed competitors cutting prices.
Watkins: People got very aggressive in pricing starting in the June quarter, so we want to be fairly vocal about it and say "Quit being so stupid." Notebooks probably grew 15 to 17 percent quarter-on-quarter and probably 20 percent year-on-year, but pricing dropped 10 percent, I mean there was no reason for that. I mean it was just stupid.

I think we can actually get a sense that people are starting to back off a little bit. But we wanted to send a warning shot: "Guys, it's stupid, it's the highest growth part of the year, and you are just being stupid." Everybody last December was making money.

Next year, people are gearing up to release hybrid drives where flash memory is inserted into the drive, and Intel is promoting Robson, where flash is put on the motherboard. From a technical perspective, which one is better?
Watkins: There is no difference. People try to argue one way or the other, but we don't see any difference.

What are PC makers leaning toward?
Watkins: It kind of depends on the customer, but they (PC makers in general) would like it on the drive, because they don't want to be hooked into Intel's motherboard. They want to use other motherboards or use AMD's. There are certain people who would like to have it on the board. Microsoft wants it on the drive.

We're indifferent, to be honest. If you buy a hybrid drive, fine, and if you have the flash on the motherboard, you're still buying a new drive. And my sense is that I'll give away the flash. The cost will probably pass through.

How is the effort to get drives into phones going?
Watkins: It's kind of like flash in a notebook. There are some people like Samsung that have a phone with a hard drive, and you can hold a lot of content, if you want to watch video. I would argue that everyone has got great plans, but again, I would never watch anything on a phone.

Before you took over, Seagate always had a reputation of the "school of hard knocks," the kind of place where people would get burned out or fired. What was it like when you first arrived, and how did you change it?
Watkins: It really changed when Steve (Luczo) took over as CEO. He took over as CEO, and I took over as COO, and we had both lived under the old culture, and we both really wanted to change it.

I will tell you about my first meeting at Seagate. I was on executive staff, and the meeting lasted about four or five hours, and I have never been around so many people who just screamed and yelled at each other. Everyone was, "F--- you, f--- you." The sales guy would say, "I need this" and the operations guy would say, "Well, f--- you. I'm not doing that." And the design guy would say. "F---, I hate doing that." It was six hours of "f--- you."

If you can create an environment where you respect each other, you trust each other and you get to this point where people think "I am not just going to let you down."

It was my first meeting coming in, and we had real issues to take care of, and I mean not one issue got resolved. It was like you didn't have to. You could just say "f--- you." There were seven of us, and everything was just screaming. I was stunned that I just had a meeting for six hours, and not one decision got agreed upon.

It sounds like an episode of "The Sopranos."
Watkins: And when it was over, they brought out the dog head. It was a head of a stuffed dog. They cut it off and sewed up the bottom. Then they all took a vote on who is the biggest ---hole in the meeting and they gave him the dog head award. That was the only agreement, and the person who got the dog head was sort of happy.

So Steve and I started talking about things offline a little bit, about communication and culture and values, and so when we got our opportunity, we just started changing things.

What do you think motivates people? There has been a big turnaround at Seagate.
Watkins: I will tell you what I think, and we strive to apply it. I kind of learned it in the Army. People don't die for their country, they don't die for their God, and they surely don't die for money. But they will die and put their life on the line for their platoon mates, because they don't want to let them down.

Now, you don't want people to die. Business and war aren't the same thing, and I'm not a big fan of that analogy. But if you can create an environment where you respect each other, you trust each other and you get to this point where people think "I am not just going to let you down." That is more powerful than money or anything else. So everything we do at Seagate is to create a teamwork culture. If employees learn we don't motivate by fear or firing, then you can create that environment. It's not just putting up posters.

I mean, you spend your whole life at work. You want to feel like you belong. I love corporate--corporations can do great things. These are places where people spend an amazing amount of time in their life. Why can't it be a positive thing? I think you focus on your customer, and focus on your people, and you focus on any community you're in--and if you do those, the stockholders do fine.

Do you think most companies miss that point?
Watkins: I think they used to understand it. One of the weird things that happened in the late '70s and in the '80s and '90s is this sort of little pact that stockholders made with the CEOs. They said "Forget about long term, we will give you bunch of stock. Focus on short, and you will make a lot of money." And that's what happened. Stockholders did not care about the long term. It was all about short-term deals.

CEOs used to make decisions that would impact the companies six years down the road. That was the real responsibility, and that stopped happening. And you will hear a CEO complain, "Well, the Street holds me accountable." But you know what my argument is? If you don't have the nerve to stand up and tell the Street (Wall Street analysts) what you are going to do and why you are doing it, you shouldn't have that job.