Surfing and disk drives may have more in common than you’d think.
Catching a wave was the mindset a year ago when Western Digital Corp.’s sales staff worked double time to land an account to make drives for Microsoft Corp.’s Xbox video game console.
“It’s important to get it as it’s curling,” Rich Rutledge, Western Digital’s marketing chief, would later say. “This could be one of the biggest things for Western Digital.”
Now, with the much-ballyhooed Xbox launch coming next month and more drive shipments on their way, Lake Forest-based Western Digital is hoping to hang ten,and the prize for not wiping out could be huge.
The most immediate gain for the company would be to wrest market share from rival Seagate Technology Inc., a Scotts Valley-based drive maker Microsoft also signed on to produce Xbox drives. But even that task promises to be formidable.
When Microsoft was soliciting bids, nearly every drive maker was eyeing the deal, industry analysts say. With average drive selling prices of around $89,the price computer makers pay to put them in an $899 PC,Microsoft knew it had to undercut the deals given to PC makers in order to meet its $299 Xbox price.
“I would tend to believe they had a designated price target and each company bid to that,” said Dave Reinsel, an analyst with market tracker International Data Corp.
In the end, Seagate and Western Digital won the contracts at, what analysts estimate, was around $60 a drive,a mere 6% profit.
“I can’t imagine it was much above that,” Reinsel said.
At such a slim margin, both Western Digital and Seagate need to ship as many drives as possible to turn a decent profit on the Xbox, analysts say, making both companies ready to wipe the other’s nose should they sneeze.
“Our success here is really a function of how we execute,” Rutledge said. “But Western Digital has always been a logistics company. We know how to build millions of drives. We know how to charter a 747 if shipping is shut down. We know what we’re doing.”
But perhaps a more elusive goal than winning share from Seagate is to become the premier maker of drives for game consoles. When Sony Corp. and Nintendo Co. put hard drives in their game machines, Western Digital hopes it’ll be the first company they’ll go to.
Last year, Western Digital’s marketing team made a list of several different potential markets they hoped to go after. Alongside each market, they listed the top players. The strategy was simple: Western Digital would land deals with each of those major players, and, eventually, wouldn’t be as dependent on lagging computer sales.
Then Microsoft baffled technology watchers with its announcement that it would make a game console similar to Sony’s successful PlayStation and Nintendo’s GameCube. Western Digital was ready.
Microsoft estimates it will sell nearly 1 million Xbox consoles this holiday season and 5 million next year. After Xbox enters more markets, the number is expected to double, though Microsoft hasn’t commented on numbers beyond next year.
“We anticipate (the Xbox drive) will be a very successful product,” said Western Digital Chief Executive Matt Massengill. “We think they will sell a lot of them.”
That’s the reason Rutledge and others at Western Digital liken the company’s situation with Xbox to the one it faced in the summer of 1984.
Around that time, IBM Corp. released its newest desktop computer, which featured a Western Digital controller board. That put the company in the position to make disk drives when they became a standard feature in personal computers. Western Digital stood to,and subsequently did,take in billions of dollars in sales.
“To put it in perspective, I compare this to that computer,” said Rutledge, who’s been with Western Digital since that time. “I look forward to the day that we look back on this time and say this was also as important of an event.”
Depending on how well it fills orders this year and next, Western Digital could just about complete a turnaround.
Under Massengill, Western Digital has moved out of making drives for large computers and shuttered operations in Singapore and Minnesota.
The company also moved out of its high-rent Irvine Spectrum digs and into more modest accommodations in Lake Forest. With lower overhead, the company has slowed losses to a relative trickle,only $4 million in the quarter ended Sept. 30, vs. $37.2 million in the year-ago period.
But the Xbox deal may not be enough to save Western Digital from the dwindling PC market, analysts say. “This deal might make them look less susceptible from a perception basis,” Reinsel said. “But they’re still relying on business from PC companies.”
Western Digital has set up other businesses in a bid to diversify away from PCs. SageTree Inc. makes supply chain management software, while Keen Personal Media Inc. makes set-top box products.
Western Digital recently sold SANavigator Inc., a maker of software that helps manage storage networks, and Connex Inc., a designer of network storage products, for a total of $35 million.
But Western Digital’s remaining offshoots still are in their relative infancy and are yet to turn a profit. So, for now, Western Digital has a lot riding on the Xbox wave.
“We’re really excited about the Xbox on a number of fronts,” Massengill said. “Microsoft is really going to focus on the product and we’re certainly pleased that we’re participating in it.” n
