The hard-drive company's CEO puts acquisition rumors to rest and opines on the state of the data storage industry in the U.S.
Bill Watkins, the chief executive of hard-drive maker Seagate Technology (STX) loves to talk. When he does, it sometimes makes headlines in ways he didn't intend. Last month, when he gave an interview to The New York Times, it resulted in a front page story about a Chinese-controlled hard-drive company that would give Chinese spies a better opportunity to spy on American companies and government agencies who buy computers built with those drives. The story left the impression that Chinese companies were actively seeking to acquire either Seagate or its rival Western Digital (WDC), and forced Watkins to clarify what he meant days later.
When Watkins, who has been Seagate's CEO since 2004, sat down with BusinessWeek.com's Arik Hesseldahl in New York, he explained that in the Times interview he was less concerned with spying than the long-term economic security of the U.S. and its technology industry. He also spoke of Seagate's plans to meet the seemingly endless demand for data storage that once seemed so unlikely.
Seagate, of Scotts Valley, Calif., shipped 159.2 million drives in its recently ended fiscal year, recording a $913 million profit. Though sales rose more than $2 billion, to $11.4 billion, price pressures kept profit growth to a gain of merely $73 million year-over-year. No wonder Seagate's stock has hovered between $22 and $26 per share over the last three months. But the picture's improving: Seagate just revised its guidance for the current quarter upward, saying sales will hit $3.15 billion to $3.25 billion, while profits will come in at 62¢ to 66¢ per share, both beating prior guidance. Analyst Marc Kandel of Goldman Sachs (GS) on Sept. 18 upgraded Seagate to a buy, saying pricing pressure from aggressive rivals such as Hitachi (HIT) and Samsung appears to be lessening, even though demand for hard drives is heating up heading into the holidays. He expects Seagate to beat even its revised guidance.
Your last interview certainly got a reaction, and not necessarily the one you intended. What were you really getting at?
We've never been approached by the Chinese and I was very clear and we were not for sale. To be honest, I was on a different tangent, saying something from up on the soapbox, as I often do, about how storage is not really considered critical in the U.S. In the Asian countries, whether it's Korea or Taiwan or China, it's a critical technology and there is a lot closer relationship between the government and business, especially in funding these technologies and making sure the technology development is being done. And we've kind of lost that here in the U.S., and that is what I was talking about.
The writer really picked on one aspect of it, but I was really talking about how the Asian countries work hand-in-hand with businesses on developing critical technologies. When you think about the components guys, all the suppliers of hard-drive heads are gone from the U.S. The only independent suppliers of heads and media are all in Japan now. That was the gist of what I was talking about, and the writer when off on another angle.
That sounds a little like a conversation we had with Brian Halla, chief executive of National Semiconductor (NSM), a few years ago. We talked about basic research and how it was falling by the wayside here in the U.S.
We can't seem to have policies in the U.S. anymore, but we always seem to have issues. It used to be that businesses and government and universities were all involved in research in the '60s and '70s. It wasn't just the research they created, but the initiative for kids to get interested in engineering.… We have a lot of engineers at Seagate who are all in their forties and fifties who got excited because of what was happening in their schools and universities at the time. But we gave all that up about 20 years ago. And we're losing it. And that was the point I made to that writer at the Times, that this is how they think in Asia. They have a very tight relationship between government and universities and private business. They copied our model. The problem is we dropped it and we can't seem to get it back together.
Here in the U.S., a lot of people would argue that hard drives are one of the commodity components in a computer. But I'd imagine that you'd argue differently.
It's a complicated technology. There's chips, there's media, there's software code. In a world where storage is increasingly important, all your content and information is being stored there. And to own that technology I think is of fundamental importance to the U.S. But storage has never been well respected as an industry. When Seagate first launched, it couldn't get any venture capital funding. This was about 1980, and the Valley was funding everything, but it wouldn't fund a storage company. The first drive from Seagate was 5 megabytes. And there were these letters from all these VCs saying that no one in their right mind would ever need 5MB of storage. And that was 1980, and even now some people can't see why they would ever need 100 gigabytes. But people are sucking up lots of storage.
When we talked a year ago (BusinessWeek.com, 8/11/06), the industry was making noise about replacing the spinning platters in hard drives with flash memory—chips that store data without moving parts. Now there's more interest in combining the two into hybrid drives. Where does Seagate fit into this?
Basically, if you start using flash as a cache, you can get faster boot-up time. You can really reduce the power consumption… [But with traditional storage], you don't have the issues that flash does, which is a write-reliability issue and a cost issue. It's just a very expensive means of storage. But combining them, you get the best of both worlds.
What do PC makers say about that?
They kind of like that solution. We think longer term that people won't be willing to pay a lot for that. Four or five years out, we think there will be things we can do to really get the power consumption down. And by then it won't be about notebooks or desktops, but it will be about the Internet. You think about the Yahoo!s (YHOO) and Microsofts (MSFT) and Googles (GOOG): They're buying tons of drives, the highest capacity they can get their hands on, and just stringing them together in warehouses full of storage. The power in those places gets sucked up big time, and we actually think we can over time make major reductions in power usage. And that's an opportunity that people will pay for in that business space.
Would you ever consider buying a flash memory company?
We think about flash the same way we do about hard-drive heads. We think our real value proposition is to design the system. It's the system that makes it all work.… Would we go buy a semiconductor company? I doubt it.… Would we make investments? Yeah. Would we do joint venture in a chip fab? Yeah. The important thing is getting low-cost flash. It's not going to be a big deal for a few years yet, but now is the time to start laying that groundwork.
Do you sell more storage in consumer or business computers?
We sell more storage in the home than we do in businesses. It's all about the digital home these days. That was a startling fact to us. There's so much discrete storage around the house. There's many PCs, one or two DVRs. And we think that eventually that will all be consolidated. In my home, I have 6 terabytes storing all my music and films and so on. It's an expensive system, but systems like it are going to get cheaper and cheaper as time goes on. There's obviously a big opportunity for something like this. But then there's also a huge opportunity for all this infrastructure to support it. There's all these devices [in the home], but then there's a big massive build-out of enterprise infrastructure to deliver all that content [to consumer devices], and that's being driven by all the consumer storage, and that's the part that no one really thinks about.