A Sea Change at Seagate

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Lack of Flash

Seagate under Watkins had also made some noise, but ultimately took no action on the latest trend in hard drive technology known as solid state. Traditional hard drives store data to a rotating platter of glass. Solid state drives use NAND-type flash memory chips of the type manufactured by companies like Samsung and Toshiba. Although they're more expensive, they're useful in notebooks because they resist drops and consume less power, extending battery life.

Solid state drives are also making inroads in servers used by large corporations and in data centers because they consume less power. Samsung and Toshiba, while both smaller players in the hard drive business, are major players in flash and could easily produce hybrid drives. Chander says Seagate has missed out almost entirely on the solid state trend. At one time the company was rumored to be interested in buying out Intel's share of IM Flash, a NAND-flash joint venture with Micron Technology (MU), but such a deal never materialized.

Another miss: The popularity of consumer-grade external hard drives. Consumers looking to quickly and easily add storage capacity for music and video files snapped up more than 12 million external drives last year, according to iSuppli estimates. Of those, 3.7 million carried the Western Digital brand. Those carrying either the Seagate or Maxtor brand: a combined 600,000. "It's not a very big business, but it's a high-margin business, and had [been] until consumer spending slowed, growing fast," Chander says. This after Seagate launched an effort two years ago to make hard drives more appealing to consumers. The company brought in Jim Druckrey, a former Gibson Guitar executive, to execute on the strategy, and launched its FreeAgent line of external drives. The drives are small, light, and store large capacities, but haven't come close to dislodging Western Digital as the market leader. Druckrey, however, didn't stay long, and left for a job at high end audio company Bose in mid-2008.

Consolidation Ahead

So what does Luczo do to get things back on track? The hard drive industry probably has to consolidate, says Ashok Kumar, an analyst with Collins Stewart. One likely target: Fujitsu's hard drive business. "Until we see some consolidation or rationalization of all the capacity that's out there, we can't expect to get a return to balance in the industry," Kumar says. With only about $1.1 billion in cash and short-term investments, and credit markets tight, Seagate isn't likely to acquire its way toward a sustainable market, as it did when it bought Maxtor. "Maxtor had been a marginal player and Seagate decided to take one for the team and eliminate some of its excess capacity that had been upsetting the apple cart with pricing," Kumar said.

When Watkins joined in the mid-1990's, Seagate was much bigger, with more than 110,000 employees. Its last head count was 54,000, and it has announced plans to cut another 10% of its workforce. Watkins is not the first CEO to be replaced by Luczo. In 1998 he took the reins of Seagate from founder Alan Shugart, who is generally considered the founding father of the hard drive industry. Shugart started the company in 1979, and died in 2006.

Hesseldahl is a reporter for BusinessWeek.com.