The tape business is normally about as exciting as watching paint dry. But with Sun’s misguided acquisition of StorageTek and now Quantum’s acquisition of ADIC, the pace of change is picking up.
Quantum has been in a long going-out-of-business spiral for the last six or so years, after getting an incredible string of luck from their acquisition of Digital’s DLT business in 1993 as part of their takeover of all of Digital’s storage device manufacturing. Freed from the stigma of buying from a competitor, IBM, HP, Sun as well as integrators started buying lots of DLT tape drives and tape cartridges. Business boomed from about, if memory serves, $55m to over $1B a year in the first four full years of Quantum ownership.
Quantum inherited a unique business from DEC: not only were the tape drives proprietary, but so were the tapes, and every tape sold paid a royalty to Quantum. Only two vendors were licensed to sell DLT tape so prices were high and very profitable. In contrast, most media vendors engage in cut-throat pricing that drives all profit out of their businesses (priced any blank DVD’s lately?).
Quantum’s problem was that it was too successful, and its major OEMs, IBM and HP, along with Seagate, banded together to introduce a new tape device unfettered by Quantum’s near total control of the DLT business, LTO. Rather than defend the strongest brand in the mid-range tape market, Quantum signed up with LTO, accelerating their downward spiral in both marketshare and profitability.
Looking at Quantum’s latest 10K and ADIC’s latest 10Q, the deal looks like a good fit. Quantum’s drive business has been growing, with even their tape royalties (the easiest money in the world) rising almost 10% in the first nine months of this fiscal year, while the drives were growing at over 30%. But once a drive company, it seems, always a drive company: the storage systems business seems to be on an accelerating swoon, dropping 17% in the last quarter of 2005.
ADIC, on the other hand, has flat revenues but rising gross margins on storage systems, so they have exactly what Quantum needs: a healthy brand and gear customers want to buy.
So if Quantum cans its storage systems development budget it will save over $30m right there. But the important thing is to make sure that ADIC continues to drive the marketing of storage systems for the combined company. It is a different mindset and one that Quantum has never mastered. If Belluzzo is really smart about this, he’ll keep the ADIC brand for systems and the Quantum brand for devices and media: the best of both worlds.
Note: I worked at Quantum and hold stock in the firm. I also worked at DEC, where I launched the original DLT family in ’91-’92. BTW, while the marketing name of DLT is Digital Linear Tape, it is no accident that the scrappy engineering manager who shepherded the project was Demetrios Lignos, now VP of Engineering at InPhase.