History 2002: Quantum Regains Monopoly Over DLT

Scant weeks after Benchmark announced the release of a new DLT drive with a non-Quantum DLT cartridge, Quantum moves to acquire its only DLT rival.

Quantum will acquire the privately-held Benchmark Storage Innovations for nearly $56 million, based on the current value of Quantum stock at roughly $3. Benchmark’s equity holders will receive $11 million in cash, 13.1 million common shares in Quantum, plus an additional 1.9 million shares depending on the sales performance of Benchmark products in the first year following the acquisition.

Quantum already held a 20% interest in Benchmark, but only 20%.

It owns anything and everything related to DLT, to which it is firmly committed, particularly with respect to the cartridges that account for the bulk of the company’s profits, thanks to royalties in the neighborhood of 30% on the sale price set by the various licensed manufacturers (Fujifilm, Imation, Maxell and recently, Sony).

Why, however, would it jump on Benchmark which makes low-end DLT drives that scarcely rivaled its own models, and which sells hardly any cartridges? For 2 main reasons, in our opinion: Quantum has recently been working on a very-low-cost DLT drive, codenamed Samurai, even cheaper than Benchmark’s units. But more importantly, Benchmark just announced a new tape device, the ValueSmart 160, which must have horrified Quantum, since it uses an updated DLT-type cartridge of its own design, manufactured by Sony, for which, consequently, Quantum would no longer be entitled to royalties.

Now that’s biting the hand that feeds you! For the moment, however, according to Barbara Nelson, Quantum’s EVP, corporate and marketing, plans for the VS160 are going ahead, as are final touches on Samurai, which could be unveiled “at the end of the year.“

Naturally, these reasons were not those officially provided by Quantum for the costly acquisition. The company instead explained that it plans to “expand its DLT tape business by leveraging Benchmark’s complementary products to serve the data protection needs.”

The purchase does offer Quantum other advantages than simply regaining a complete hold over DLT (there is in fact one other DLT and SDLT drive maker, Tandberg Data, but it operates under license from Quantum).

Benchmark, founded in 1998 by tape drive star Jesse Aweida, has performed beautifully, managing sales of $75 million in 2001, up 350% from the previous year, and predicting $100 million in 2002. The company has also succeeded in selling nearly 200,000 units since its founding, and what’s more, has been profitable with a gross margin around 20%, much better than Quantum’s margin for its own drives.

Benchmark’s excellent performance is the result of the drive’s design and the firm’s smart choices in components and subcontractors (Mitsumi and Beyonics).

Quantum, incidentally, has itself just adopted this subcontracting model, by handing over the operations of its 900-person Malaysian plant to Jabil Circuit.

Tandberg is also expected to take the same route for the assembly of its DLT drives, until now assembled in its Norwegian HQ.

The integration of the 2 DLT drive makers should be fairly painless (even if some lay-offs are inevitable), since both have development teams in Colorado, as well as several OEMs in common, including ADIC, Dell, HP, IBM, Overland and Tandberg.

The tape drive industry, whose market has stabilized nicely, has recently been experiencing a certain consolidation, given that this merger comes a year on the heel of the Exabyte/Ecrix merger. Other manufacturers remain, of course: HP, IBM, OnStream, Seagate, StorageTek, Sony or Tandberg, for instance. But now there are only 9, roughly the same number as HDD makers still ticking, although for a much smaller market.

This article is an abstract of news published on issue 176 on September 2002 from the former paper version of Computer Data Storage Newsletter.