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Follow The Money.

It's so easy to get rich these days. Why launch a new product line, or extend your research budget, or modernize your factory floor, or give your best people a bonus? Simply plough your spare cash into some start-up with a clever name and ".com" on the end and wait a few days until some greater fool out there bids the shares up.

Why invest in your core competency anyway? Nobody does that any more--not AOL, not AT&T--and those are the sort of companies that today's executives admire; companies that maybe you wish you worked for, too.

Even some of the storage industry's pioneers are looking like suckers, now, for trying to extend their product lines organically. Seagate reported losing $35 million in the last quarter of '99, mainly because it had put $374 million into Veritas. Let's see: A major player in storage devices invests serious money in a highly regarded backup software developer. If there are cases to be made for "synergy," that's surely one of them and, a year ago, I'm sure it sounded like a great plan, but you're probably thinking, "Why didn't they just go online and buy stock in" Right?

And I don't suppose anybody's dreaming any more about getting rich building HDD heads. Five years ago, Applied Magnetics was profitable and had 1,200 people on its payroll, but, in January, they filed for Chapter 11 bankruptcy protection and the 630 employees who were still there are now skipping the real-estate section on their way to the help-wanted ads. The company expects to lose $261.7 million this year and about $415 million over the past two years. "It's been a tough couple of years," understated chief operating officer John Foster.

Yet, losing millions for years hasn't flummoxed Jeff Bezos. Time Magazine considers the founder of to be a genius and named him Man of the year! Am I the only one who's worried about this?

Call me old-fashioned, but I think the trend is contagious and dangerously so. Like most companies in the hardware business, storage manufacturers risk edging themselves away from their core competency--innovation--by trying to boost the bottom line solely through cash-management.

It's almost as if executives have come to believe that there's no more money to be made from building better products. Why add value when price-cutting is cheaper and the boost in unit sales will pump up the very next quarterly report? Who do they have to please, anyway? Their end users? Please! It's their investors. They have stockholders to think about, even if most of them are day-trading speculators, and they have venture capital partners to placate, even if those people are already calculating their cut of the action when they sell the company to a competitor or liquidate its assets. Satisfying customers or assuring that every product is uniformly high in quality are corporate responsibilities that seem as dated, now, as the 8-inch floppy.

To be fair, a good chunk of the problem lies in the marketplace. Higher storage capacity confers higher status and price counts for more than anything else. So, drives have become mere commodities to be purchased--at both the wholesale and retail levels--strictly on a bang-for-buck basis. Okay. But more attention is being paid to the buck than the bang. Are manufacturers doubling capacity? No. They're cutting prices. That can't go on forever; eventually, the chief financial officer cracks the old joke about making up in volume what's lost on each sale.

"Globalization" is a factor too, raising the question of whether it's better for people to earn money indirectly through sales or directly from wages. That was a big issue in the streets of Seattle during the World Trade Organization's meeting last December, but does it have to be a zero-sum game? Do we have to choose between mark-ups and salaries everywhere in the world? It seems to me that we can make enough of everything to go around and that we have the how-how to manage prosperity to everyone's benefit, if we could only cooperate.

It's true that manufacturing costs are lower overseas than in North America and that that's been good mainly for Asian economies, but everybody deserves to have new employment opportunities wherever they live, including the 630 folks in Goleta, CA who used to work for Applied Magnetics. One hopes, of course, that the government ministers of low-wage countries like Malaysia realize that their citizens' high-tech jobs will surely vanish too, as soon as the next underachieving country (in Africa maybe?) eliminates the corporate income tax. Yet, as long as investors are willing to pump cash into companies that don't make a dime, whose only profitable products are stock certificates, there won't be any money left over for making smaller disk drives, or thinner magnetic tape, or higher-density EEPROMs.

Dot-coin companies brush this worry off by saying that they are stimulating demand, that they are the hot new customers for storage devices that manufacturers have been longing for, and that they'll need more and more storage capacity as their businesses grow. Well, how many RAIDs do you need to keep track of inventory when your business plan is built on a just-in-time model? Does it take more than one tape drive to back up the mere handful of bits representing the daily delta of your stock price? Any cheap PC with more than a couple of gigabytes in its hard drive can store the account books and spreadsheets of a dot-coin company with a multi-million-dollar valuation: It's only the figures that are large--not the scale of the enterprise. Isn't anybody investing in technology any more?
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Author:Glatzer, Hal
Publication:Computer Technology Review
Article Type:Column
Date:Feb 1, 2000
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