EVault stockholders have had a surprise Christmas present. Santa Seagate, aka CEO Bill Watkins, has come early and filled their trousers with gold, $185 million of it. The idea is to expand the scope of Seagate Services - did anyone know it existed? - and start supplying online vaulting services to 74 million small and medium enterprises (SME) worldwide.
EVault is rather a successful company. Founded in 1997, the company is privately held, based in Emeryville, CA, with over 250 employees. It has more than 8,500 customers, including hundreds of financial, health care and legal organizations.
Earlier this year it replaced Iron Mountain at a Canadian company's site because of Iron Mountain's inadequate disaster recovery arrangements for its vault.
It expanded into archiving services via a special product in March this year.
Given that Seagate has become the biggest and most successful disk drive manufacturer in the world and there is no single competitor that could conceivably oust it, why is it bothering?
Its revenue in FY 2005 was $7.55 billion with net income of $707 million earned from shipping 98 million hard drives. It has just used the revenue from 2.4 million disk drives to buy EVault, roughly 2.4 percent of its annual shipments. Seagate's cash and cash equivalent resources at the end of FY 2005 were $1.8 billion. EVault is being bought from its small change. This is peanuts.
Its statement says: "The company's strategy for Seagate Services includes offering market-leading services in the areas of data recovery, online backup/recovery and archiving for small-medium businesses."
Data recovery is the recovery of data from drives that customers can't read. This is important to those customers but exceedingly small potatoes and most customers will shortly afterwards improve their backup strategy. You don't get many repeat customers in that business!
Online backup and captive market
Online backup and archiving is a growing business but it has to be seen as being very attractive if you're a business using tape backups with the associated hassle, inconvenience and unreliability. It's not so attractive if you are using disk-to-disk (D2D) backup and even less attractive if you are using removable hard drive backup. That market is set to expand dramatically with recent entrants including Dell and Tandberg.
Still, both D2D and removable disk backup products could use millions of Seagate drives, so Seagate wins either way. Perhaps one EVault appeal for Seagate is that it provides an internal customer for Seagate drives? That would give EVault a competitive advantage versus competitors like Iron Mountain who can't get Seagate drives cheap.
EVault though would have to dramatically, seriously dramatically, increase its customer numbers and stored data amounts to make this captive drive market business worthwhile. Still, it would increase the profitability of EVault if it profitably sold vaulting services to customers and Seagate profitably sold it disk drives.
Seagate service strategy
Watkins stated: "Today's announcement highlights a strategic next step into services, which is a natural extension of Seagate's core business and will leverage our brand leadership and channel expertise to deliver solutions to the SMB market."
A natural extension of Seagate's business? Well, arguably not. Going up the storage stack into selling drive arrays could be a natural extension. Unfortunately that market is pretty crowded with strong and established players.
Also Seagate has already tried natural extensions to its business of storing customers' data. Remember the tape drive diversion with the LTO Consortium and Certance? That's all history now.
So, and again, why bother with this EVault minnow?
Watkins expanded more on the strategy: "Seagate has been executing a strategy designed to broaden its customer base and increase growth opportunities by expanding beyond its core hard disc drive business into the broader storage solutions category."
That's pretty vague and could encompass virtually anything.
"Our objective for Seagate Services is to become a leading provider of services to manage and protect our customers' digital content throughout its lifecycle." Oh dear. Oh dear, dear, dear, that old information lifecycle management (ILM) chestnut.
To 'manage and protect' is still pretty vague and open-ended. It might, for example, include encryption, and Seagate already has an encrypting hard drive.
It might, for example, include managing data throughout its life cycle, like moving it from tier to tier in a set of tiered disk storage. Is that what Watkins has in mind because, if so, in no way whatsoever is it a natural extension of Seagate's core business.
That core business is making spinning platters that hold more information for less money than anybody else. Seagate executes this superbly well. It is seeing off the threat from flash memory technology. It is benefiting from the move to limit the use of tape as that data that would have gone to tape stays on disk. There is simply no short-term threat to its core business at all.
What about the long-term? That's got to be flash memory or some other solid state storage technology, or a viable replacement for spinning platters. There are contenders but they are many years of speculative development away from being on Seagate's threat radar screen.
EVault joins two 2005 acquisitions by Seagate: Mirra, a provider of networked digital content protection products for the home and small business markets; and Action Front, a professional in-lab data recovery company. I mean, it's comparative peanut time again. We're talking about a $7.55 billion dollar company amusing itself. Doesn't it know what else to do with the cash it has sloshing around inside its Scotts Valley HQ?
Back to the EVault market and its potential; talking of the storage needs of the 74 million SMEs world-wide, Seagate's statement said: "As a category leader in storage technology, Seagate is uniquely positioned to address the customer needs of this multi-billion dollar market." Why? EMC and NetApp are category leaders. So is Symantec, IBM, HP, Quantum, Bocada, Isilon and who knows how many other companies. What on earth does Seagate know about the provision of services to SMEs?
Quite close to nothing would be the guess of virtually every service company. Box-shifting and service selling are opposite operations. Seagate is the world's pre-eminent hard-drive box-shifter.
The only thing that makes sense to me in this deal is if EVault has realistic prospects of becoming very big indeed and giving Seagate two slices of the online vaulting cake: a profit from selling the service to customers; and another profit from selling the disks to EVault.
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