Iomega Gets Its NAS Kicked

After losing about $16 million on its NAS product line last year, Iomega Corp. is changing its strategy to a "think small" approach. Put another way, it's cutting off its NAS to save its ASS.

During its quarterly earnings call yesterday, Iomega announced it cut 29 NAS staffers in December and will discontinue its higher-end NAS systems.

Until now, Iomega's played a broad hand in the NAS space, trying to capitalize on Microsofts NAS support to win small and medium-sized business customers. It didn’t work. Iomega reported a $6.1 million loss in networked storage last quarter on revenue of $3.7 million. CEO Werner Heid said Iomega averaged losses of $4 million per quarter in 2003 on networked storage. Last quarter’s loss included roughly $2.3 million related to severance and other expenses related to the layoffs.

Iomega’s revised NAS strategy is to chase the small office and small business market with entry-level systems that require little or no IT support.

Specifically, Iomega’s NAS family has until now ranged from 160 GBytes to 2 TByes of capacity, with prices from $300 to just under $25,000. Heid says Iomega will focus now on products with up to 1 Tbyte of capacity, priced from $500 to $3,000.The new focus homes in on the segment where 50 to 60 percent of NAS sales for Iomega came from recently, according to Heid. In contrast, most of expenses of the company's NAS line came from R&D and marketing on the higher-end products.

“Our review of the NAS storage business made it clear that the success we have enjoyed thus far has been concentrated at the lower end of the target markets,” Heid said during a Webcast with analysts. “Conversely, we’re gaining only limited traction in the upper end of the market.”

Network Appliance Inc. (Nasdaq: NTAP) and EMC Corp. (NYSE: EMC) dominate the high end of the NAS market. Iomega primarily competes with Hewlett-Packard Co. (NYSE: HPQ) and Dell Computer Corp. (Nasdaq: DELL) in the low end of what Microsoft calls the “Windows-powered NAS” space (see Sands Shift Under NAS Market).

“There’s a litter of NAS companies that haven’t made it, strung along the way,” says senior research analyst Steve Berg of Punk Ziegel & Co.. “It just goes to show this technology has room only for big players.”

In Heavy Reading's Fall 2003 Storage Networking Market Perception Study, fewer than half of the respondents surveyed identified Iomega as a NAS vendor, but Iomega placed fourth among NAS vendors in price leadership, behind NetApp, Dell, and startup Snap Appliance Inc.Heid thinks Iomega can stay in the game with Microsoft’s support, but he knows it will be tough. He concedes Iomega will lose money for at least the next two quarters on networked storage but expects to reduce those losses from 2003 levels.

“We have an ongoing and renewed support from Microsoft because, according to them, we are the only company in the space with a good brand name who can actually address the small office and small business markets overall with NAS solutions,” he said. [Ed. note: Dell? HP? Ha! Parvenues!]

Iomega has more problems than revamping its NAS line. Due largely to disappointing sales of its signature Zip desktop storage drive, Iomega lost $15.5 million for the last quarter and Heid expects at least two more quarters of losses.

— Dave Raffo, Senior Editor, Byte and Switch