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Tech Wreck Sends Iomega in a New Direction

When the market for Zip drives lost its zip, causing revenues at San Diego-based Iomega Corp. to go into a free-fall, CEO Werner Heid didn’t panic.

Instead, he devised a strategy of creating new products aimed at helping businesses back up their data, and consumers keep track of ever-increasing mounds of data generated from more hours spent on their personal computers.

The German-born high-tech veteran was named chief executive officer and president in June 2001 as the company’s revenues were dropping almost as rapidly as its stock price. From a peak in 1998 when it had more than $1.7 billion in revenues, the company’s sales have continued a rapid decline, and last year finished at about $229 million.

Iomega’s flagship product, the Zip drive, has become nearly obsolete as personal computers have gotten more powerful and manufacturers installed standard hard drives with far more data storage space.

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The Zip drives were first introduced in 1995 as a way of providing users with a handy way of expanding their computer’s data storage by inserting portable disks into the processor that could be easily removed and stored.

New Directions

But by the late 1990s, the data storage capacity of most PC hard drives went from a few gigabytes to 40 to 80 gigs. Newer and much faster optical drive systems using compact discs to store the data became the standard. Eventually, manufacturers didn’t even include the floppy disk drives in most processors.

Heid knew he had to restructure Iomega to keep it alive.

“I felt we had to refocus the company and add value where we could, and outsource the rest,” he said. “We sold our manufacturing sites, we outsourced our logistics areas and fundamentally decided we are going to become a sales, marketing, service and design company.”

The restructuring also meant cutting Iomega’s employment from about 5,000 people in 1998 to about 450 today. Only 52 employees work at Iomega’s Sorrento Valley headquarters. It moved the headquarters to San Diego in January 2002. The rest are at its former headquarters in Roy, Utah, and a few satellite offices.

The process of right-sizing a company to fit a dramatically reduced revenue stream and different product mix has been tough, but Heid said there’s no easy way to get through it.

“There’s nothing about a restructuring where people can feel good about it,” he said. “There’s nothing you can do to make people smile and laugh about it. You basically have to do it with the sincerity of a doctor who looks at a patient and says, ‘We’re going to have to do an operation.’ ”

The key in achieving a successful restructuring is keeping employees informed about why layoffs are necessary and what the company’s long-range strategy is, Heid said. Treating those who are let go with respect and fairness is another thing he made sure took place.

Realizing the lifespan of the Zip drive was coming to an end, the company reconfigured its product line into two main types: removable magnetic storage devices to replace tape backup storage systems used by small and medium sized businesses, and networked attached storage systems that combine software and hardware.

Iomega still makes Zip drives, but it’s betting its future on devices that emphasize ease of use and durability. The company’s REV 35 GB drive contains 35 gigabytes of storage capacity into a component that’s smaller than a pack of playing cards.

Heid said sales of the firm’s new products went well in the fourth quarter and should continue to rise this year, turning around a precipitous decline that began in 1998.

“This year we’re going to see some healthy growth,” he said. “This company will grow on the top line and get back to profitability in the second half of this year.”

Last year, Iomega, which celebrates its 25th anniversary this year, reported a net loss of $36.7 million on revenues of $329 million, compared with a net loss of $19 million on revenues of $391 million.

Kevin Carroll, the executive director of AeA San Diego, a local high-tech trade group, said he wasn’t aware of any other tech firm that had to overcome the same kind of challenges as Iomega.

“I don’t know of another technology company in San Diego that had their market disappear that fast. It just evaporated,” he said.

Given the situation, Heid has done well in his efforts to redesign the company and get it back on track, Carroll said.

“Werner is a no-nonsense kind of guy, and that’s what you need at the head of a company that had its market obliterated,” he said.

Robert Amatruda, research manager for IDC, a Framingham, Mass., technology research firm, said that while the company has gone through some painful times, it still retains a strong core competency in the area of removable data storage products.

“They’ve had some wins with REV but to make a home run like they had with Zip, they’re going to have to secure a major OEM (original equipment manufacturer) partner such as IBM or Dell,” Amatruda said.

The fact that Iomega had a good quarter and its new products are showing some traction hasn’t resulted in any irrational exuberance on Heid’s part.

“I think the morale here is cautiously optimistic,” he said. “People have learned in the high-tech world that you have your ups and downs. And just because you have one good quarter, it doesn’t necessarily mean you are out of the woods.”

Heid, a native of Boebingen, a town near Stutgart in Germany, came to the United States in 1994 after working for 10 years at Hewlett-Packard Co.’s European division.

He was lured to HP’s office in Rancho Bernardo to take the job as marketing manager for the company’s office jet printer line. He left HP in 1998 to become the president of Proxima Corp., a San Diego maker of projectors. Two years later, after Proxima was acquired by a Norwegian company, that company was gobbled up in another acquisition. He was first invited to join Iomega’s board in April 2000, and about a year later was hired as the new CEO.

Heid said he never flinched at the prospect of taking over a company that was obviously facing hard times.

“I’ve never run away from challenges before in my life. When you see a challenge you can either run away from it, or enjoy it.”


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