Iomega Bear's Den
by Paul Larson (TMF Parlay)

My argument against owning Iomega centers on the viability of the Zip product going forward. Since Iomega receives the vast majority of its revenues from this one product alone, talking about Zip and talking about Iomega is for all practical purposes one in the same.

Zip will never be a standard. Period. What Zip *has* become, to a degree, is a standard option. The difference between a standard and a standard option is one that many Iomega bulls seem to gloss over. Let me use a car as an example. A steering wheel is standard. Every car has one and you can't drive without it. A standard option, however, is something along the lines of power windows and electric seat heaters. These are items that are handy, serve a purpose, and can be ordered with almost any car, but not every car has these items nor is it required for the car to run.

Computers don't need a Zip drive to run. This is one important point that will keep Iomega from breaking out of its niche. In fact, I'm willing to bet that most computers don't even need a floppy drive to operate in today's environment. Let me ask, when was the last time you actually used that floppy disk in your computer? Even if, by some stroke of amazing luck, the Zip drive does "replace the floppy," the need for the floppy itself is fading. It wasn't exactly a good proposition to be making the best buggy-whips in 1915.

I did some grassroots research for this piece that involved driving down to the local strip-mall and visiting both a Best Buy and a Circuit City store. I wanted to see how many computers were being shipped with Zip drives installed and to also get some quotes on competing products. A scientific market study this was not. Nevertheless, I think my trip exemplifies the typical consumer experience.

Out of thirty-six computer models on display at the two stores, I can count on one hand the number of models that were being sold with a Zip drive installed. In fact, I can count the number on one finger! That's right, exactly one model -- which was an old display model on clearance -- came with a Zip drive. The Circuit City I visited didn't even sell the Zip drive as a peripheral! This is not exactly the portrait of ubiquity Iomega bulls would like to paint.

My field trip also gave this argument even more ammunition when I looked at the prices of other computer storage products. Iomega is losing the price/performance battle quite badly with competing products and technologies. It's not even close. Below is a table that I think illustrates this point quite well:

Product          Storage   Price   Price per    Price per 
                    Space             Mb (drive)   Mb (disks) 
 Standard Zip      100 Mb    $149        $1.49      $.1299 
 LS 120            120 Mb    $149        $1.24      $.1500 
 Jaz External    1,000 Mb    $349        $.349       $.099 
 Syquest Sparq   1,000 Mb    $199        $.199       $.033 
 Syquest Syjet   1,500 Mb    $299       $.1993      $.0527 
 Quantum Hd Dr.  6,400 Mb    $289       $.0452          NA 
 Maxtor Hd Dr.   7,000 Mb    $279       $.0399          NA 
 Maxtor Hd Dr.   8,400 Mb    $409       $.0487          NA 
 

You see those Iomega ads where they have 70 old floppy disks sitting next to a single Zip disk? The idea being "this equals this." If I had a slick marketing department helping me here, I would have a picture of a 7.0 gigabyte hard disk next to the picture of 70 Zip disks. Or better yet, I might have a picture of the same hard drive over a photograph of a thousand-dollar bill (if there was such a thing). Why? Because it will cost you over a grand to back up this hard-drive using Zip disks -- not exactly an economical proposition.

Furthermore, the need to "unload my unused computer programs onto Zip disks" is going away. As hard drives get bigger and cheaper, the need for extra storage is evaporating quite quickly.

When it comes to sharing large files, other technologies are also creeping up on Zip. If I want to send a picture or spreadsheet to an associate, I email it. Simple as that. Of course, Zip is handy for folks using huge files such as graphics designers and architects. Problem is, most of us are not architects and don't need to give 50 Mb drawings to our co-workers on a daily basis. Zip dominates this niche, yes. But it is still a niche.

There is no doubt that Iomega hit a homerun with the Zip drive. Iomega has dominated its niche and has built up quite a bit of goodwill in the computer community. But Zip is getting long in the tooth and the utility of the product at its price point is making less and less sense. I expect Zip drive sales to level off or even decline over the next year. And since Zip and the company's fortunes are intimately tied together, I expect Iomega's stock to do the same.

Next: The Bull Responds