Disk-Drive Maker Taking Lead in Multi-User Market : Micropolis Stakes Out a Promising Niche

At long last, Micropolis Corp. may be sitting pretty.

For most of its eight years, the Chatsworth-based disk-drive company has scrambled to stay narrowly ahead of the blistering competition and erratic market conditions that have crushed many of its counterparts. The company’s profits have been slim and its growth modest.

Now, however, Micropolis executives and many analysts believe that the company is in a position to increase its earnings and expand in a big way. The reason is that Micropolis apparently is on the verge of achieving a longtime goal--becoming a leader in a promising, relatively uncompetitive pocket of the disk-drive industry.

‘In the Right Market’

“They’re in the right market,” said David P. Vellante, a research analyst with International Data Corp. in Framingham, Mass. “Someone is going to make some money here.”

Micropolis is one of the small group of companies making high-speed, high-storage-capacity disk drives, which store and retrieve information for computers. Its drives are used by a budding “multi-user” segment of the computer industry, which consists of small minicomputers and personal computer networks on which from two to 15 people--and occasionally more--can work at the same time.

But, before fat times arrive at Micropolis, the company will have to overcome an array of obstacles. Perhaps foremost, the company must learn to mass-produce its disk drives cheaply and without the sort of manufacturing foul-ups that have haunted it and others in the industry.

Micropolis also will have to head off the competition from Japanese electronics giants Fujitsu and Hitachi. And, to avoid being overtaken by others in the crowded disk-drive business over the next several years, Micropolis will need to keep blazing a trail in developing more advanced disk drives.

For now, Micropolis has big contracts with many of the strongest minicomputer companies, including Digital Equipment and Data General. Although Micropolis is believed to do little or no business with IBM, some industry experts consider that a blessing.

Most suppliers that have relied heavily on business with IBM ultimately faltered when the computer company abandoned them. For instance, Chatsworth-based Computer Memories announced Monday that its contract with IBM, whose business accounted for 81% of its revenue in the latest quarter, would not be renewed. Moreover, although IBM appears destined to play a growing role in the market that Micropolis serves, its position there is much smaller than it is in the mainframe computer and the personal computer businesses.

Stuart Mabon, the 47-year-old executive who has headed Micropolis from its beginnings, has kept the company on a narrow course.

“The secret of success when you’re a small company like ours is to try not to do too much,” said Mabon, a white-haired, professorial man who talks with a lilt bespeaking his upbringing in Scotland.

“It’s very seductive when you’re an engineer to try to do a lot of things.”

Higher Capacity a Goal

The strategy of Mabon and the three other engineers who left Pertec Computer in Chatsworth to establish Micropolis was to focus on higher-capacity disk drives. Mabon said they took that course because all of the founders knew more about designing sophisticated, new products than about mass producing run-of-the-mill but strong-selling products.

Micropolis, which now employs 754 workers at its headquarters and plant in Chatsworth, soon found itself in a hot market. It produced floppy disk drives, which store information on inserted disks.

The company started making money almost immediately. In fact, during its first three years of business, Micropolis enjoyed the fattest profit margins--the percent of sales representing profit--in its history.

In 1980, however, Micropolis began pulling out of the business of floppy disk drives and started making hard disk drives. Hard drives, which tend to be faster and to store more information than floppy drives, use disks that are sealed inside the component.

Mabon said Micropolis changed direction because company executives could see that the floppy-disk-drive business would become more competitive and more dependent on large-scale manufacturing techniques than on engineering skill.

With that move, Micropolis avoided the disasters that befell companies such as Chatsworth-based Tandon Corp. That company, one of the nation’s largest disk-drive makers, last week reported its fourth consecutive quarterly loss, a deficit of nearly $15 million.

Micropolis itself lost money in 1980 and has posted skimpy profits since. The company found itself on a treadmill, never able to enjoy substantial profits because it constantly was forced to spend heavily on developing new products to keep up with the competition.

Sales Rose, Profits Fell

Last year its sales rose 14% over the year before to $60.1 million, but profits fell 77% to $819,301 as the company stepped up production of its latest line of disk drives. The company lost $411,000 on sales of $16.1 million during the first quarter of this year, then recovered in the second quarter with profits of $485,000 on sales of $20.1 million.

“A company making money these days has got to be a well-managed company,” said Vellante, the International Data analyst.

Vellante estimated that Micropolis has garnered about 1.5% of the worldwide disk-drive market and about 30% of the segment of the disk-drive market in which it competes.

Mabon predicted that Micropolis’ sales and profits will climb at least 40% this year and next. Although most analysts are not quite so optimistic, they say the expected demand for Micropolis’ drives should keep the company on an upswing.

Distinct Advantage

Industry consultant James Porter, president of Los Altos-based Disk/Trend, said Micropolis has a distinct advantage in that it will not have to bear major retooling costs to make its new generation of disk drives.

Micropolis’ main product now is an 85-megabyte, 28-millisecond drive that stores up to 85 million bytes, or basic units of computer information, and can retrieve information in 28-thousandths of a second. It is developing a 170-megabyte drive that it plans to begin shipping to customers next year.

Analysts are unsure, however, how long Micropolis can maintain its momentum. In the past, disk drives have gone from being trendy to passe in as little as 18 months.

“It’s really a question of how quickly management can move in a rapidly changing market,” said Jonathan Art, an analyst with the Gartner Group in Stamford, Conn.

Future Profits in Doubt

Thomas Lord, an analyst with Johnson, Lane, Space, Smith & Co. in Atlanta, said he considers Micropolis one of the nation’s best disk-drive companies. But he predicted that its ability to make money over the long run will be hampered by its “limited product line and limited financial resources.”

In addition, industry experts say that, even though Micropolis’ segment of the disk-drive market is less competitive than other parts of the business, the emergence of new competitors will shave profits.

An analyst who asked not to be identified raised questions about Micropolis’ skill as a manufacturer. The analyst cited the company’s failure for three weeks last year to detect a design change in components it was receiving from a supplier.

The change made Micropolis’ disk drives vibrate and produce errors. Costs climbed and shipments were delayed until the problem was corrected.

Mabon, however, dismisses any doubts about the quality of Micropolis’ manufacturing. He said Micropolis keeps a closer eye on production and responds to customers’ demands quickly because the company assembles all its disk drives in Chatsworth. Many other disk-drive companies do their manufacturing at plants in the Far East, and even Micropolis buys its components from overseas.

Because Micropolis’ plans to keep prices low to win an increased share of the market and to head off Japanese competitors, it is especially important that the company hold down manufacturing problems and costs.

Competitors of Concern

Mabon concedes he is worried that competition from companies such as Fujitsu and Hitachi could crush the U. S. disk-drive business the same way Japanese companies have crushed parts of the U. S. semiconductor industry.

“The outcome of that struggle is not clear at this point,” he said. “Our position is that we’re going to be the best in the world at what we do and go toe-to-toe with Fujitsu.”

Nevertheless, Micropolis now faces an opportunity that most computer-equipment companies can only dream about.

“A lot of the guys are losing their shirts right now, but a lot of them are beyond the worst part,” said Blake Downing, an analyst with Robertson, Colman & Stephens. “Micropolis appears to be in a particularly strong position right now.”