Hard drive vendors reduce warranties

by Brett Winterford

September 27, 2002 —

Hard drive manufacturers Maxtor Corp., Seagate Technology LLC and Western Digital Corp. have colluded to reduce the duration of their warranties on desktop models from three years to 12 months.

As of October 1, resellers and systems integrators that offer two and three-year warranties with their machines to differentiate themselves from their competitors will have to make some tough choices. Either they will have to drop their warranties to one year to follow the market trend, or they will have to source higher value hard drives that still carry three-year warranties and raise the price of their machines.

The manufacturers and many of their distributors in Australia are defending the decision based on several assumptions. The first is that hard drive reliability has improved to the point where a three-year warranty is no longer a necessity. The second is that most hard drives that do fail will do so within the first few months of purchase. The third assumption is that many, if not most, other PC components only carry one-year warranties, so standardizing on a one-year warranty makes the service of the whole computer inherently more manageable. Finally, the decision is designed to suit the larger tier-one PC vendors that only offer a one-year warranty on their low-end desktop models.

But these assumptions have been questioned by several distributors and systems integrators, who now have to reassess their business models to ensure the financial stability of their vendor partners.

The first assumption, that hard drive reliability has improved, is beyond doubt. Vendors have been claiming for some time that the products have become much more reliable. Seagate's general manager of sales and marketing for South Asia, Robert Yang, claims failure rates of hard drives have come down to around 1 percent. Distributors are also reporting a reduced level of stock returns.

But according to recent consumer surveys, the hard drive still remains one of the more problematic components of a desktop PC in terms of reliability. The Australian Consumer Association's recent report into reliability claims that 8 percent of laptop owners and 10 percent of desktop owners have had to repair their hard drives in the last 12 months. Tim Davoren, business development manager for Bluechip Infotech (Servex), said that while the quality of hard drives is improving, they are still quite prone to failure. He doubts that the quality factor is the sole motivator behind the manufacturers' decisions to pull the three-year warranty. "I'd bet my house that if you ship out 50 drives, one will fail within six months," he said.

The three vendors in question claim that if hard drives do fail, they are likely to do so within the first few months of purchase. But resellers and systems integrators disagree. "Ninety percent of hard drive warranty claims are either in those first few months or in between the first and second year of use," said Malex Reed, managing director of First Technology Computers.

Daniel Loski, vice president of sales for Western Digital in South Asia, said the decision aligns hard drive warranties with the warranties on most components in a personal computer. But one wholesaler has pointed out that while this is true for processors and memory, there are still several products that carry three-year warranties, including graphics cards and motherboards.

The first of the hard drive manufacturers to decide on the warranty reduction was Maxtor. Local sales manager Craig Davis said that the decision brings manufacturers in line with the tier-one PC builders, which tend to only offer a one-year warranty on low-end desktop models. Similarly, Seagate's Robert Yang said that feedback from the channel community so far has indicated that many assemblers and distributors found the three-year warranty somewhat of a burden.

But as many whitebox assemblers have pointed out, the two or three-year warranty is a way in which systems integrators often differentiate themselves from the tier-one vendors. If they continue to offer a three-year warranty on their machines without the backing of their manufacturers, they are inviting substantial risk into their own business.

CN Low, managing director of Maxtor and IBM hard drive distributor Digiland, said that the move is probably not going to be seen as a good thing by his customers. "It makes the resellers' warranties a little bit more complicated," Low said. "One of the differentiators that whitebox resellers offer over the branded PCs is a three-year warranty and this move will complicate that."

The message these resellers are receiving from vendors and indeed some of their distributors, is "adapt or perish". Maxtor's Davis believes systems integrators have a choice of following the market trend and offering a one year warranty, or putting higher performance drives in their machines that still carry a three year warranty.

"There will naturally be some concerns, our feedback so far has been as much praise as it has been unhappiness," said Seagate's Yang. "Many of those resellers that differentiate through a three year warranty will probably have to think about reducing their offer to a one year warranty. If they still want to offer three years, then they need to look at their cost model. It may be that they will need to sell their product at a premium."

This sentiment was shared by Steve Rust, managing director for broad-based distributor Ingram Micro. "They will have to adjust their service offering because they're sustaining more risk," he said.

Davis said these resellers simply need to find other ways to differentiate themselves outside of warranty and service.

Differentiation may now prove to lie in the hands of the distributor. Ingram Micro's Steve Rust looks forward to a more simplified warranty system. "We think manufacturers will now move from the return-to-base type warranty systems to one where they just replace a faulty unit with a new one," Rust said. "Ingram Micro will back that principle up."

For the time being, Bluechip Infotech is hoping to maintain its three-year warranties on hard drives, but Davoren is not confident the company can continue to take this stand indefinitely. "I'm not really prepared to keep sustaining the cost of a three-year warranty," he said.

"We don't have the deep pockets of the tier-one guys to take the hit of a $100 repair charge every time a hard drive dies."

Other distributors are embracing the opportunity to offer a new service to their customers.

Frank Sheu, managing director of components distributor Synnex, said he is concerned about his customers that differentiate themselves to the major vendors through offering longer warranty periods. He is particularly concerned about those systems integrators that sell into education and government accounts and have signed contracts stating that they will always offer a three-year warranty.

"In this case, we will be offering them our resources as of October 1," he said. "They can opt for the one-year Seagate warranty, or offer an extended warranty covered by Synnex."

Sheu said he has a very objective view of the decision, considering the current financial health of several hard drive vendors. "All of these hard drive manufacturers have been subsidizing the industry for too long," he said.

"They are selling 40GB drives today that were 4GB two years ago and half the price. They were competing on price and offering three-year warranties and none of them were making any money. It couldn't go on forever."

Western Digital's Daniel Loski said the speed of the current technology cycle means hard drive manufacturers cannot continue to support the spare parts and servicing of drives that are almost obsolete within a few years of being sold.

Davoren believes the real motivator behind the move is the pending release of serial ATA drives at the end of the year. Calling the drives the "next best thing", he said they outstrip the current parallel ATA drives in throughput speeds (from 100MG per second up to 150MG per second) and even outperform SCSI when inserted into raid arrays.

"The manufacturers want to cut their exposure on the legacy drives so they're dumping the price until then," he said.

Davoren also said that with the growing base of hard drives in the market, which shows no sign of abating, the manufacturers may be concerned about their growing exposure. "The more hard drives there are out there in the market, the greater their liability," he said.

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