Q&A: Hard-driving Seagate CEO talks about making money in storage

Bill Watkins is a hard driver. The CEO of Seagate, the $13 billion hard disk drive maker based in Scotts Valley, Calif., is racing to take advantage of the boom in storage as digital media spreads everywhere: to iPods, home servers, game consoles, handhelds — not to mention desktops and laptops.

The Texas-raised son of an oil man has been CEO since 2004. He joined the company in 1996 after Seagate bought rival disk drive maker Conner Peripherals. Watkins, a former enlisted soldier with Army, views morale as critical. That’s why he started “Eco Seagate,” a week-long endurance program in New Zealand, way back in 2000. At a cost of $2 million a year, he puts 200 employees through the grueling adventure program – which culminates in a rock-climbing, mountain biking, and kayaking endurance race. Fortune just posted a story on the most recent trek.

He recently talked loudly above the din at the Foreign Cinema restaurant in San Francisco with a group of journalists. He is outspoken, crass, and he pulls no punches. His style invokes the same gregariousness of Seagate founder Al Shugart, who favored Hawaiian shirts and ran his dog for Congress. What doesn’t quite come through here is the cackling, almost maniacal laughter that punctuates most of Watkins’ sentences. These days, he is glad that storage is on the upswing because everybody needs it to store all of their music, videos, pictures and games. Here’s an edited transcript of the interview.

VB: Is storage a commodity?

BW: It is and it isn’t. We thought it was a commodity. But I’ll tell you, in the last four years, the most money in electronics has been made by storage companies. Intel’s growth is slowing down. In storage, the profits and revenues are up. It’s because storage is everywhere, not just in online businesses. You have a terabyte of storage in your home now, or you soon will. Look at an iPod. The music has to be stored somewhere on servers. That uses our enterprise hard drives. And guess what? It has to be backed up. More drives. Then the user downloads it to a desktop or notebook. More storage. And they need more backup. Then they transfer it to a hard drive on the iPod. It’s all about content being delivered digitally. It creates an ecosystem of storage devices. The center of that is all hard drives. A seven-megabyte song is stored a lot of times. Video is even more data. Then you take it, mash it up, and put it on MySpace or on YouTube. The number of petabytes being stored is consistently up 60 percent a year. That’s not even counting new applications, like on a storage device in the car.

VB: So digital media is driving growth?

BW: It’s going to go on and on and on. Look at all of those bootleg copies of concerts and music recordings out there. They’re getting digitized.

VB: That would be crazy if all of the bootlegged recordings got uploaded and stored again.

BW: This is going to be phenomenal. If all content in the world gets digitized, then you’ll have multiple copies. You will have a copy. It’s going to sit in the server cloud. It’s going to get backed up. That’s our Kool-Aid and we’re grateful for it. I talked about this bootlegged concert thing in the Wall Street Journal. You wouldn’t believe it but three billionaires emailed me and asked me about digital recordings of Grateful Dead concerts. I said I didn’t have it. But it’s amazing how social media gives a new life to these things.

VB: There are a lot of Deadheads out there in the corporate world. I guess the Grateful Dead were the start of social media?

BW: I don’t think I would have made it through my teenage years without the Grateful Dead. People emailed me and said they’ve got Dead tapes. That’s just a small thing. But it goes back to social media. The Dead had a huge social following.

VB: You’re thinking of putting storage servers into homes?

BW: If you look at the ’90s, it was all about digitizing the work place. Now it’s about digitizing the home. How do you bring this to a unified system. We think the handheld has a little storage. The car has a little. But the home has a lot. You carry it with you.

VB: Is Seagate going to manage that experience?

BW: Yes, that’s the ideal. We’ll become a big software play. We will put our software on the storage to manage it for you.

VB: What’s your thinking behind Eco Seagate?

BW: It’s a way to break down barriers and get to know people. We’ve got more than 50,000 employees. The only way you can handle the scale of a company like ours is structure and function. How do you break down those barriers and bring back human nature into our company? I had a discussion with a guy on one trip. I told him that the most important thing in my life was to get my daughters through high school without them becoming pregnant. That guy said it was his No. 1 goal too. We may be a billion dollars different in income but we are really just the same humans. I’ve done 10 of these Eco Seagate trips now. The stories from those trips about teamwork come back into our culture. I want to create the right stories in the right atmosphere so those people come back and use those stories at work. We’re creating the culture of our company this way.
VB: It’s all physical tasks?

BW: Yes. But you have to make an emotional attachment in order to create change. People get emotional when they’re physically tired. They get emotional in a different environment. Here, they’re isolated. They have to learn to ask for help and give it. You can be in the worst physical shape and do it. We do a 36-kilometer race. It takes nine or 10 hours for the best to get through it. There can be overweight people. But they can have three or four people help them through it. They would never be able to do it themselves. We have gotten every team through for the last seven years. One of the most rewarding races we had was when we had a woman who was so overweight that we couldn’t go 100 yards without taking a break. We came in at 10 hours and 45 minutes. But it was so rewarding. I was getting frustrated with her. She was so out of shape, but she had a trainer. I remembered thinking at a point, “I’m going to sue that trainer.” But that was the wrong attitude. You realize you have control over one thing in your life — that’s your attitude. You can be cold and wet and miserable, or you can be cold and wet. That woman started crying when she realized that she was going to finish the race. Her husband had died a year earlier. She said she thought her life was over. She was thinking of killing herself. She said that we showed her how she could come out here and do all of these things.

VB: How many people have gone through it?

BW: About 2,500 people have gone through it. We do it every year. It costs $2 million but we’re a $13 billion company. I don’t get this. People talk about their employees being the most important thing. But when it comes to spending money on them, they don’t. Employees are an asset or a cost problem. We invest in our assets.

VB: How many people drop out of the company because of Eco Seagate?

BW: I get two or three every year. I had a senior vice president drop out.

VB: Do you have a Club Med option for those kinds of people?

BW: No. This guy wanted to be a CEO. We had a discussion at the event. I told him to go do it. I said I would help him. If that’s what your life’s goal, go do it. If I don’t convince those people to leave Seagate, I think I’ve failed.

VB: Back to storage. What storage do you have at home?

BW: I have Kaleidescape systems. I have six terabytes. I have pictures, movies, music. They’re all distributed. I download everything digitally. People aren’t going to carry things around like physical media disks like DVDs. It’s not about physical distribution. It’s about electronic distribution.

VB: Do you think that Google is ever going to charge me for all of the stuff I have stored in my Gmail account because they can’t afford the online storage?

BW: If it is pure storage, it’s not so bad. The problem is that if you are constantly accessing what you have stored, the bandwidth costs are phenomenal. One thing I’ve looked at is business models. You would think the easiest way to do downloads to the TV is video. The bandwidth won’t get cheap enough to keep downloading those movies to you over and over. If you keep accessing the data, they have to pay for the bandwidth. It’s the bandwidth. They are banking that you’re never going to use what you stored.

VB: Will you become close enough to the customer to know what is in that data they are storing?

BW: Yes.

VB: So you can sell ads against what you know is in that data?

BW: Yes. I have to also worry about competing with my own customers like Dell and HP. When you get into home storage, the component costs of the drives are the biggest. So we think we have a cost advantage over everyone else. What I don’t have is a brand name.

VB: So there is a lot of debate about cloud computing versus client computing, the server versus the desktop. Microsoft has said storage in the cloud isn’t a threat to them because computing will stay on the desktop. But others say that whoever is closest to the storage will be the winner. They will know what’s in the data and can sell ads against it. They have the ad model and that is more powerful. You’re close to the data. What is your view?

BW: For us, the best thing possible is both things happen. You store data in the cloud and you also store it on the client. We believe that people want it near them and they want it far away too so they can access it from anywhere. The same content will end up being duplicated in both places. What is the cost of downloading content? If you download it once a year from Google, it’s no big deal. If you download it three times a week, it becomes a problem for Google. I think the cloud wins if there is no cost problem.

VB: How is the market for storage in video game consoles? (Picture: no, he’s not flipping me off).
BW: Both Microsoft and Sony are having a hard time figuring out what they want to do with storage. They always use a media disk. To try to reduce their costs, their offer an option without a hard drive (at least Microsoft does). Everyone defaults to buying a game console with a hard drive. Sony has a big cost issue because they had to have a hard drive and Blu-ray too. They want people to turn on a PS 3, go to this Home space, which is like YouTube and Second Life. You walk around with your avatar and look in your picture book. The problem is that is a massive amount of storage. Sony is caught between wanting both physical and electronic distribution. That battle is over. Electronic won. They fought the wrong damn battle.

VB: But people don’t have the patience to wait for downloads.

BW: Yes. Bandwidth will improve enough where it will happen. I wouldn’t give up on the cloud computing, though it is more expensive now. People will watch lousy content if it’s easy. That’s the great thing about people. They will take the path of least resistance. Why read something interesting if they can watch something free or easy? People are watching commercials on YouTube. It’s a damn commercial. It’s some PR hack trying to sell me something. There are hundreds of thousands of hits on these things. I go back to the early days of TV. They watched Howdy Doody. They gave it away free. With the Internet, it’s the same thing all over again.

VB: IBM is getting very excited about Second Life as the metaphor for computing in the future. It will all be 3-D.

BW: They are pushing Second Life so hard. It’s a mantra within IBM. What is not obvious to me is the business model. What they need to get is a lot of people selling stuff in those stores online. They think we’re all going to live with avatars. I don’t see how people make money at it. I’m having a hard time with it. If you’re in World of Warcraft and you’re selling people a higher-skill level sword, that isn’t a $20 billion market. That’s what IBM is looking for, a $20 billion market, not a $1 billion market in five years.

VB: You’re not into this totally connected life?

BW: When I quit my job, I’m going off the grid. I’m going to make it happen. I won’t have a cell phone or a PC. I’m an anarchist at heart. You won’t be able to find me or watch me. I’ll be totally analog. Right now, I can’t live that life. I’m paranoid, waiting for the end of the world. I’ve got my bunker.

VB: Why is Seagate so interested in gaming? Do you want to sell drives to gamers?

BW: We have the PS 3 drives and the Xbox 360 drives. What is interesting to me about gaming — it’s not about selling into that market. We’re a $13 billion company. Why would we put a lot of effort into a $300 million market? I think gaming is the right skill set for the future. They are comfortable with technology. They will buy my home networking stuff. And they tell people about your products. They are influencers. I want to capture them young and then have them as influencers for the rest of their lives.

VB: So in the next 12 months, you’re going to try to get people to think about storage?

BW: We’re trying to. It’s the Wild Wild West for your home now. How can we put a service on top of our storage? Everyone wants to do account control for your home, to control all of the storage. It’s wide open. Cisco, EMC, HP, Dell, and Apple are all trying to get in there. We are too. Every one of them needs to us to enter the home storage market. We’re competing with our own customers here and are trying to establish our own retail brand.

VB: You have lawsuits with the flash chip makers?

BW: Yes, I’m suing them all. I have one interesting patent on flash. Drive guys are legalists. We looked at what patents we needed. We bought a patent from HP. HP didn’t realize what they had. It said that if you put solid state storage in a notebook, desktop or enterprise application, and the format is half an inch to five inches, I own that technology. If you want to sell ice cream with one scoop, I own it. If you want to sell it with two scoops, I own it. If you want to sell it with three scoops, I own it. If you want to put in ten scoops, you can probably do that. If the courts uphold this patent we have, it’s a showstopper if you don’t pay me. Everybody in the enterprise, desktop or notebook, they can’t handle solid state like solid state. When you start making it look like a hard drive, then you violate an application patent that I have. Samsung and Toshiba are probably OK. We have all cross-licensed each other. The SanDisks of the world don’t have licenses.

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