From...

February 10, 1999
Web posted at: 6:36 p.m. EST (2336 GMT)

by Christina Wood

INTERACTIVE:

Have you ever had a computer vendor disappear on you? Yes No View Results

(IDG) -- Morgan Fralick's SparQ drive started acting up last fall. So he called the maker, SyQuest, and asked for technical support. A company rep told Fralick, an optician in Aiken, South Carolina, to mail in the drive, saying that the company would send him a replacement in ten days. Fralick dutifully sent in the drive and waited. Ten days passed before he called the company. And called. And called. Finally he learned the bad news: SyQuest had suspended operations and filed for Chapter 11 bankruptcy protection. "I felt abandoned," Fralick says. "I did the research and bought a good product from a company that had the service to back it up. But I got caught in a bad situation."

What happened to Fralick and SyQuest are far from isolated incidents. In the past year, at least seven companies have fallen victim to the fierce price wars raging in the computer industry. In addition to SyQuest, a maker of removable drives, casualties include storage manufacturer Avatar Systems; scanner producers Storm Technologies and Info Peripherals; computer vendors Vektron International and EPS Technologies; and most recently Hayes, the modem pioneer. Each of these companies either has filed for bankruptcy or has closed its doors and disappeared quietly into the night. (SyQuest, like the other ailing firms, was unavailable for comment for this article; nobody's answering the phones or e-mail.)

The real victims in these situations, of course, are customers like Fralick who are left without access to customer support, warranty service, or rebates they were promised. Fralick is out his drive, the nearly $200 he spent on it, and several months' worth of data backed up on disks only a SparQ drive can read. But there are steps you can take to prevent this from happening to you. The key is to find out about the companies you're buying from as well as the products you're buying.

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Smaller Vendors, Bigger Risk?

Chung has the right idea (though even Dell was a dicey start-up once upon a time). Bruce Stephen, an analyst at International Data Corporation in Framingham, Massachusetts, explains that the PC industry is undergoing a tremendous revenue and profit squeeze. The bigger companies can afford to make the changes necessary to survive, he says, but the crunch on third- and fourth-tier vendors will intensify. "It's usually the smaller companies that are driven out," Stephen says.

How do you protect yourself against buying from a failing PC vendor? Approach the purchase with the same caution you'd use when buying stock. "Be careful about the viability of the company [you're] buying from," Stephen advises. "Ask about the company's profitability, ask how many employees there are. Is the company expanding? All these are clues to the health of the organization."

You can get solid information about most companies with a little help from the Net. If the company is publicly traded, consult Company Sleuth. Register with the site, give it a list of the companies you're considering, and it'll e-mail you all kinds of information, including related news stories, filings with the Securities and Exchange Commission, analyst reports, job postings, and relevant online discussion groups. If the company is privately held, try looking for help at Companies Online, where you can order a Dun & Bradstreet report for about $20.

Peripheral Problems

Peripheral makers also live on the edge. Venerable modem maker Hayes, for example, announced in January that it was shutting its doors. "There's a lot of blood flowing in the modem industry," says John Navas, a communications consultant in Dublin, California. Among the causes of the bloodshed: modem buyers aren't upgrading as often as they used to, and very serious competition from new technologies such as Digital Subscriber Line and cable modems is looming.

The outlook for modem vendors is pretty grim. Of the six companies represented in a recent PC World Top 10 Modems chart, one vendor (Zoom Telephonics) lost money in six of the previous eight quarters, while another (Boca Research) was in the red for seven of those quarters.

Scanner makers have weathered a nasty spell of their own: Within one month in late 1998, Storm Technologies of Mountain View, California, filed for Chapter 7 bankruptcy, and Visioneer of Fremont, California, sold its scanner business to Primax. Consumers who had previously benefited from intense price competition quickly became its unwitting victims. One PC World reader (who requested that we not print her name) bought a Storm scanner and applied for an advertised $30 rebate. She never received the rebate check and, according to the trustee for Storm Technologies' bankruptcy case, she probably never will.

Nevertheless, Kristy Holch, principal of the Boston-based InfoTrends Research Group, believes that it's safe for consumers to purchase from the scanner makers that are left. "Most of the companies in the market have a reason for being there," she says. "The pressures of price cutting were fierce in 1998, but I don't think we'll see it continue." Many of the remaining scanner companies, Holch predicts, will adjust to market pressures by selling higher-quality products with higher profit margins.

The shakeout has already hit the removable-storage market: Unless SyQuest recovers under Chapter 11 protection, Iomega will be the only major vendor still standing. (However, new storage technologies--such as high-capacity floppies from Imation, Sony, and other companies--are already starting to arrive.) According to Jim Porter, the president of Disk/Trends, a market research firm in Mountain View, California, SyQuest's demise may have been as much the result of errors in judgment as industry pressures. "[SyQuest management] sized the company at a level larger than the market it could attract," he explains.

Shop Smart

For commodity products like modems and scanners, checking a company's background before you buy may not be worth the trouble. Consultant Navas suggests buying a modem the same way you would a toaster. "Buy from a reputable retailer, and if [the product] doesn't work, take it back and try something else," he advises. Even if you exhaustively research a company whose product you buy, there's no guarantee that it will stick around to support it. For instance, industry experts were caught off guard when SyQuest suspended operations, because the company looked to be on the rebound.

Fortunately, Morgan Fralick is feeling a glimmer of hope these days. In January, SyQuest's Web site suddenly returned from the dead to announce that the company had found funding for its Chapter 11 reorganization. Not long after that proclamation, InterManufacturing Incorporated of Santa Clara, California, a contract manufacturer that once repaired drives for SyQuest, said it would provide limited warranty support for the ailing company's products. When Fralick contacted IMI, representatives there told him they could send him a replacement unit. The catch? Instead of getting it for free, as SyQuest's warranty promised, he has to pay for the new drive.