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Finding Its Tape Niche, Qualstar Is Able to Succeed

Technology: The Canoga Park firm found a way to survive into the Internet Age with its hold on data storage equipment.


William Gervais, president of Qualstar Corp., counts himself and his company among the few lucky survivors of the boom-and-bust that built the San Fernando Valley into a center of data storage equipment in the 1980s, only to see most of it go away.

Former stalwart companies such as Pertec Computer, Tandon, Computer Memories and Micropolis were once scattered around the west Valley like a mini version of Northern California's Silicon Valley. In a few years, however, they were all gone, victims of plummeting prices, overseas competition and fast-changing technologies.

Qualstar, founded in 1984 as a maker of magnetic tape drives for computers, has survived by finding new niches for itself in a cutthroat market. Now, after years of percolating as a tiny, but profitable company, it is beginning to reap the benefits of living into the Internet Age.

In June, the Canoga Park-based company launched its first public stock on Nasdaq. Starting at $7, its shares have been on the rise, closing at $11 Friday. That's a respectable showing in a market that over the same period has seen the Nasdaq index lose more than 500 points, or 14%. Gervais, 57, owns a quarter of the company--a stake worth about $35 million.

Qualstar's revenue jumped 65% this year, growing from $29.7 million in 1999 to $49.4 million for the fiscal year ending June 30. The company's profit grew at an even faster pace in the same period, increasing $4 million last year to $7.8 million--a 95% increase.

The company makes automated systems, known as magnetic tape libraries, that back up and store critical computer data on tape cassettes. The backup process has become a routine part of computing for most businesses to protect themselves from losing information due to viruses, human error, machine failure or hacking attacks. Many companies also archive their records on a regular schedule, resulting in trillions of bytes of information that need to be stored in a safe and cheap way.

It is admittedly an unglamorous product in an industry that even Gervais describes as the "U.S. Steel of high technology."

But the growth of the Internet in the last few years has sparked an explosion in the amount of computer information that needs to be stored, archived and cataloged.

Qualstar focuses only on the backup and archiving piece of the puzzle, and has found itself with about 2% to 5% of a quickly expanding market, according to the research firm IDC. "It's a rising tide, and all the boats are going up," Gervais said.

The boom in information is largely due to the proliferation of Web sites, e-mail, Internet video and e-commerce transactions since the mid-1990s.

All those pieces of information are stored on large arrays of disk drives, leading to a demand for disk storage that is growing 80% a year, according to IDC.

Eventually, backup copies of that information are made onto magnetic tape, which is the cheapest method of storage.

The tapes are stored in racks that are accessed by robotic arms programmed to find the right tape, record the right information on it, and then return it to its proper slot. The total magnetic tape library industry now stands at about $3.1 billion in sales, according to Robert C. Abraham, president of the Freeman Reports, an Ojai-based research firm focused on magnetic tape storage.

Even though the demand for data storage is growing quickly, revenue from magnetic tape library sales will grow at a more modest 15% a year because the price of equipment is constantly dropping, Abraham said.

But he added that by 2004, tape libraries should be a $4.2-billion industry--enough to support good growth for small companies such as Qualstar. "Qualstar is definitely a viable player," Abraham said.

Qualstar was founded by Gervais, a mechanical engineer by training, and Richard Nelson, an electrical engineer who was Gervais' roommate at Cal Poly Pomona in the 1960s. Nelson is now vice president of engineering at the company.

Both men found themselves at Pertec in the late 1960s just as the minicomputer industry was beginning to boom. Before then, the computer world was dominated by large mainframe computers--usually made by IBM. IBM had developed a system to store information using a type of 9-track magnetic tape held on large reels, just like on an old tape-recording machine.

Pertec realized that the new minicomputers from rival companies would also need 9-track tape drives. Pertec found a niche for itself below the radar of IBM and thrived.

It was a lesson that Gervais and Nelson took to heart.

Learning From Pertec's Example

Fifteen years after joining Pertec, the two men launched Qualstar with the idea of making 9-track tape drives for the newly created world of personal computers. "We saw an opportunity to do exactly what Pertec did when the minicomputer came out," Gervais said.

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