October 24, 2013

Seagate's Data Rescue Service Contracts:

Warranties and service contracts repair or replace the data storage hardware in computers and mobile phones. But they don't cover the data and files stored within them. But now, for a small fee, Seagate and its partners will provide a service contract for data recovery.

A new type of service contract is launching on Amazon.com this week. For laptops and desktops, rather than merely replacing a defective hard drive, Seagate Technology LLC is willing to also recover the lost data upon it.

The service contracts come in two flavors: Rescue, which is a service contract covering just the data, and Rescue and Replace, a service that recovers the data as well as replacing the hard drive. On Amazon.com, Rescue and Replace is offered as a two-year plan for $29.99 and as a three-year plan for $39.99.

These service contracts are entirely separate from the service contracts offered on the Amazon.com website by Assurant Solutions, Warrantech, SquareTrade, and others. But they would make a great enhancement to any service contract that promises to fix a broken computer. Or, if the price of hardware and repairs isn't much of a concern, they would make a great standalone purchase solely to protect a user's data.

Paul Steele

Paul Steele, general manager of Seagate Recovery Services, a division of Seagate Technology, said at least one more channel partner is expected to begin selling these service plans within a month.

At any given time, Seagate has hundreds of millions of drives in the field under warranty. And it handles roughly a million warranty and tech support calls per year. However, Steele noted that many Seagate customers mistakenly believe that data recovery is already included in their manufacturer's warranty. It's not. Disk drive manufacturers will simply repair or replace the existing drive -- but not the data, files and applications software on it. That's the customer's responsibility. You're supposed to back up your data regularly.

This has led to some major misunderstandings, and predictably, some unhappy customers. Terabyte hard drives can be bought for only $60 to $80 online. But that's not what customers want. They want their data back. They want a new hard drive and their old data. They want their budget spreadsheets, their email inbox, their slide shows, their family videos, and their extensive digital music collections. They want their happiness back.

"We're looking to make happy Seagate customers," Steele said.

The problem is, the cost of recovering data from a hard drive frequently exceeds the cost of the hardware itself. And as with old appliances and televisions, when consumers are told the cost of labor, they cancel the job.

In the Old Days

Data recovery services are nothing new. What's new here is the use of insurance underwriting and service contract techniques to spread the risk among a pool of policy-holders, so that everyone is covered for a small fee paid by each of them.

Seagate acquired a Toronto company called Action Front Data Recovery in 2006, and rebranded it as Seagate Recovery Services. Basically, the company provided as-needed data recovery services to people whose hard drives had failed, charging an average of $1,500 per incident. Jobs came in either through the website or through one of the company's channel partners. They even took in work from competitors who didn't have as sophisticated an operation as Seagate.

Part of the reason the average price was so high was the technology Seagate Recovery Services used. Steele said that while there are thousands of companies that can provide some sort of low-level software-based data recovery services, very few can go into the actual hardware and accomplish the most difficult mechanical recoveries with specialized tools. But that was also an impediment to the growth of the business.

"Data recoveries on a hard drive would range anywhere from $700 to $2,900," he said. "And when you looked at the cost of the devices that the hard drives were being utilized in, many of those were down in the $400 to $500 range -- certainly sub-$1,000. And they simply weren't prepared to pay that kind of money to get their data recovered."

Steele said the company concluded that recovery costs would have to come down considerably if the business was going to grow.

Instead, what they'd do is get a new laptop and see which files and media could be recovered from friends and business associates. Or they'd get just a new hard drive put into their old computer. Perhaps they kept their old Microsoft Office CD handy and could reinstall that. Maybe they could download and reinstall some of the drivers and applications they needed.

Still, there were plenty of customers who were willing to pay for a full data recovery. The way the as-needed service works is the customer sends the unit to Seagate for an evaluation. Seagate collects a non-refundable evaluation fee of $49 to $149, and returns to the customer an evaluation report with an estimated final cost.

If the customer accepts the quote, the job is completed and the customer is happy. However, if they don't accept it, the recovery effort ends and the evaluation fee remains with Seagate. And the customer is left unhappy.

Customer Testimonials

The main reason some customers were more than willing to pay the price was because the value of their spreadsheets and photos and personal data was bordering on priceless. One customer testimonial tells the story of a family that lost their son to cancer, then lost all their videos to a hard drive failure a few months later.

Their external hard drive had been dropped, and the media within it had been further damaged by another company's botched attempt to repair it. So the chances of a successful recovery at that point were slim. But Seagate's lab technicians persevered, and in the end managed to get the family's essential data back.

"You guys never gave up, even after several tries, and did a phenomenal job recovering the data. You have an awesome team there," wrote the unnamed customer, from Allen, Texas.

Meanwhile, costs are high primarily because there are not that many people in the world that can do data recovery at a very high level, and not that many labs where they can do it. And their time is therefore valuable. But they're generally successful. At a very low level, lots of people can run data recovery software, but the results aren't as good. In between are the people who try to manipulate heads and media, but aren't always careful. So you get what you pay for.

Paul Swenson

Paul Swenson, president of Fulcrum Aftermarket Solutions, said a data recovery service appeals most to those who've lost data in the past. And he's one of those people. About four years ago, he lost a hard drive and a good deal of valuable business data. So he sent his hard drive in to Seagate Recovery Services, paid a lot of money, and got his data back. And it was well worth it.

For consumers, there's the additional risk of losing photos, music, and video. "We're moving more and more into a digital world," Swenson said. "Everything we do is digital any more: our music, our movies, all of our work files. So the ability to be able to protect my data, and to get my data back when stuff happens, is why this has such a good reaction."

"That's the point," Swenson said. "As the price of laptops keep coming down, we become less concerned about the break/fix aspect. What we really care about is the data we have on that laptop. I'll pay the $400 or $500 for another laptop. I want the data."

Swenson said that back when he lost his hard drive and Seagate helped him get his data back, he was thinking about what could be the next great add-on to service contracts, whose appeal to consumers had been greatly enhanced years ago by the addition of new types of coverage such as accidental damage from handling. So when he met with some of the Seagate team and heard they were looking for a way to spread the risk and cut the cost of a data recovery service offering, there was something of a meeting of the minds.

The Next ADH?

"When I was pondering what's the next ADH, and then my hard drive broke, it was like a light bulb went off," Swenson said. And now, it looks like, just as with ADH, what was first seen as an interesting add-on for service contracts could become a primary reason for buying one. In fact, Swenson said in focus groups consumers have said they're more interested in a data recovery service contract than in one that covers just the cost of parts and labor.

"ADH or ADP or whatever you want to call it, at least initially got off to a slow start, because there was an education process that had to occur, both with consumers and with the channel partners," he said. "And then all of a sudden it took off, and now it's standard fare. If you have a product that has any kind of mobility to it, it's virtually 100% that the channel partners are going to offer a protection plan that includes ADH and sometimes theft. It's no longer just about break/fix."

At the time, Seagate was working with Fulcrum on an unrelated project having to do with customer service metrics. Steele got into a conversation with Swenson, who has an extensive background in insurance and loss cost analysis. The conversation quickly turned into a discussion about how insurance could bring down the cost of data recovery services.

Steele said he asked Swenson if there was a way to spread the risk using a service contract-like program. As the market-leading disk drive manufacturer, Seagate was already in possession of reams of failure rate analysis data. Through years of work by Seagate Recovery Services, it already knew the mechanics of how to be able to successfully recover data in upwards of 95% of the failures.

"Help me figure out how we can do a risk base where we can dramatically lower the cost of this service, and proliferate it across any number of devices," Steele said he asked of Swenson. "And help me package it in a way that it is consumable not only by consumers, but also by large channel partners: big box retailers, OEMs, and the kinds of customers that we've worked with over the years."

Data recovery services have been around a long time as well. But while perhaps 35% or 40% of the jobs can be handled with software, sometimes even over a remote connection on the Internet, the rest require sophisticated handling of the actual hardware. And in a laboratory setting, Seagate Recovery Services can get the data back in about 95% of the cases, even if the hard drive was damaged by a drop or a spill. But as we mentioned, the price can be multiple times higher than the cost of replacing the hardware alone.

While putting together the financial projections, Swenson said he sat down with some Seagate engineers to figure out the mechanical failure rates for hard drives on various devices. Then they started working through the typical cost of both software-based and hardware-based data recovery efforts. Armed with that data, they went looking for an insurance underwriter, which they found in AmTrust Financial Services Inc.

Market Research Needed

"So we put some ideas together, started running the financials, and found we could put this together if we could spread the risk," Swenson said. "Then we decided we needed to do some research."

Tara Piazza

Tara Piazza, Fulcrum's executive vice president of consumer research, was brought in this past summer to conduct a consumer survey about attitudes towards data recovery services in North America and Europe. The survey polled at least 600 respondents in each of five countries: the U.S., the UK, France, Germany, and the Netherlands. It qualified the respondents by asking them if they had bought a new desktop, laptop or external storage drive in the past 24 months for personal use, or if they were planning to purchase one in the next 24 months.

In the survey, there were lots of questions about what kinds of files and data the consumers kept on their devices, how they'd react to data loss, and what they used in terms of cloud services and data backups. Then they were asked about what they thought of a low-cost service-contract-like data rescue service run by Seagate. Over half said they would buy it.

"We wanted to test the consumer pricing acceptance," she said. "What we found consistently across all the countries where we did the research was that there was a very high interest in the Rescue plan."

Piazza said she found that there was a great opportunity to bring this to consumers as a low-cost service contract-like offering. However, the results looked a little too good. Could it be that the initial questions were worrying the survey respondents about the risk of losing data so much that they were just reacting to their own fears?

"I immediately thought to myself, 'This is because we led the witness,'" Piazza suggested. So she went back and reran the questionnaire without all the worrisome buildup questions, diving straight in to the questions about a data rescue service. And the results were the same.

"On a seven-point scale of interest where 1 means 'I will never buy it' and 7 means 'Where do I sign up?' half gave a 6 or 7 interest level, in both cases," she said.

Meanwhile, those who scored their interest at 1, 2 or 3 were cross-tabulated with the questions about data loss and their use of backups or cloud services, and Piazza found that those who never lost their data and never backed up their data also were the least interested in something like Seagate Rescue.

"When I broke out the interest level by people who use cloud backup, people who have a regular but manual backup method, people who do sporadic backups, and people who have no backup, the most interested were the cloud users," she said, "followed by the regular backups, followed by the sporadic backups, and the least interested were the no backups."

Figure 1
Interest in Seagate Rescue
U.S. Survey (n=846)

Figure 1

"It comes down to people who are dead serious about protecting their data," she said. "They use the cloud, and they want the Rescue protection too."

Two notes Piazza wanted to add about cloud usage. First, some files are too big to send to the cloud. But those half-hour high-definition wedding videos are still treasured data. Second, some files are too sensitive to store on the cloud, especially given the prying eyes of No Such Agency and its competitors. And those are precisely the files one cannot afford to lose.

Cloud services and data recovery services seem to be complementary, she concluded. The real competitor, she said, is indifference.

"I think our biggest barrier to making this a wild success is that there are so many people who don't realize that it will be super-painful to lose their data," Piazza said. "They've never lost data, and they think they're invincible. That lack of understanding their risk is the biggest obstacle."

Piazza also noted that Rescue seems to appeal more to those whose laptops are a few years old, and that appeal seems to increase as the laptop accumulates more vital data. Meanwhile, as the laptop gets to be two or three years old, the hardware is really getting outdated. If the hardware fails at that point, most users will replace, not repair.

So this kind of coverage could lengthen the tail for laptop service contracts: Just as the worries fade about protecting the aging hardware, the worries increase about losing data. You may not want a new hard drive in your old computer, but you will definitely want a copy of your old data for your new machine.

Piazza said her research suggests that some people will buy Rescue with a traditional service contract, and some will buy Rescue alone. With the decreasing cost of laptop components such as hard drives, many people believe they can afford to pay for repairs out-of-pocket. But they can't afford to lose their data. And that's a feeling of vulnerability that increases over time.

New Type of Service Contract?

It makes you wonder if this could become a new type of offering that goes on top of the protection service hierarchy. Think of the protection services now offered to a typical laptop buyer. The manufacturer offers them a year's protection from defects in the form of a manufacturer's warranty. The retailer or the manufacturer offers additional years in the form of a service contract or extended warranty.

As Swenson mentioned, ADH for laptops began to appear in the last decade, usually positioned as an additional fee combined with the price of the extended warranty. For tablets short on memory, and for clumsy laptop users, retailers and manufacturers now typically offer subscriptions to a cloud-based storage or backup service. For those worried about theft and the recovery of their stolen units, there's LoJack for Laptops, and numerous other anti-theft services for smartphones. And now there's a data recovery service contract to add on top.

Figure 2
Laptop Protection Service Hierarchy

Data Recovery Service Contract

Theft Recovery - LoJack for Laptops

Cloud Backup/Storage Services

Accidental Damage from Handling

Service Contract/Extended Warranty

Manufacturer's Warranty

The thing is, the data recovery service contract model works only if enough people buy into the program to spread the risk across lots of people who won't lose their data and a handful who will. As with health insurance, if only sick people sign up, the model collapses, because the cost per recovery is in the hundreds or even the thousands while the price per service contract, at least at Amazon.com, is under $40.

How Insurance Works

Everyone who reads Warranty Week knows how insurance works, but let's review the process anyway, and oversimplify it greatly. With something like fire insurance, each covered homeowner pays a premium of let's say $200 a year to insure against the risk of a fire that burns down their $200,000 home. If a thousand people buy the policy but only one home burns down per year, the program breaks even. If two burn down, the insurance company loses money.

The essential skill of an insurance company is to figure out the rate at which houses burn down, and the price at which that risk can be spread across all policyholders. If the loss rate is indeed two houses per thousand, then the break-even point would be at a $400 premium if the replacement cost of any given home is $200,000.

The thing is, no homeowner knows if their home will be among the casualties. So the premium they pay is their insurance -- their peace-of-mind against the risk of having to replace their home out of their own pocket. For 998 or 999 of them, it's money wasted, but risk averted. For one or two, though, it's a miracle.

Why couldn't this concept work for data recovery services? If the cost per data recovery attempt is in the hundreds or even the thousands per disk drive, why not spread the risk with insurance? If every disk drive buyer paid a dollar for insurance but only one in a thousand ever needed data recovery, there would be $1,000 in the fund to pay for the job.

Then the question becomes, do you want to buy the laptop alone for $400 or the laptop with a data recovery plan for $401? For your dollar you get access to a thousand dollar's worth of data recovery services, if you should ever need it. If you don't buy the service contract and you're the unlucky one, you have to pay $1,000 to recover the data on a $400 laptop out of your own pocket.

However, most of the big box retailers don't sell insurance. But they do sell service contracts. So the question for Seagate and Fulcrum became, how do we spread the risk and package a data recovery capability as an inexpensive service contract that can be sold by retailers?

Rescue Service Options

Steele said that initially, the biggest competitive threat was thought to be the automatic backup and cloud services that give everyone the opportunity to replicate their irreplaceable data in a safe place. However, this turned out to not be the case, as Piazza's research showed. Customers who regularly backed up or used cloud services were found to be the most eager to buy inexpensive service contracts that covered data recovery. It was the customers who never backed up and who never suffered a catastrophic data loss who were the most indifferent.

Steele said some channel partners will offer Rescue & Replace as a standalone service contract. Others will offer Rescue as an added benefit of their existing service contracts. Some customers may want to buy this and no extended warranty at all. Others may want to buy the whole suite, from break/fix coverage and ADH to LoJack and Rescue. It's up to the channel partners how or if they're going to sell Rescue as a standalone service or bundled with other services.

"We're looking for the right model," Steele said. "There is a lot of debate internally amongst our marketing folks around what will happen. The truth is you never really know what the consumer will do until you put something out there. I'd like to believe that we would displace some extended warranties."

One potential channel partner, he said, is thinking about completely de-emphasizing the traditional extended warranties and service contracts that focus on repairs. Instead, they want to feature Replace & Recovery and premium services like it. In other words, that retailer believes the customers would rather a pay-as-you-go approach to break/fix. Some customers might prefer break/buy new. To them, the riskiest item is data loss, and for that they need to buy protection to avoid the high cost of a pay-as-you-go approach towards that peril.

Steele said the need for a service like this really resonates with the people who've lost data, and with the warranty and extended warranty repair people who've been the bearers of that bad news in the past.

"I've got to tell you, after working in and around data recovery here for the last six years, the traction that we've built in just the last six months, as we've packaged this and put it in front of potential channel partners, has been overwhelming," he said. "People instantly get it."

Figure 3
Seagate Rescue & Replace
Demonstration Video

Figure 3

Click Here to see a video demo of the
Seagate Rescue & Replace Service Plan

At a call center, Fulcrum will take the initial reports from customers in the name of Seagate, and will then pass on the jobs to the Seagate technicians after entitling the customer. Because of regulatory concerns, in six states (CA, ME, NY, TX, UT, WI) Fulcrum Analytics is the administrator of record, though the company has now registered itself as a service contract administrator in all 50 states. Once Fulcrum completed all the required state filings, compliance and regulatory work, it and Seagate began to approach potential channel partners.

Finding an Insurance Underwriter

"Seagate is in the business of designing, manufacturing and selling hard disk drives," Steele said. "And while we have a lot of familiarity with warranty costs and how that works, our core competency wasn't in that area. So we went to some experts."

Seagate is working with affiliates of AmTrust and Fulcrum to provide the services. In the Rescue Service Plan's terms and conditions, Seagate Technology LLC is named as the administrator, while Northcoast Warranty Services Inc. is named as the obligor. In the Rescue & Replace Service Plan, Seagate is named as the administrator, while AMT Warranty Corp. is the obligor and Wesco Insurance Company is the underwriter. Northcoast, AMT and Wesco are all units of AmTrust Financial Services.

Bruce Saulnier, the executive vice president of AmTrust's North America Special Risk Division, said what made it easy to do business with both Fulcrum and Seagate was the amount of research both parties had done on the risk.

"We have a very strong relationship with Fulcrum, and we feel very comfortable with their position in the market and the value that they bring to the clients they work with," Saulnier said. "With Seagate, being one of the premier manufacturers of hard drives, with a tremendous amount of experience in the servicing of these products, as well as having the data available on the overall performance of these products, and what types of failures they see, we knew we had the right partners to engage in an underwriting decision with them."

Fulcrum regularly performs loss cost analytics for its service contract clients and Seagate has the failure data on the drives as well as the track record in data recovery services. So the team is very deep already in terms of experience, he added.

"We think that while we may be a pioneer in this space, we have a tremendous amount of foundation and a lot of experience from the business partners that we've engaged," Saulnier said. "So, knowing that, maybe we're not so much the pioneers, but just very good risk calculators. We think that we have all the necessary information to make those solid decisions in order to move forward with the product."

Saulnier agrees that the need for data recovery service contracts is going to be strongest with people who have lost data in the past. "Data is everything," he said. "And it's becoming more and more important to clients, because people are using and saving data on these devices now more than ever. We need to be innovative and come up with solutions that meet client needs. We know this has a very high value proposition for customers. And we know we have very good business partners with a tremendous amount of data and recovery experience."

Saulnier said the research suggests that this is going to be a big hit. "We think it's going to have a very significant attach rate. We think there's a lot of need for this. People have been asking for a viable solution in this space for a long time. The market has been calling for good data recovery solutions and protection solutions for a long time. And I think we've finally brought one to the table that people are going to enjoy," he said.

Service Rollout Plans

Already, the partners have test-marketed the service to consumers who bought a Seagate external hard drive and had registered it with Seagate. And they've also tested various pricing schemes that would both cover costs and provide funds for a marketing budget. One measure of their confidence: customers whose data can't be recovered will get $100 in compensation -- more than they paid for the service to begin with.

For three years of coverage on a laptop, the price of Rescue & Replace will be around $79. For an external hard drive, the price for three years of coverage will be in the range of $39 to $49. If the problem can be fixed over a remote Internet connection, the customer keeps their laptop at home. But if a hardware recovery is needed, they'll have to send it in. The administrators will first replace the hard drive and quickly send the laptop back to the customer. Then they'll follow up with the shipment of an external hard drive containing all the recovered data. The customer gets to keep the external drive.

Right now, the service is available for devices that use hard drive technology, such as laptops, desktops, and external backup systems. Next month, a Seagate channel partner will add support for computer products based around flash memory and solid-state drives. Eventually, the service will support USB drives, digital audio players and digital cameras.

Service plans for tablets and mobile phones will take a bit longer to assemble, because of some technical issues with the data storage technology those units use. For instance, in many units the flash memory is soldered onto the circuit boards, which complicates the data recovery process. Trying to remove and replace the memory during a repair can in and of itself damage the data. However, the current trend in product design is to make the memory more modular and therefore more removable.

For consumer hard drives, Steele said the service is ready to roll out now. It's already available for purchase on the Seagate website, to end user customers whose hard drive is less than a year old. Availability through another channel partners is imminent, he said, with at least one more expected to make announcements within a month.

After this week's launch by Amazon.com, Swenson said, "we're getting ready to launch our first big box retailer in the next few weeks," Swenson said. It's a well-known U.S. retail name, though the company doesn't want its identity made public yet. And then later in November a Canadian partner is expected to launch, followed by the first European partner early next year. A partner in Asia/Pacific will follow by the middle of 2014.

After those service launches aimed at consumers, Steele said there are also plans to expand Rescue & Replace into small and medium-sized businesses, through support for multi-drive units and RAID (redundant array of independent disks) storage units.

GWSCA Survey Invitation

The Global Warranty and Service Contract Association (GWSCA) is conducting an online survey to learn what is important to members of the warranty and service contracts industry. The information collected will be used to formulate programs and proposed solutions to commonly experienced industry questions, problems, and fast emerging trends.

The survey is being conducted by Fulcrum Analytics on behalf of the GWSCA. To get started, click here or cut and paste this URL into your browser: surveygizmo.com/s3/1411787/92b03449fbf2

The survey will be open to everyone in the warranty and service contracts industry through Sunday, November 17th.

If you have any questions please email Terry Hawkins at: gterry.hawkins@gmail.com or contact Tara Piazza, SVP of Research at Fulcrum Analytics at 1-212-651-7012, or via email at tpiazza@fulcrumanalytics.com.

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