Kevin Magenis hung up the phone, looked out his office window into his company's development lab, and thought about what he'd just heard. The callers were from Apple Computer, and they wanted to talk business. Magenis's start-up, Cornice, had developed tiny hard drives with a one-inch platter for storing music or digital files. And it made them for a third of the price of rivals like IBM.

That's why the Apple execs called that afternoon in late 2002. Would Cornice be interested, they wanted to know, in supplying the drives for the iPod Mini, the new, smaller version of Apple's MP3 player? Digital music was still new, and no single player had emerged to dominate. But Apple was clearly the most innovative player on the scene and hooking up with the company would definitely be a coup for Cornice.

Magenis was tempted. The problem was that Cornice was already working with two other makers of MP3 players, Thomson/RCA and Rio, and the Apple execs were insisting on an exclusive deal. Honoring that request would mean betraying two key clients.

Cornice, which is based in Longmont, Colo., had been doing business with those two companies almost from the moment it was founded in 2000. At the time, Thomson and Rio were the leading manufacturers of MP3 players, both of them outselling Apple. Both companies had new products in the prototype stage designed around Cornice's hard drives, and Cornice expected the two clients to account for as much as 40% of its revenue. Cornice also was negotiating to supply drives, for nonmusic uses, to Dell, Hewlett-Packard, and Sony.

Indeed, digital music was just a tiny part of Cornice's business plan. The way Magenis and his team saw it, the real opportunity was in the much larger market for mobile phones--which they believed eventually would function as hand-held computers, storing and sending all manner of data.

Still, Magenis knew he'd be a fool not to at least try to forge a relationship with Apple. He contacted some of his board members and told them about the offer. In addition to an exclusive arrangement, Apple also wanted Cornice to make some changes to its technology; specifically, it wanted Cornice to design a new, double-sided drive capable of storing more information. That seemed reasonable. Nonetheless, the board members concluded it would be bad business to abandon Thomson and Rio. Instead, they decided to propose a compromise: Cornice would keep its two current customers, but the iPod would be the only other MP3-device manufacturer it would make drives for. (Apple declined to comment for this story.)

Over the next few months, Magenis made several trips to Apple's headquarters in Cupertino, Calif., and Apple's engineers came out to Cornice's Colorado offices. Magenis could sense how excited everyone at Apple seemed to be about the Mini; the iPod team was in constant contact with CEO Steve Jobs, and Magenis couldn't help but be thrilled when he got to meet the man in passing. In the back of his mind, Magenis fretted that Apple would fix the problems in the digital music business, and Cornice might miss out on being inside the market leader. "I could see it was going to be a hell of an effort on their part," he says.

But Magenis was also juggling nearly 40 other deals. Apple could consume only so much of his time. By the end of the year, Apple was getting impatient. The executives were friendly but insistent. Apple wanted to work with Cornice, but it absolutely refused to budge on the issue of exclusivity.

The Decision

After hearing the news, Magenis sent an e-mail to his board members. All of them had the same response: It was time to move on. Magenis was disappointed but convinced it was the right decision. Cornice would forget about the iPod and forge ahead with its original business plan.

That meant pushing hard into the cell phone market. The first move was to perfect its technology. Hard drives, after all, were invented for computers, which are far less likely to be dropped than cell phones, especially while in use. Cornice's engineers have been hard at work shockproofing the company's products. One innovation, CrashGuard, actually alerts the hard drive that the phone has been dropped, allowing the drive to brace itself for impact. Cornice's drives can now fall 1.5 meters without disturbance--a market best, according to industry analysts.

In July, Magenis became Cornice's chairman, handing CEO duties to Camillo Martino. Both men believe that Cornice's engineering will give the company an edge with cell phone makers, which obviously do not want consumers calling to complain that their phone stopped working because the hard drive crashed. "We have a two-year advantage on our competitors," says Martino. Indeed, the company is working with Samsung, one of the world's largest cell phone makers, to develop hard drives for its upcoming line of high-end smart phones.

The iPod Mini, of course, proved every bit as successful as Magenis sensed it would be. The Mini debuted in January 2004, with hard drives from Hitachi. Seagate also became a supplier and both companies lowered prices and expanded storage capacity--essentially erasing Cornice's early lead. Still, both Magenis and Martino say they have no regrets about Cornice's decision. "The original vision was to create the ultimate storage solution for cell phones," says Martino. "The iPod presented a turning point for the company." Just look at the numbers, they say. According to market researcher iSuppli, the market for all MP3 players will hit 132 million units in 2009. The number of cell phones sold is expected to hit one billion. While only 10% or so are likely to have hard drives, it's still an enormous market. Martino predicts that in three years hard drives will ship in more than 100 million cell phones a year.

No cell phones with hard drives are currently being sold in the U.S. That should change late this year, when Samsung introduces a smart phone with a version of Microsoft's Windows operating system and a camera that can shoot up to four hours of high-quality video--thanks to a Cornice hard drive.

While Cornice waits for the cell phone market to materialize, the company continues to sell to manufacturers of MP3 players, digital video cameras, global-positioning systems, and personal storage units. It's eyeing the market for hand-held video game players. And the company recently started talking to Apple again and hopes to be in a position to collaborate on some future version of the iPod. "We still covet an Apple opportunity," Magenis says.

The Experts Weigh In

A Smart Move

If you look at the numbers, it's probably the smarter move to pick cell phones over the iPod. It's pretty clear that as these cell phones become more personalized media devices, the demand for localized storage is probably going to increase. Consumers will want to have more stuff on their phones. Cornice is in a very strong leadership position to be a provider to cell phone makers, and that's the larger potential market.

Tim Bajarin
Principal analyst
Creative Strategies
Campbell, Calif.

Numbers Don't Lie

I would've made the same call. No one knew Apple could knock this out of the park. Focusing on cell phones is a good choice, given where the market is going. Eventually, every device we carry will have a hard drive in it. If you look realistically at the numbers, iPods sell maybe 25 million a year. But in three years there will be 100 million cell phones with hard drives in them.

Sean Ryan
Donnerwood Media
San Francisco

I'm Not Convinced

Going with cell phones wasn't a bad move, since that market will always be larger than the MP3 player market. The question is, how many consumers will want a cell phone with 10 gigabytes of storage, with music, photos, video, GPS? There will be cell phones with hard drives. But will there be hundreds of millions of them? I'm not convinced of that at this point.

David Reinsel
Director of storage
research, IDC
Framingham, Mass.

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