September 11, 2003
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Despite a sluggish PC market, the hard-disk drive (HDD) industry has managed to turn profits and is poised to continue enjoying good times, company leaders and analysts said at Diskcon USA this week.
By Ed Frauenheim
Reasons for the sunny outlook include a shrinking number of HDD makers as well as growing demand for HDD in relatively new consumer applications such as personal video recorders, industry veterans said at the Diskcon USA 2003 conference, held in San Jose, California.
"We've got a real opportunity to ship a lot more product, and maybe stabilize the price," said John Donovan, vice president of research firm TrendFocus.
The HDD business has been a turbulent one marked by plunging prices and stiff competition. Average sales prices for desktop HDDs fell from $401 in 1992 to $77 in 2002, according to a J.P. Morgan presentation at the conference on Tuesday.
The price drop relates to an "areal density race," said Mark Miller, analyst with investment firm Hoefer and Arnett. Areal density refers to the amount of data that can be packed onto a square inch of disk. Data density doubled for several years beginning in the late 1990s. HDD makers could therefore use fewer disks and heads -- the devices that write and read data -- in HDDs, and cut costs. But lower component costs can cause a price war on the finished product.
Miller also said the decline in the number of disks and heads per HDD led to more manufacturing capacity than was needed for components -- generally a bad sign for manufacturers.
With extra capacity and falling prices, HDD companies struggled. A wave of consolidation has since shrunk the field to a handful of HDD makers. Quantum sold its HDD business to Maxtor, and Hitachi bought IBM's HDD division. More recently, Western Digital acquired most of head-maker Read-Rite's assets.
HDD companies that survived have learned to do a better job managing their inventory and their cash, Miller said. Publicly traded HDD makers Maxtor, Seagate Technology and Western Digital all posted profits in their most recent quarters.
There's less competition in the HDD business, but a new challenge, said Bill Watkins, president of Seagate Technology. Watkins said HDD companies used to be able to pit component suppliers against each other to squeeze out a lower price. With fewer suppliers surviving, HDD makers now need to consider forging strategic alliances with suppliers, according to Watkins. "We're going to be in supply chain wars," he said.
Still, the outlook for HDD demand is rosy. Desktop personal computers make up the bulk of the market for HDDs, and the number of desktop PCs shipped should rise 4.2% this year, to 105.1M units, and increase by 7.6% next year, to 113.1M units, according to TrendFocus. The number of notebook computers, meanwhile, is expected to jump 20.2% this year to 39.8M, the research company said.
But the fastest-growing arena for HDD demand is consumer electronics devices. TrendFocus estimates that the number of HDDs shipped in consumer electronics will soar from about 17M this year to roughly 55M in 2006. Personal video recorders (also known as digital video recorders), which allow users to record television and temporarily pause live programming, represent a significant HDD market, along with game consoles and digital audio players, according to TrendFocus.
Harry Blount, a Lehman Brothers analyst, said the HDD industry is in a good position to benefit from data archiving regulations, such as the Health Insurance Portability and Accountability Act. What's more, aging technology equipment at corporations indicates an upgrade is coming soon that will mean additional business for HDD makers, Blount said.
Blount also said the fact that areal density growth has slowed creates an opportunity for pricing to improve.
Investors have begun to believe the HDD industry has a positive outlook. Leading HDD companies outperformed the Nasdaq composite index in 2001 and 2002 and are doing so again this year, said Bill Lewis, a J.P. Morgan analyst. One positive sign for the industry, Lewis said, is that "there still is no competing technology for HDDs."
Miller of Hoefer and Arnett saw a bright future. "We think the industry as a whole is going to have a very good year in 2004," he said.
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