Storage Business Looking Up

By Mark Hachman  |  Posted 2003-09-15

Storage Business Looking Up

SAN JOSE, Calif.—The disk drive industry is happy. Cautious, but happy.

After weathering years of price declines, cutthroat competition and questions about whether customers actually needed all the storage manufacturers had to offer, vendors can afford to breathe a small sigh of relief.

Drive shipments are expected to grow from 225.4 million units this year to 239.7 million units in 2004, according to John Donovan, vice president at market researcher Trend/Focus Inc. However, both analysts and manufacturers alike expect a sharp 19.4 percent increase in 2.5-inch drives from this year to the next, as the IT world shifts more of its workforce to notebook computers.

So far, the run-up toward the holiday selling season has not brought with it the type of inventory fluctuation that has characterized past years. Drive makers and analysts who presented at the DiskCON trade show and various storage conferences here this past week say theyre seeing a steady demand for their products, which has firmed prices. In return, the drive industry has been able to supply customers with a steady supply of product, eliminating any supply potholes that could halt shipments of notebooks or desktop PCs.

"If you look at the seasonality, everythings tracking where it should be," said Paul Tufano, president and chief executive of Maxtor Corp, Milpitas, Calif., speaking at the Lehman Bros. "Half Day of Hard Drives" presentation last week.

"The outlook is excellent," added Bill Watkins, president and chief operating officer of Seagate Technology Inc. of Scotts Valley, Calif., speaking at the Prudential Equity Storage Tour last week. "Im very hopeful for the future."

Tufano said his company is experiencing 13 percent volume growth increases compared with 2002 versus about a 10 percent increase in PC sales, indicative of strong demand.

The real boost, however, will be in consumer-electronics applications. The industry has already received a boost from the personal video-recorder (PVR) industry, with approximately 2 million units shipping in 2002, according to Trend/Focus. Those sales still indicate an immature market, Donovan said, and Trend/Focus anticipates the PVR market growing to approximately 8 million units this year and 25 million units in 2006.

Next page: Storage prices and capacities are stabilizing.

Storage Pricing, Capacity Stabilize

IT managers and consumers alike will be able to choose from two tiers of products this holiday season: models that comprise 40GB and 80GB per platter, according to analyst Dave Reinsel of IDC. High-end models at Dell and other suppliers will probably feature the 80GB drives, he said. However, its likely that the industry wont shift to the 80GB models until next year, when 80GB pricing drops enough to force 40GB-per-platter drives out of the market, Maxtors Tufano said.

"While more and more people will ramp on 80GB, the impact on pricing will not be that dramatic," Tufano said. Maxtor raised prices on most of its products in July in anticipation of the holiday uptick and to balance out demand, he said.

Typically, PC OEMs begin purchasing components in late August, building out their inventories in anticipation of the holiday selling season, which begins in late November. So far, drive supply has remained "tight, but stable," Reinsel said.

"It would seem clear that the commercial business is beginning to pick up in corporate Western Europe, and corporate America is also beginning to pick up," said Matt Massengill, chairman and chief executive of Western Digital Corp., of Irvine, Calif., in a presentation at the Prudential Equity Group Storage Tour.

"Theres no question well always see a seasonal impact, but its clear to me were seeing some pretty good end-user demand."

Average selling prices of the drives should flatten out, smoothing out a steady decline in ASPs over the next four to seven quarters, Massengill said. At the same time, the drive industry has resisted dumping drives into the "gray market", the industrys traditional addiction. Massengill said that a competitor had walked away from doing business with Dell Computer Corp., after Dell had reportedly pressured the supplier to lower prices to unsatisfactory levels.

Massengill said that he also did not anticipate any shortages of the heads and media components needed to assemble the companys own disk drives, thanks to the fact that the company bought a key heads supplier, Read-Rite Corp., in July. WD is on track to produce 30 million heads internally by June 2004, the same amount it previously purchased from outside suppliers from Read-Rite. The internal production will not affect the prices of WDs drives but will boost its gross margins by a few points, he said.

Next page: Notebook storage race heats up.

The Notebook Race

Meanwhile, drive manufacturers are also beginning to re-examine the notebook market, which uses 2.5-inch disk drives, dominated by Hitachi Global Storage and Toshiba.

In June, Seagate announced its intention to reenter the notebook market with its first "Momentus" 2.5-inch drives, and Western Digital said in July it had firm plans to design and ship mobile drives. Samsung and Maxtor are being more secretive with their mobile drive plans, but IDCs Reinsel expects both companies to be the next entrants to the market.

Seagates Watkins said the company has learned from its experience in the enterprise disk space, where it has an "overpowering" share of the market, according to Disk/Trends Thompson. "Lots of mistakes are made in the enterprise where [vendors] come in, cheapen themselves, lose quality and then lose the business," Watkins said. "When you go into the notebook, you can do the same thing. Well demonstrate quality, well demonstrate reliability, and then well see" about market share, he said.

Maxtors Tufano said the company has already begun developing key technologies in preparation for the undisclosed launch date: the ability to load/unload heads to resist operating shock, plus low-power electronics. WDs Massengill was more specific, saying that the company will require 12 to 18 months to develop and ship a product after the companys announcement in July.

Although OEMs have honed their supply chain models, old habits die hard. Trend/Focus Donovan warned that some customers may be hedging their bets, ordering drives from more than one supplier and then preparing to cancel them. "Is the 2.5-inch demand real, or is it double-booking?" he asked.

Next page: How consumer electronics will boost the storage industry.

The Future

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Perhaps the weakest segment of the industry will be in the corporate desktop space, as IT managers have realized that local users are only storing relatively small, Office-type documents on their desktop PCs. Video files and larger collaborative designs generally are shared via a server.

That means that the consumer market is driving desktop storage, which was unheard of two years ago, according to Stephen diFranco, vice president of corporate marketing at Maxtor. Eighty-GA-per-platter models will ramp through the end of 2003, with 120GB- and 160GB-per-platter models already in development for 2004, according to Trend/Focus Donovan.

With the rise of Napster, consumers began filling their hard drives with music. Now, graphics cards such as ATIs All-In-Wonder allow PC users to add video as well, recording shows like dedicated boxes from TiVO and Replay TV do as well. By 2007, consumer electronics will make up 18 percent of all hard drive dollar sales, according to IDC, just a percentage point less than enterprise storage.

"You might wonder why I chose to focus on consumer examples," said Jun Naruse, president and chief executive of Hitachi Global Storage Technologies, in a DiskCON keynote speech. "After all, our industry is most often associated with the IT world.

"I believe, though, that the consumer world represents a new and exciting opportunity, one with the potential to change our entire industry landscape," Naruse added. "Our own projections suggest that growth in consumer electronics will exceed traditional IT. It is an easy idea to believe. Todays consumer-electronics superstores are filled with devices to satisfy customer appetites."

Today, a typical personal video recorder or set-top box will contain an 80GB hard drive, enough to store 50 hours of content using three streams of data: one to record or play back video, another to simultaneously record a second channel of video, and a third to provide content data. In the future, set-top box designers and drive markers will need to support 320GB of video, including support for 17MB per second of HDTV content and seven simultaneous streams of data, according to Ken Morse, vice president of client architecture for PowerTV Inc., a division of set-top maker Scientific-Atlanta.

Game consoles and audio players are also shifting to hard drives. The Microsoft Xbox represents an installed base of 12 million hard drives, and Sony has announced plans to develop an enhanced PlayStation with an internal hard drive.

But while consumer demand for storage is increasing, drive makers are finding additional capacity increases slow going.

In the early 1990s, the areal density of a typical disk drive grew on the order of 60 percent a year, increasing to 100 percent in the latter part of the decade. Now, the industry is recognizing that the industry will have to develop more research-intensive methods to improve capacity, a trend with technological as well as business applications.

"The difference used to be so steep that if you were even a little bit higher on the [areal-density] curve the difference would be so high that youd kill him," said John Best, chief technologist for HGST. "Now, were slowing down. Shrinks dont work any more."

Hitachi and others developed "pixie dust" as a means of improving the areal density, and the next revolution will be in the use of perpendicular recording, where the magnetic bits are aligned vertically to squeeze more density out of the disk platter. Perpendicular recording will start to become commercialized in 2005, Best said.

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