Analysts: Disk Drive Industry Ripe for Mergers

Overstocked inventories and cutthroat pricing are dragging down an industry that should be thriving-but consolidation could prove to be the quickest fix, they say at the Diskcon conference.

SANTA CLARA, Calif.—The disk-drive industry faces a dilemma: It should be thriving, but its not. But while analysts say the industry would be better off with fewer competitors, none seems ready to throw in the towel.

That hasnt stopped drive makers from pointing fingers at one another. In fact, analysts say thats part of the problem. Instead of adhering to some basic business principles and carving out small profits for all involved, the cutthroat behavior has dragged down the sector as a whole from a year ago, when the future looked rosy.

For those who feel that consolidation would be the saving grace of the hard-disk industry, Tuesday morning served as a parallel to the Super Bowl pregame show. Analysts and industry insiders handicapped possible business deals at the Diskcon show here, the industrys annual gathering of hard-disk-drive makers.

The most popular candidates include Samsung Electronics, the smallest player in commodity drives; Toshiba America Information Systems Inc. (TAIS), whose commitment to the drive industry some called questionable; Maxtor Corp., which has been late to enter the 2.5-inch drive market; and Fujitsu Ltd., whose market share in mobile and enterprise drives will be threatened by new entrants.

But others feel that theres room enough for the seven vendors that currently dominate the industry: Seagate, Western Digital, Maxtor, Hitachi, Samsung, Fujitsu and Toshiba. Those analysts said they think predatory pricing and poor inventory management will keep the drive industry from the status that industries such as PCs enjoy.

/zimages/2/28571.gifClick here to read about the battle between disk and tape for storage supremacy.

A year ago, the Diskcon show was an unusually happy conference: Continual price declines had flatten to single digits, the PC market was rebounding, and the promised CE market was just beginning to start sucking up hard drives into gaming consoles and PVRs. Seagate, meanwhile, announced its public offering.

Maxtor, Seagate and Western Digital raked in a combined $819 million in profits during the first three quarters in 2003, up 216 percent from a year earlier. The industry made more money than in the previous seven years combined, according to Rob Cihra, hardware analyst and managing director at Fulcrum Global Partners LLC, based in Ontario.

And then, the industry blew it. Massive overbuilding produced 8 million to 9 million more drives than could actually be sold, driving down pricing precipitously and causing vendors to start pointing fingers. From the fourth quarter of 2003 to the second quarter of 2004, the industry erased its former profits and then some.

"As products and technologies, hard disk drives have been a phenomenal success," Cihra said. "As stocks, theyve been a long-term disappointment. Some might even call them a bust."

As such, the industry has returned to the bad old days, even as unit demand continues to climb. Demand for the 2.5-inch drives used in notebooks is expected to climb by 25 percent this year, reported John Donovan, an analyst at San Jose, Calif.-based Trend/Focus, while the opportunity that consumer-electronic shipments represents will surpass 30 million units, an 85 percent growth rate. Drive shipments during 2004 should come in at an even 300 million units, roughly 40 million higher than a year ago, he said.

Thomas Weisel Partners LLC forecasts that 303.14 million drives will be sold this year, pulling in $23.8 billion in revenue—increases of 15.9 percent and 4.8 percent, respectively, when compared with a year earlier.

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