Hard Disk Makers Seek Profits, Price Stability

Following earnings reports from Seagate, Maxtor and Western Digital, analysts said the channel picture is uncertain. Will the prices for hard disks rise or fall? That's the question now hanging over the storage market.

Has stability returned to the disk-drive market? For the most part, according to analysts, but they warn that companies like Seagate and other storage manufacturers still show tendencies to stuff the reseller channel when times get tight.

Seagate Technology LLC , Maxtor Corp. and Western Digital Corp. all reported earnings this week, and all three noted that desktop disk-drive pricing tightened during the fourth quarter, as OEMs tried to negotiate last-minute deals to lower the prices of their own PCs.

But both Maxtors and Western Digitals revenues increased significantly from the same period a year ago, while Seagates revenue nudged upward by less than 2 percent. That, combined with Seagates problems with manufacturing, prompted analysts to postulate that perhaps any problems with the industry were largely confined to Seagate alone.

However, both analysts and corporate executives warned that the hard drive industry isnt out of the woods just yet. The prices of disk drives, especially those that go into desktop PCs, are always in danger of swinging into wild oscillations of supply and demand that are amplified during the holiday selling season. For the most part, however, the industry has learned its lesson.

"Theres no question that even with the industry so fiercely competitive that … pricing is not nearly as chaotic as in June 1999, when average desktop drive prices dropped from $88 to $69 in two weeks and market share changed not one whit," said John Monroe, a disk-drive analyst with Gartner Inc. in San Jose, Calif. "Demand is essentially healthy," he said, and the industry is working through normal problems, as well as the usual shifts in market share.

"What happened was that price-cutting companies like Quantum [Corp.s] hard-disk business were removed [through a sale to Maxtor]," said Jim Porter, founder of DISK/TREND Inc. in Mountain View, Calif. "That was removed when Maxtor took ownership, and their management believes in getting their margins up."

The real question is how Seagate will react. Some analysts believe Seagate, which owns about a third of the disk-drive market, began "stuffing the channel" with drives to push through sales during the final weeks of the quarter.

Seagate executives said they did not expect the excess channel inventory and that the company had shored up relations with OEMs and planned to do more business there.

"I think you heard Seagate complaining about the desktop drive business," Porter said. "Those other guys were not complaining; they picked up business."

For its part, Maxtor will continue to "act rationally in the channel," according to Paul Tufano, Maxtors chief executive. "We know what actions are required to grow gross margin, and our goal is to execute on these initiatives throughout the year."

Next Page: Drive vendors seek a tactical edge. Could this mean lower prices?