Hard times for drive makers may be easing

Hard disk drives have fallen dramatically in price over the last few years, leading to an industrywide phenomenon of robust sales but down revenues--but that trend may be changing.

3 min read
As with almost all computer components, hard disk drives have fallen dramatically in price over the last few years, leading to an industrywide phenomenon of robust sales but lackluster revenues for the companies that make the drives.

But that trend may be changing, according to a new study.

Unlike some other markets, the hard drive Net, e-commerce fueling chip surge industry is poised for a rebound of sorts, according to new research released today from Disktrend. Both revenues and shipments of hard drives will grow over the next several years, the report found, although admittedly not at the same rate. A hard drive is the most commonly used technology for storing data on a computer.

The news follows a related report from the Semiconductor Industry Association, which found that the Internet and e-commerce are driving a resurgence in chip sales. (See related story.)

By the end of 1999, hard drive manufacturers, which have been buffeted by the trend, will again prioritize profit over market share, Disktrend predicts. In other words, hard-disk prices will not continue to drop quite as fast, while sales keep growing, the report predicts. Revenues in 1999 will increase to 7.7 percent, on a 16.1 percent increase in unit shipments, Disktrend says.

Hard drive prices will indeed continue to drop, just not as fast, according to the study. Prices per megabyte of storage have declined sharply over the last several years. In 1988, each megabyte of storage cost $11.54, compared to 4.3 cents in 1998 and 2.3 cents in 1999. By 2002, the average price per megabyte is expected to be .3 cents.

In 1998, revenues from hard drive shipments were down 5.2 percent, despite an increase of 11.1 percent in overall shipments. These numbers are reflected in the shaky financial health of some of the companies that manufacture hard drives.

Hard drive maker Quantum, for example, announced last week that its earnings would be half of what analysts were expecting because of the diminished revenues associated with cheap, but popular, hard drives. Seagate, another hard drive manufacturer, recently announced its $90 hard drives were outselling all of its other products by a margin of two to one. These drives are priced about $30 cheaper than drives from Seagate's competitors. Seagate has outperformed analysts' expectations in the last several quarters.

"Even though unit shipments are increasing, prices are declining so fast its difficult to show strong revenue growth," said Jean Orr, senior technology analyst at Nutmeg Securities.

These price declines are driving sales of increasingly larger-capacity drives. Last year, the majority of drives sold held between 3-to-5 gigabytes, or GB. In 1999, sales will shift to 5-to-10 GB drives, and by 2002, Disktrend predicts that whopping 40-to-80 GB drives will be the norm.

Profitability depends on how much cost manufacturers can take out of the drives. In the current quarter, all of the desktop drive makers will have a hard time showing a profit, because many will struggle to cut costs enough to keep pace with the 15-percent price decline, Orr said. Seagate is the main culprit, having offered a drive for low-cost computers that is priced significantly less than the competitive offerings.

IBM is making money in disk drives by staying away from the low-cost drive fray. The company has had its greatest success in selling drives to notebook PC makers and in selling high-performance drives for use in servers, according to Orr.

In addition, IBM has succeeded because its drives are shipped both in its own computers as well as PCs from other manufacturers, Disktrend found. IBM had 27 percent of the market last year, followed by Seagate at 19.8 percent, and Quantum, with 12.4 percent.

News.com's Jim Davis contributed to this report.