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Hard times for hard-drive makers

Despite industry consolidation and a push into new markets, a new report says that hard-drive makers are feeling the pinch of the PC slowdown.

The already unsteady hard-drive market will continue to face rocky times due in large part to the PC slowdown, according to a new report from Morgan Stanley.

"PC demand--the No. 1 driver of disk drive demand--is very soft, and this is likely to cause the industry some pain over the summer," analyst Gillian Munson said in the report.

The hard-drive business has been hyper-competitive for some time, as substantial increases in storage capacity each year and the trend toward lower-cost PCs have led to razor-thin profit margins.

Consolidation among the top hard-drive makers and a push into new markets had previously led some industry watchers to believe that companies such as Maxtor, Seagate Technology and Western Digital could get some relief this year.

This spring, Quantum sold its hard-drive business to rival Maxtor, which temporarily alleviated some excess inventory in the industry. At the same time, hard-drive makers have been expanding into new markets, such as consumer electronics.

However, Munson asserts that growth related to consumer electronics is a "longer-term story."

"On consumer-device drives, we suspect that both (average selling prices) and unit volumes will be low over the next few months. In...2002, we could see higher unit volumes emerging," Munson wrote.

Jim Porter, president of research firm Disk/Trends, added he isn't surprised that consumer electronics devices with hard drives have faced slow sales initially.

Citing TiVo and ReplayTV digital video recorders as an example, Porter said the two companies "only managed to ship a few hundred thousands units instead of the millions that many expected. But this is typical of the consumer electronics industry. Strong growth won't occur until manufacturers can get to lower price points and they work out the bugs in their services."

Meanwhile, market researcher IDC predicts that about 209 million hard drives will ship this year. Hard drives for desktop PCs will account for about 71 percent of the market and growth will be relatively flat compared with 2000, IDC said.

Maxtor holds the top spot in market share for desktop PC hard drives with 35.2 percent of the market, according to IDC. Seagate, No. 2, trails with 24.7 percent of the market.

IDC predicts that hard-drive shipments will reach 259 million next year.

Porter said he expects the launch of Microsoft's Windows XP operating system in late October to help boost PC shipments and, in turn, the hard-drive industry. He added that new game consoles with hard drives, such as Microsoft's upcoming Xbox, will help hard-drive makers too.