Reasons for the sunny outlook include a shrinking number of drive makers as well as growing demand for disk drives in relatively new consumer applications such as personal video recorders, industry veterans said at the Diskcon USA 2003 conference, held in San Jose, Calif.
"We've got a real opportunity to ship a lot more product, and maybe stabilize the price," said John Donovan, vice president of research firm TrendFocus.
The disk drive business has beenmarked by plunging prices and stiff competition. Average sales prices for desktop drives fell from $401 in 1992 to $77 in 2002, according to a J.P. Morgan presentation at the conference on Tuesday.
The price drop relates to an "areal density race," said Mark Miller, analyst with investment firm Hoefer and Arnett. Areal density refers to the amount of data that can be packed onto a square inch of disk. Data density beginning in the late 1990s. Drive makers could therefore use fewer disks and heads?-the devices that write and read data?-in drives, and cut costs. But lower component costs can cause a price war on the finished product.
Miller also said the decline in the number of disks and heads per drive led to more manufacturing capacity than was needed for components--generally a bad sign for manufacturers.
With extra capacity and falling prices, disk-drive companies struggled. A wave of consolidation has since shrunk the field to a handful of drive makers., and . More recently, most of head-maker Read-Rite's assets.
Drive companies that survived have learned to do a better job managing their inventory and their cash, Miller said. Publicly traded drive makers Maxtor, Seagate Technology and Western Digital all posted profits in their most recent quarters.
There's less competition in the drive business, but a new challenge, said Bill Watkins, president of Seagate Technology. Watkins said drive companies used to be able to pit component suppliers against each other to squeeze out a lower price. With fewer suppliers surviving, drive makers now need to consider forging strategic alliances with suppliers, according to Watkins. "We're going to be in supply chain wars," he said.
Still, the outlook for hard-drive demand is rosy. Desktop personal computers make up the bulk of the market for hard drives, and the number of desktop PCs shipped should rise 4.2 percent this year, to 105.1 million units, and increase by 7.6 percent next year, to 113.1 million units, according to TrendFocus. The number of notebook computers, meanwhile, is expected to jump 20.2 percent this year to 39.8 million, the research company said.
But the fastest-growing arena for hard-drive demand is consumer electronics devices. TrendFocus estimates that the number of disk drives shipped in consumer electronics will soar from about 17 million this year to roughly 55 million in 2006. Personal video recorders (also known as digital video recorders), which allow users to record television and temporarily pause live programming, represent a significant hard-drive market, along with game consoles and digital audio players, according to TrendFocus.
Harry Blount, a Lehman Brothers analyst, said the drive industry is in a good position to benefit from data archiving regulations, such as the Health Insurance Portability and Accountability Act. What's more, aging technology equipment at corporations indicates an upgrade is coming soon that will mean additional business for drive makers, Blount said.
Blount also said the fact thatcreates an opportunity for pricing to improve.
Investors have begun to believe the hard-drive industry has a positive outlook. Leading disk-drive companies outperformed the Nasdaq composite index in 2001 and 2002 and are doing so again this year, said Bill Lewis, a J.P. Morgan analyst. One positive sign for the industry, Lewis said, is that "there still is no competing technology for disk drives."
Miller of Hoefer and Arnett saw a bright future. "We think the industry as a whole is going to have a very good year in 2004," he said.