Good news for laptop makers and consumers heading into the second half of this year: Competition in the hard drive market continues to keep prices low. Bad news for the hard drive makers (and their shareholders): That same competition continues to keep margins low as well.
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In case you needed a reminder of how this dynamic plays out, market researcher iSuppli put out a report that underscores the tough times this year in hard drives. (For the raw data, see the chart below.) The report focuses on the first three months of 2007, but my conversations in the industry indicate that the trends could continue throughout the year: While Seagate (STX) and Western Digital (WDC) continue to lead the pack with historically strong hard drive unit shipments and stable market share, profits are taking a beating.
"Prices came under pressure in the first quarter due to intense competition and changing demand patterns. The six major hard disk drive suppliers – Seagate Technology, Western Digital (TOSBF), Hitachi Global Storage Technologies (HIT), Samsung Electronics, Fujitsu and Toshiba – engaged in vigorous competition in the market for mobile-PC storage. All of these companies offered similar products as they attempted to position themselves in the fast-growing notebook PC hard disk drive market," said Krishna Chander, senior analyst, storage systems, for iSuppli.
I expect the summer to see some interesting moves for the storage industry. I'm hearing buzz that hard disk leader Seagate is looking to make a significant partnership or acquisition related to flash storage, which could have an impact on players like SanDisk (SNDK) and Micron Technology (MU). Hard disk players are also talking more aggressively about bringing hybrid drives to market – a type of storage that combines flash and a hard disc to allow faster boot times in laptops. And then there's always the effect of Apple's (AAPL) iPhone, which comes with either 4 or 8 gigabytes of built-in flash storage. It's possible that, to compete with the iPhone, carriers and handset manufacturers will begin showing off more high-end phones with built-in storage.
That kind of new demand sounds nice, but from this vantage it's not clear that it would be enough to ease the sharp pain the storage industry is feeling in its margins lately. Unless more component makers can add value to their storage products by tapping into the consumer market and making storage devices user friendly, they'll increasingly get commoditized – and profits will get squeezed.
Hard Disk Drive Supplier Ranking, First Quarter 2007 (by unit shipments in thousands)