Excellent post, Brian. Thanks.
W.T. Thompson: Some useful facts from the proxy materials that Applied Magnetics submitted during the course of its attempted takeover of RDRT earlier this year. Start with this one...
sec.gov
1) The 1997 PC market is expected to be around 87.1 million units. The 1997 disk drive market is expected to be around 131.4 million units ($30-34 billion). The 1997 magnetic head market is expected to be around 830 million units (average head per disk drive = 6.3).
2) RDRT had about 30-35% of the 1996 global head market while APM had about 10%. That may change in 1997 with the Japanese independent manufacturers gaining market share.
3) Until the first quarter of this year, RDRT and APM were positioning themselves to be the remaining suppliers of inductive heads. RDRT, however, abandoned its 1.7 and 2.1 GB/platter TFI head program (using planar technology they licensed from Censtor for about $10 million) around the second half of February 1997. This means that RDRT, whose customers are QNTM, WDC, Micropolis, Maxtor and Samsung, is going to end its TFI program at 1.3 GB/platter.
APM, on the other hand, has been shipping its 1.3 GB/platter TFI heads and is ramping up production of its 1.7 GB/platter TFI head. They have also beem sampling its 2.1 GB/platter TFI head and their road map calls for a 2.8 GB/platter TFI head. It is not all clear that APM can indeed extend the TFI head beyond 1.7 GB/platter. The reported yield problems with the 1.7 GB/platter TFI head may be worse than expected and may be a sign that the rest of the industry was right to abandon the TFI head at 1.3 GB/platter, BUT if APM can extend the TFI head to 1.7, 2.1 and 2.8 GB/platter AND if they can maintain the price advantage of TFI vs MR heads (48% to 22% edge est. from 1997-1999), then they stand to reap an enormous bonanza because they will be the only ones supplying TFI heads while they transition more carefully to their 2.1/2.8/3.4/4.3 GB/platter MR heads
3) Average Sales Price (TFI vs MR heads)
1995....$ 8.96 vs $ 18.20 (103%)
1996....$ 7.95 vs $ 12.97 ( 63%)
1997E...$ 7.04 vs $ 10.42 ( 48%)
1998E...$ 6.71 vs $ 8.83 ( 32%)
1999E...$ 6.57 vs $ 8.00 ( 22%)
Source: Trend-Focus
Note also that Seagate has predicted that they can achieve practical cost parity later this year or early next year at the most. Understand, however, that SEG had been working on MR for about 10 years before it ramped up production last year. The last quarterly conference call indicated that SEG was at 38% MR at the end of the March quarter and expected to go 100% by the end of the year. Even then that would still be only 80% of its internal requirements.
4) Yields, Yields and Yields. Every disk drive maker wants to go to MR right away. The truth is that this year not everybody will get all the MR heads they want. Everybody is talking about their plan A MR program and downplaying their plan B TFI program. Does anyone here seriously believe that RDRT, the number 1 independent head supplier in the world, can manufacture its 1.6 and 2.1 GB/platter MR heads without the yield problems that IBM, Seagate and Quantum had to absorb?
Understand what RDRT, the leading independent head maker, is saying. RDRT is now saying that they can ramp up production from the current 7+ million heads per quarter to its maximum capacity(including expansion) of north of 30 million heads per quarter without the same problems that caused them to delay the launch of their last three TFI products notwithstanding the fact that MR head production is considerably more complicated.
What happens if they stumble into the same yield problems that plagued IBM, Seagate and Quantum? I think it was telling that in the last RDRT press release they indicated that they were going to ask their customers to provide them with 3 gross margin points over and above the 24% gross margins that they wanted to maintain for their MR head program. I think it was also interesting that Maxtor, which has long announced that they want to vertically integrate their operations, agreed to purchase the complete HGA assembly instead of just the heads in order to secure their position in the supply line ahead of Quantum and WDC (read: higher margins for RDRT, higher costs for Maxtor). There is a good chance that the next few months will either see RDRT absorbing the yield hits from their MR program or they are going to be asking their customers again for some more gross margin points to make up for the poor yields.
Below is a link to a Seagate article in the Jan/Feb 1997 issue of Insight magazine of IDEMA that compares the issues involved in the 3 stages of MR vs TFI head production. Note the pernicuous effect of ESD (or electrostatic discharge or static) in all three stages as well as the need for more sophisticated testing procedures at various stages, both of which pile up incremental costs that translate to the higher cost of MR heads vs TFI heads.
idema.org
5) If APM succeeds in extending TFI to 2.8 GB/platter then KM's 30-40% provides the following benefits at a cost of under $1.00 per platter:
1.3 GB/platter = 1.7 to 1.8 GB/platter
1.7 GB/platter = 2.2 to 2.4 GB/platter
2.1 GB/platter = 2.7 to 2.9 GB/platter*
2.8 GB/platter = 3.6 to 3.9 GB/platter*
* questionable ?
Now, the MR heads that are probably going to be shipping in volume later this year will most likely be 1.3, 1.6, and 2.1 GB/platter with IBM probably the only one shipping 2.5+ GB/platter heads all of which will probably be absorbed by its new line of premium priced Thinkpad notebooks and some of its premium priced server products.
Even if you set aside APM's 2.1 GB/platter as too technologically speculative, you can clearly see how KM allows a 1.7 TFI head to match or even exceed the performance of a 2.1 GB/platter MR head.
In ending, let me point out a trend that is probably going to be the most powerful trend in the PC business for the next few years: the tremendous growth in the sub-$1,000 PC segment. This is a trend that is impacting even Intel's plans and is already evident in the retail
channels.
In terms of unit shipments, sub-$1000 PCs accounted for about 41% in January, 52% in February, and 67% in March with a corresponding drop in the average retail PC price dropping from $1645 in January, $1524 in February, and $1400 in March. (source: Carl Johnson of Infrastructure at infras.com )
Bottomline: The Maxtor news notwithstanding, there is still a chance for some KM earnings this year. Any KM+TFI revenue would be welcome of course, but the way things stand right now, KM+MR will probably be the KM program that will provide a substantial portion of the cash flow we need so Ampex can develop its digital video patents. We should have a clearer picture of where we stand near the end of summer. Just remember that we are standing on technology grounds that are constantly shifting.
Gus
P.S. Thanks, William. Unless they did the new web site design in-house, that new web site probably set them back $20-50,000. Good site.
There is a press release describing how the Fox-owned TV station in Houston is adopting the Tektronix/Ampex model of the digital tapeless studio by purchasing a DST 812 to store over 550 hours of commercials and programs. First it was the Fox movie studio then it was the Fox News Center. Now, one of the 10 or 12 Fox-owned TV stations. Anyone see the pattern here? If Ampex and Tektronix play their cards right they might just have a shot at supplying the entire News Corporation empire, including the satellite business. This brings up an interesting and obscure part of Rupert Murdoch's operations:
Murdoch to collect all the key digital video technology pieces
techweb.cmp.com |
