another great post Jon.
Excerpts from the Motley Fool "Investment Opinon" and my comments follow:
Disk drive investors who thought they might catch a break today were disappointed. A profit warning from Read-Rite (Nasdaq: RDRT), an all-out mashing of Read-Rite competitor Applied Magnetics (NYSE: APM) in Barron's, a product transition at IBM (NYSE: IBM), and a whole mess of downgrades from analysts on Western Digital (NYSE: WDC) and Seagate (NYSE: SEG) gave investors an overall down day for the entire
cluster of drive and drive-component makers. Investors struggled to digest the sudden overflow of information, rooting through all of the contradictory information spewing out of the business media.
The sudden, unexpected fall in drive prices has forced Western Digital to transition faster than expected to magnetoresistive (MR) heads from thin-film inductive heads. This means Western Digital's main supplier of drive heads, Read-Rite, has to do the same. Although in hindsight many are accusing both companies of being behind the technology curve, it is really this sudden price drop that upset the apple cart. If a PC manufacturer could get the same
or better price performance out of a thin-film inductive head because of higher yields and precision production, there was no real advantage to one over the other. With prices rapidly falling, thin-film inductive has lost any cost-efficiency almost overnight.
Unfortunately for Western Digital, Quantum (Nasdaq: QNTM) has already bought a good deal of the existing worldwide capacity for MR heads from TDK and Yamaha. With Read-Rite having difficulties in the transition and Applied Magnetics even farther behind, Western Digital's reliance on outside suppliers as opposed to the vertically-integrated, make-it-yourself models used by Seagate and IBM is now unfortunately going against it. As prices drop
and make thin-film inductive less appealing on a cost-basis, without a firm supply Western Digital has become the odd man out in the drive industry.
my thoughts:
My impression here is that if the supply of MR heads has been effectively bought out by QNTM, WDC is going to have difficulty meeting demand, and RDRT can get a premium for the MR heads they produce; unfortunately for APM, they're left out in the cold with the inability to produce MR heads in quantity.
Mike
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