Here's a useful check of the pulse of the DD sector...
From the 4/6/98 issue of the WSJ...
April 6, 1998
The Rise of the Under-$1,000 PC
Spells Fall for Drive Makers,
Bounty for Internet Stocks
By ERIC J. SAVITZ
Deflation is alive and well and living in Silicon Valley.
The big story in the PC industry this year has been the
rise of the sub-$1,000 PC. The trend has caused all
kinds of trauma for companies like Compaq, Intel and
CompUSA; it has also helped fuel the current mania for
Internet stocks. The more cheap PCs sold, the more
eyeballs gazing on Yahoo!, buying books from
Amazon.com and booking airline tickets on Preview
Travel. Or at least that's the theory.
In any case, the industry is gearing up for the next round
of PC price compression, and it will be a doozy. By
Christmas, you should be able to buy a perfectly useful
PC for $500, or maybe less. The PC makers, including
market leader Compaq, have been pressuring their parts
suppliers to bring costs down low enough to get retail
prices on entry-level machines to $500. And it's no pipe
dream. Already, you can find some no-name clone
makers offering boxes in that price range, not counting
the monitor. In last week's San Jose Mercury News, for
instance, a little outfit called Hi-Tech USA was offering a
system using a 180-megahertz Cyrix processor, with 16
megabyte of memory, a 2 gigabyte hard drive, a 16X
CD ROM and a 33.6 kilobits-per-second modem for
$498.
It's only the beginning. The accelerating price declines
have interesting implications for both disk-drive and
microprocessor manufacturers. Both segments should
see increasing volumes as the entry-level price point for
personal computers continues to crumble. And at the
same time, both will suffer thinning profit margins as they
struggle to meet the escalating pricing demands of the
PC makers.
For the disk-drive industry, it's just one more thing to
worry about. Shares of both drive makers and their key
suppliers have been heading steadily lower for six
months. Seagate, the leading independent drive maker,
trades for less than half its 52-week high, and rival
Quantum has suffered similarly. Western Digital has
stumbled even harder -- its stock price has eroded by
more than two-thirds since last summer. Disk-drive
component suppliers, like Read-Rite, Applied Magnetics
and Komag, have suffered similarly frightful declines.
The carnage has attracted the attention of some of the
more patient members of the value crowd, including
William Miller, the red-hot fund manager at Legg Mason
in Baltimore. And for investors with a long time horizon,
you can make a good case for the stocks. Demand for
storage continues to rise year after year, and the need
will grow even greater with the arrival of fast
Internet-access technologies like cable modems and
their telephonic rivals, ADSL, allowing fast downloads
of fat video and audio files. But for the short run, the
drive industry has some serious problems to
solve-mounting pressure to reduce prices will only
complicate matters.
Business on a Roll
At least, that's the opinion of Larry Sanders. He's the
president of Fujitsu Computer Products of America, a
San Jose-based subsidiary of the Japanese computer
giant responsible for the company's disk-drive
operations. It's a business on a roll. While Seagate,
Quantum and Western Digital suffered badly in 1997,
Fujitsu prospered, gaining substantial share. Sanders
expects the trend to continue. "When you look at what
happened in the drive business in 1997, its pretty
simple," he says. "Entering 1997, the top three
companies assumed they'd lose no market share, with
growth equal to the industry. Meanwhile, IBM, Fujitsu
and Maxtor targeted dramatically higher market share.
By year-end, IBM, Fujitsu and Maxtor had gained
share, and had low inventories. The other three guys lost
share, and had high inventories."
Sanders suggests looking at the disk-drive business in
three pieces: "mobile" drives, for laptop computers;
desktop drives; and "enterprise" drives, mostly used in
network servers. In mobile drives, Sanders notes, IBM
and Toshiba control more than 80% of the market, with
the three big U.S. independents playing almost no role at
all. The enterprise market, long dominated by Seagate,
has become increasingly competitive, with IBM and
Fujitsu taking substantial market share away from
Seagate. Sanders expects that trend to continue through
1998.
The desktop business, which accounts for the majority
of the industry's unit volume, has been slowly working
through a serious oversupply problem. Sanders expects
the pressures to ease a bit over the next few months as
PC makers launch new high-end systems. But the push
by PC makers to get $500 boxes by Christmas is going
to take a toll, Sanders warns.
"I'm concerned that after the oversupply eases, we'll see
dramatic pressure from the major PC makers to provide
low-cost drives for their fourth-quarter sales push,"
Sanders says. "We're going sub-$500. In fact, we think
that by the end of the year, half of all PCs sold will be
priced under $1,000." The trend has huge implications
for the drive business. "For many years," Sanders says,
"the drive industry survived by periodically doubling
capacity without changing prices," he says. "Now PC
makers want the same capacity for half the price. That's
a major change. Every major PC maker is talking to us
about a low-cost solution for their fourth-quarter
models." While low-end drives now sell to PC makers
for north of $100 apiece, Sanders says the advent of the
$500 PC could push low-end drives down to the
$60-$70 range. Jim Porter, who tracks the drive
industry at Disk/Trend, a market-research firm, confirms
that all of the major players have started "crash
programs" to produce lower-cost drives.
While the drive companies are working on new designs,
Sanders notes that few of them will reach the market
before 1999. For now, he says, Fujitsu and others are
offering cost-reduced versions of current drives. The
dynamic, he says, will hurt the profitability of disk-drive
companies that rely heavily on the desktop market.
Quantum, Western Digital and the Maxtor division of
Hyundai all fit that description.
Gillian Munson, who tracks the industry for Morgan
Stanley Dean Witter, advises would-be bottom-fishers
that the stocks in the group actually look "somewhat
expensive" on a historical basis, even after their recent
slide. In a recent research report, Munson noted that the
best time to buy drive stocks historically has been when
they trade for one times book value, as they did in the
summer of 1991. She notes that Quantum, Seagate and
Western Digital as a group are trading on average at 2.6
times book. Munson also notes that Fujitsu, Samsung
and Maxtor continue to gain market share and increase
production. "If market share losers do not cut their build
plans enough to offset this growth," she writes, "the
industry will continue to be in an oversupply situation for
quite some time......."
|
