It's such an interesting story comparing PC sales and company values with those of HDD's. I had never really thought about it as clearly as when an analyst, I believe Gillian Munson, showed a pie chart of the HDD industry and then a pie chart of the PC industry.
It was clear that the HDD industry can only benefit companies who can take market share. The play is basically divided between 5 companies holding about +85% market share.
Now compare this to PC industry pie chart and you see a wholly different dynamic. There's a giant wedge, in fact the largest, going to sales by "other". Perhaps it was 44%. It was a real head slap for me. I had been thinking all of these guys were slugging it out while in fact, they were seeing a major shift in how people buy computers. Clearly, the big 5 can continue to grow market share regardless of unit growth, simply by killing off the "other".
So, what does this leave the HDD folks? Well, last year there was supposed to have been a big shift from large inventories to a build to order format that would make Compaq, IBM and HP leaner and meaner. This caused a big blip in orders for HDD's as inventory in the channel was disposed. The scary thing today is its being suggested that Compaq, are they alone, actually stuffed the channel again.
But, once this BTO format is really in place, will all things be better for HDD companies? Have the basic issues been answered? Over capacity, no product differentiation, and extreme pricing pressure. I say they have not. I think there are still terrible problems to be faced. The mention of a new drive company has everyone in a panic. Apparently, new capacity pops up like mushrooms after a summer rain.
Also, has anybody wondered what the effect of each little "other" being disposed will have on the above constraints? If "other" is chopped back to 30% this year, how will their inventory shifts effect the channel? How have they been forced to a BTO format to compete or will their habit of keeping high inventory need to be worked through as they fail?
Funny thing is you also have people like Scott Neilly of Sun saying buyers will probably need to do a little stock piling before y2k on the consideration that parts may be hard to come by. So, some channel stuffing and inventory bloat may be prudent? When does the over ordering come, and how will it be worked through? It's really so strange a situation, why take the risk and buy these stocks unless they are really undervalued? Maybe that's the point? Should they be trading below value?
I may be loosing track a bit. My point is to compare the growth possibility of a PC maker with that of a HDD company is difficult as PC makers can grow even in a falling unit environment due to their taking market share from the "other". HDD's have the worst of this situation and it's only getting worse.
If you look a flat PC units in the future, think about the apparent HDD savior, commercial apps like VCR's and set top boxes. These things all have margin pressures that similar to a sub $599 PC. Here you are trying to sell the public a new device and in a very price conscious. Ramping volumes to improve margins will be slow going as the market decided whether they want these devices.
Seems to me that the only area to get really good growth will be the enterprise as we see a shift to more and more net centric storage. I think for example, there will be a revolution in wireless based net devices in the next 5 years and they will all be based on enterprise storage. Also, Internet content is shifting very quickly to a more dynamic format using audio and video.
So, I sort of feel the PC is no longer the green pasture for the HDD industry to make good profits regardless of short term issues. We will soon see a cap on PC growth. Seagate may be a good play if they can keep a hold on enterprise storage, but we have little reason to think supplying enterprise drives will be much more profitable than OEM sales to PC makers.
Wouldn't it be amazing to see Quantum announce Monday they are getting out of hard drives? Maybe I'm being cynical, but really how can the problems of this group be over come? If they could dump their HDD business, would it be for the better?
I read many opinions here about using either vertical, horizontal, or even virtual manufacturing, but in the end can these companies really make money faced with the challenges of 5 companies pushing for market share at each others expense based on a commodity like environment with over capacity?
I'm not surprised to see HDD company stocks fall. I was probably more surprised to see them rise. I think if the market sentiment is that PC's are in trouble, and they start using the words Tech Wreck, look out and run for the hills.
But then again, I could be wrong.
Regards,
Mark |
