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Technology Stocks : Disk Drive Sector Discussion Forum -- Ignore unavailable to you. Want to Upgrade?

To: Mark Madden who wrote (8399)	6/11/2000 8:59:00 PM
From: Gus	Respond to of 9256

Here's a McKinsey & Company report on SAN, NAS and the disk drive industry: HARD KNOCKS IN THE HARD-DISK-DRIVE INDUSTRY The outlook may be promising for storage devices attached to servers on open platforms, but it is considerably less so for the hard drives that store data on personal computers. In this part of the storage industry, product and price differentiation are minimal, time-to-market leads are short, and capacity-driven cycles determine overall performance, a state of affairs that puts increasing pressure on margins. Three strategies might provide relief for hard-disk-drive providers. Each strategy will be difficult to implement successfully. The first possibility is to pursue acquisitions within the industry and along the value chain. Consolidation should be attractive for companies with significant cash reserves. Suppose that the purchaser had to pay only a 20 percent purchase-price premium and that only modest synergies could be gained in research and development; sales, goods, and administration; and the cost of goods sold. In this case, buyers could capture value that might be 60 to 90 percent above the cost of acquisition. Consolidation could also improve the industry's overall performance. Movement along the value chain holds promise as well. Companies that lack core strengths in research and development, for example, should consider making substantial cutbacks and then filling the gap by entering into broad technology-licensing agreements with R&D leaders. Even modest moves in this direction could create $500 million to $800 million in industry value. More aggressively outsourcing the manufacture of hard-disk drives could create even greater value by rationalizing capacity. The second option is to take advantage of new and emerging market segments, such as 'value-class' hard disks for low-cost personal computers. To address that segment, hard-drive makers will have to attempt the difficult shift from best technology at a fixed price point to adequate technology at the lowest price. Other attractive segments include storage for application-specific servers such as those for video and databases and the seemingly limitless array of devices, as yet only imagined, that will come into existence through ubiquitous computing (computing devices included in such products as home appliances). Finally, the third strategic option is to move upmarket into the green pastures of storage subsystems for storage area networks. Here, however, hard-drive providers will need R&D skills distinct from those required to build disk drives. Developing these skills will probably take too long, but acquiring them will be expensive. Sourcing the entire controller from a third party might relegate a manufacturer to the low-margin role of assembler, which the PC industry has shown to be unattractive at best. 209.172.171.93 The third option seems to be the most promising one for the industry to take to break out of its withering boom or bust valuation cycles. I think WDC and Maxtor did the right thing by pulling out of the enterprise drive market and becoming their own NAS customers. Quantum has a large DLT installed base as well as Meridian (NAS) and the library business so it has more options if they don't squander it on the wrong focus. Seagate, with over 50% of the enterprise market, probably has the most options with Xiotech, the compact tape business (including LTO), and its Business Intelligence business. By the way, there are more than 70 companies vying for position in storage networking. The disk drive makers are clearly pouncing on the opportunity to redefine their industry (by laying claim to the NAS market, for example) and get less stingy multiples.