The death of CD-ROM. The total chipset going down to $8-$10.........
October 27, 1997, Issue: 1081
Section: News
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CD-ROMs facing death knell
By Mark Hachman
Silicon Valley- After blazing through multiple generations of speed increases, the CD-ROM race is about to come to a screeching halt.
Faced with increasing design costs and daunting technological barriers, most manufacturers say the 32X drives introduced this fall will be their last hurrah. Sometime next year, they plan to abandon the market entirely in favor of higher-margin DVD-ROMs.
As a result, CD-ROM drive prices are expected to drop sharply - along with profit margins - effectively turning the devices into a commodity.
Given the state of the market, drive makers say they have little choice but to head for the exits. And some seem positively relieved.
"The X race has more to do with marketing hype and less with real performance," said Jim McCaffrey, vice president of sales and marketing at Irving, Texas-based Mitsumi Electronics Corp., which was ranked in 1996 as the second-largest seller of CD-ROM drives by International Data Corp. "I'd like to think that after a 32X drive, we could put an end to this crap."
The move threatens an end to the cozy relationship between PC OEMs and the CD-ROM industry, "co-conspirators" in driving CD-ROM speeds higher, according to McCaffrey. While OEMs could differentiate their products by offering higher-speed drives, drive makers profited from higher margins.
Now drive makers are faced with the same dilemma they experienced in 1995, when imperfections forced vendors to redesign their 4X drives to compensate for the wobble of the CD-ROM media as it spun in the drive's tray.
Drives spinning at 32X can reach 7,400 rpm, according to a study performed by Hitachi America Ltd.'s Storage Products Group. "At more than 32X, the rotational speeds make reading data increasingly difficult to handle," said Wolfgang Schlichting, optical storage analyst at IDC, Framingham, Mass. "We don't anticipate CD-ROM drives at 40X or faster."
Executives at Toshiba America Information Systems (TAIS) and Hitachi believe that a 32X drive will be their last product in this market.
"We do have the capability to go beyond 32X," said Maciek Brzeski, director of the optical business unit at TAIS, Irvine, Calif. "But there's a question of how much cost-cutting is appropriate. The question to ask when considering a rollover to DVD is what will be the manufacturing cost of a CD drive."
When the transition to DVD occurs, the CD-ROM market is expected to undergo drastic changes as the industry's leading lights are replaced by second-tier Asian vendors content to slice margins to the bone.
"You'll see a lot more players in the market," Brzeski said. "The CD-ROM will become a true commodity product, with no room to innovate and differentiate."
At that point, "the business model is simply ugly," said Mary Bourdon, optical storage analyst at Dataquest Inc., San Jose. "There are no words to describe it." However, a significant market will remain for CD-ROM manufacturers to sell old inventory into low-cost PCs.
Analysts and vendors also expect that a few CD-ROM makers will continue to push speeds above 32X, even though the drives will rarely perform as advertised.
"We've tested the leading Japanese and American CD-ROM games," Mitsumi's McCaffrey said. "The quality of the media is all across the scale."
Since copyright issues have delayed the adoption of DVD players and DVD-ROM drives, CD-ROM makers say the transition to DVD-ROM is occurring at an opportune time for the industry, with DVD demand supposedly ramping up as CD-ROMs run into physical limitations.
However, DVD demand is still an open question. "A very important point is the availability of DVD titles," said IDC's Schlichting.
Without DVD software, a DVD drive is nothing but a more expensive CD drive. DVD-ROM makers are introducing 2X DVD-ROM drives, which can read CD-ROM data at 2,700 Kbits/s, equivalent to a 16X to 20X CD-ROM. But 10X to 16X CD-ROM drives are expected to drop from 67% of 1997 worldwide CD-ROM sales to 15% in 1998, when 32X CD-ROM drives enter production.
The market impact of the CD/DVD-ROM transition will also affect chip vendors, which say they will have to cut costs accordingly.
"Right now, the cost of the chips within a CD-ROM is about $14," said J.D. Estella, product marketing manager at Cirrus Logic Inc., Fremont, Calif. "That's now being driven down from $10 to $8."
Cirrus has an undisclosed internal program to reduce component costs to allow the company to maintain its market share and profits as the industry moves toward commodity status.
Although chip vendors are selling CD-ROM controllers that can handle data rates of about 45X, Hitachi's Brzeski indicated that very few DSP manufacturers can handle rates past 20X.
"It's a critical question for the industry," he said. "We've been going at 100 MPH for so long, but it's time to commit to a jump [to DVD]. At the same time, you want to have a safe landing."
Copyright (c) 1997 CMP Media Inc.
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