The Disk Drive Conundrum

Amid all the hoopla over slipped iMac deadlines, SEC investigations and new phone introductions, it is fairly easy to overlook the fact that just at the dawn of the convergence age, Maxtor, a disk drive maker is going to lay-off 500 people. The Milpitas company announced the cuts after a dismal second quarter, when the sales followed the trajectory taken by Boston Sox’ play-off chances. Earlier last month, Seagate announced that it would slash its work force by 2,900. Will Western Digital be next?

My old friend, Paul La Monica, a Yankees fan if there way any, and a prescient stock picker who now works over at CNN/Money (actually we are both serfs to the same TW master) is doing a very public mea culpa in his most recent column.

I sang the praises of disk drive companies Seagate, Western Digital and Maxtor because I thought that they had finally learned how damaging the price wars in this industry were. Plus, the stocks all seemed to be bargains. Wrong! They were “cheap” for a reason. These companies continue to face tough pricing pressures, which have resulted in several earnings warnings. As such, Seagate has sunk 27.9 percent, Western Digital has fallen 30.6 percent and Maxtor has plunged 44.4 percent. Gadzooks! Time to put on the hair shirt for this one.

Why are the hard drive makers having sustained losses and job cuts when by all measures demand for their products – the hard drive – is increasing by the second. From IPods to TiVO to poorly designed DVR boxes being pushed out by the likes of Comcast and Cox, every single convergence device needs a hard drive. Higher the capacity, the better.

Now that is conventional wisdom! However, some of my friends who work in the disk drive business, are suggesting an unconventional logic. They believe that instead of focussing on churning out higher capacity drives at neck-snapping speeds (i.e. Moore’s Law), the industry needs to become more responsive to the real market trends and offer many types of drives. (Moore’s Claw)

If you take a look at the current technology markets, even Intel, the shameless propagandhi of every faster processors has started to package slower, and more energy efficient models like Pentium Mobile and Centrino for laptops, XScale for handheld computers, and Xeons for servers. Video graphic chip makers like Nvidia and ATI Technologies have increased their product portfolio to address the needs of cellphones, video game consoles and ah yes, the PC.

The disk drive makers are the last one to realize this. As a very smart man, in this case Ashok Kumar, analyst for Raymond James says, “The evolution will mimic the path of other mature industries, and will make the HDD industry similar to, say, the automobile industry: they all transport you there, some with blazing speed, some with great mileage.” I could not have said it better myself.

Ed Note: So what do disk drives have to do with broadband? Everything for they store the content we accumulate due to super-fast connections. ITunes music, Movielink movies, crappy video mail, and of course lovely Jenna. Disk drives are the fat cells of Broadband. Figure that one out!