How will Maxtor/Quantum merger affect hard drives?

Earlier this year, number one drive maker Seagate Software laid off thousands of workers in its worldwide manufacturing plants to stave off losses. In a market notable for dot-com IPOs, it was striking that the company took the opposite tack, going private and removing its stock from the public market. Then earlier this month, number two drive maker Quantum and number three Maxtor announced plans to merge.

But it's good news, say industry watchers. They expect the merger to help produce a more unified field of manufacturers, and stable (and still cheap) prices for consumers.

Competition Heightens

The dropping cost per megabyte has been a sweet deal for consumers and for the PC makers who buy most hard drives. But it's been a different story for the drive manufacturers.

Cutthroat competition among the nine major drive makers has resulted in a situation that makes it very hard for companies to make money -- and in some cases, break even. Major manufacturers were "in a hellacious spin cycle and about to go out of business collectively," according to John Donovan, vice president of the market research firm TrendFocus.

But Donovan expects imminent technical changes, coupled with market adjustments because of the Quantum/Maxtor merger, are likely to slow the development and release of the next megadrives, he says. The biggest change will be that new products will come out more slowly, he says.

Currently, the majority of drives use 20GB platters (the magnetic-coated metal disks that actually store the data). Manufacturers stack the disks and add read/write heads to make larger-capacity drives. Standard-size 3.5-inch drives can take up to four platters, resulting in the current maximum capacity of 80GB.

The next major step in drive technology, doubling the areal density (the amount of data that can be stored on a specific area) of platters from 40GB to 80GB, is now in development, Donovan says. The next generation of drives will contain up to 160GB of data.

Drive makers were poised to start introducing these next-generation drives soon, but analysts say the Quantum/Maxtor merger will take the pressure off the market. It could delay the introduction of these drives until the spring or summer of 2001. This will give drive makers breathing room to catch up on backlogs and perhaps even start to make money off their existing product lines.

Drive Makers Look Beyond PCs

Hard drive developers and manufacturers have other ongoing market challenges, however.

Hard drive manufacturers don't necessarily make all the parts in a drive. The precision motors that spin the platters and the electronics that control the flow of data, for example, often come from other manufacturers. And those suppliers have been hard-pressed to keep up with the demand, resulting in a large shortage of drives.

But in a commodity market -- as hard drives have become -- the usual laws of supply and demand don't seem to apply. Despite parts shortages, prices of finished drives have remained relatively stable, although they've started to creep up a bit -- just 2 to 3 per cent since Quantum and Maxtor announced their merger. But at least for now, PC manufacturers aren't expected to pass along that cost to system buyers because of the competitive nature of the finished-system market.

For the longer term, hard drive makers are looking to alternate, less price-sensitive markets to boost their profit margins. Demand for drives in such consumer goodies as set-top boxes, digital video recorders, and high-capacity MP3 players is expected to grow. Although such products have claimed only about 1 per cent of the drive market this year, it's expected to reach 5 per cent in 2001 and continue to grow.

Consumers' Options Change

If you've been salivating over the possibility of 120GB or 160GB drives, patience will be in order. At the bottom line, the merger of Quantum and Maxtor should be a win-win for both manufacturers and buyers. After all, stable companies benefit consumers as well as stockholders.

For the first time in years, TrendFocus's Donovan says, he senses "some sensibility and a lot of optimism" in the hard drive market.

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Stan Miastkowski

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