Industry SnapShot: Computer Storage Devices

Significant cost reductions and performance enhancements have driven growth in the US computer storage devices sector, which grew at around 7% during 2003. It is forecast to continue its strong growth into the next five years, boosted by significant demand from the consumer electronics sector, resulting from the huge demand for smaller, high capacity MP3 players.

The disk-based segment is estimated to account for an 85-90% share of the US sector although the DVD-R (DVD writer) market is predicted to witness high growth in 2005, fuelled by both the home and business desktop market and the introduction of improved video editing software. Other growth areas include devices for the SAN (storage area networks) and NAS (network attached storage) systems. However, growth in the magnetic/optical media market has slowed down.

Consumer electronics are expected to significantly drive up demand for the storage drive, driven by the growth of MP3 players and compelling storage device companies to invest into new technologies such as nano-engineered storage technology and holographic technology to provide low-cost, high capacity devices. The introduction of legislation requiring more transparent business procedures in the US will increase the demand for high-capacity storage in the commercial sector, with companies needing to efficiently store business information from previous years to comply with regulations.

Top players in the sector include EMC, Seagate Technology, Maxtor Corporation, Western Digital Corporation, HP and Hitachi. EMC enjoyed a global market share of about 14.4% during 2004. Several leading storage device manufacturers have entered the information lifecycle management market introducing tiered storage solutions to provide a higher value proposition for customers.

Key Issues

Compliance Driven Growth - A large part of the growth predicted for the industry is expected to be driven by investments in storage systems to meet compliance requirements for laws designed to help companies preserve information. These laws include the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act (HIPAA), which are leading companies to adopt better data-handling practices.

Consolidation Amongst PC Manufacturers - The PC business, the largest customer segment of the computer storage devices industry, is consolidating. Mergers and acquisitions in the PC business (including the HP-Compaq merger and the IBM-Lenovo deal) have resulted in the formation of large clients, with large economies of scale and thus higher bargaining power. This is expected to further reduce margins for storage device manufacturers.

Increasing Hard Disk Demand - As hard drives find their way into more consumer electronics products, the demand for small yet high capacity hard drives will increase. Consumer electronics is expected to drive sales in this segment, accounting for a third of the hard-drive market by 2008, compared to 5% in 2003. Storage device manufacturers will need to focus on reducing the total cost of ownership of electronic gadgets to fuel growth.

Storage Commoditization - In 2005, commoditization is expected continue to impact storage systems, with low-cost, high-capacity drives accounting for almost 20% of storage array capacity, and 11% of overall revenue. This capacity-revenue differential could lead to higher price erosion.

Significant Trends

Information Lifecycle Management - Storage device manufacturers have entered the information lifecycle management market, a concept enabling priority based, tiered data storage. Both EMC (through the acquisition of LEGATO Systems, in 2003) and Seagate Technology (September 2004) have already introduced tiered storage solutions. The combination of different elements within the storage environment may lead to a higher value proposition for customers.

Growth in Miniatures - Players in the industry are increasingly shifting their focus towards miniature-sized disk drives. Not only are the size of the disks shrinking, their capacity is increasing. The growing number of products in the miniature disk drive market is expected to develop to meet the demand of the portable electronics manufacturers.

New Technologies - Storage device companies will be investing in new technologies such as nano-technology and holographic technologies to meet a growing need to reduce the cost and size of storage devices. By 2011, the nano-engineered information storage devices market is expected to be worth $65.7 billion, accounting for about 40% of the disk drive and memory chip businesses. These technologies will blur the boundaries between disk drives and memory chips, thus providing a low-cost replacement for minidisk drives in portable entertainment devices and computers.