The TiVo video recorder, the iPod music player and the Xbox game machine all owe their existence to the same high-tech innovation: smaller, denser, cheaper disk drives. For nearly 50 years the disk-drive industry has driven advances in computers and gadgets by supplying new ways to store data.
But there’s one thing drive makers can’t produce: sustainable profits. Even during the tech boom, when makers of other high-tech innards like software and chips feasted, drive makers collectively lost money in 1998 and 1999. More losses followed during the bust.
For a few shining months last year, the $22 billion-a-year industry looked ready to pull out of its long slump. Sales and profits rose with the first whiffs of a tech recovery. A consolidation wave had reduced the field of competitors, and fertile new consumer markets were opening. Instead, the next 12 months became the industry’s latest debacle, as drive makers repeated their mistakes of the past.
Encouraged in part by aggressive sales forecasts from computer makers, they overproduced. Looking to recoup their investments in research, they began targeting each other’s markets. Inventories of unsold drives mounted, sparking deep price cuts that erased drive makers’ razor-thin profit margins.
The events of the past 12 months show just how tough it is to profit by selling disk drives, how fewer competitors can mean more competition, and how prices and revenue can fall amid improving demand.