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WIKI ANALYSIS
Western Digital (NYSE: WDC) is the second largest manufacturer of hard drives with $4.3 billion in sales in 2006. The company produces drives for use in desktops, mobile devices, enterprise, and consumer electronics, and sells components to original equipment manufacturers (OEMs).
The company is behind market leader Seagate in terms of sales, with a market share of 22% (Seagate has captured 35%). It faces intense competition from Seagate and "captive" manufacturers Hitachi (HIT), Samsung, Toshiba (TOSBF), and Fujitsu (FJTSY]]. Captive competitors bundle hard drive sales with other products, so they are able to sell drives at break-even profit, or sometimes, at even at loss. In addition, advances in solid state devices (SSDs) containing flash memory threaten Seagate's core product offerings, because SSDs have many advantages over traditional hard drives, especially in mobile applications.
Western Digital has been slower than competitors to adopt perpendicular recording, a recent technology that allows for greater data capacities and faster access speeds. Currently, it offers a 160 GB notebook drive that utilizes perpendicular recording.
Corporate Overview
Western Digital's business has more than doubled in the past five years due to the growing demand for desktop drives, greater market share, and strong growth in other hard drive products, especially in the mobile and consumer electronics markets. The company has invested an increasingly greater percentage of its revenue in capital and research and development expenses. New product development is necessary to gain a foothold in new markets and to outpace the threat of competing flash memory.
Products
- Desktop hard drives: Western Digital's Caviar desktop hard drives are in the 3.5" form factor, range from 36 GB to 500 GB in storage capacity. Desktop hard drives accounted for 71% of total sales for the company.
- Mobile hard drives: Notebook hard drives are in the 2.5" form factor. Western Digital's Scorpio notebook drives range from 40 GB to 160 GB in storage capacity. The 160 GB drive is the company's newest mobile offering, and uses perpendicular recording technology.
- Enterprise hard drives: Applications such as databases and e-commerce require especially high performance and reliable hard drives. Western Digital's Raptor enterprise-class drives rotate at a faster speed than consumer hard drives, allowing for faster data access. The company also offers a WD Caviar RE line with enhanced reliability features.
- Consumer electronics: Western Digital offers hard drives designed for use in consumer electronics such as digital video recorders (DVR), karaoke systems, and gaming systems, which require quiet operation, low temperature and power consumption, and high reliability.
Customers
- OEMs: Sales to original equipment manufacturers (OEMs) represented 54% of revenue in 2006. Dell was Western Digital's largest customer, accounting for 12% of total revenue.
- Distributors: 39% of sales went to distributors, who then resell the hard drives to smaller manufacturers, dealers, systems integrators, online retailers and other resellers. This is the channel through which consumers may buy "OEM" hard drives, which are usually cheaper than the branded retail product.
- Retailers: Western Digital also sells branded, packaged hard drives to retailers (e.g., Best Buy (BBY) and Circuit City Stores (CC)), and also directly to consumers through its web site. Retailer sales accounted for 7% of total revenue.
Trends and Forces
Flash memory
Advances in flash memory technology and growing sales have put pressure on the hard drive market. Unlike hard drives, flash memory are solid state, so they contain no moving mechanical parts, use less power, are smaller and less likely to break. These advantages make flash memory very attractive for use in portable devices such as digital music players (including the ubiquitous iPod) and digital cameras. Flash memory has not replaced hard drives because cost is higher, transfer speeds are slower, and there is a limit of approximately 100,000 read/write operations. However, each of these limitations are being gradually overcome with technological advances.
The next advance for flash memory would be to replace hard drives in hard drive-based digital music players and laptops. Flash memory makers such as SanDisk would have the most to gain from adoption of the new technology, while hard drive manufacturers such as Western Digital and Seagate would have the most to lose. Diversified companies like Samsung would be less affected, because they manufacture both types of storage or other types of products. Samsung and SanDisk have both announced or released solid state disks (SSDs) up to 64 GB, which can effectively compete with smaller sized hard drives. Dell has already began shipping ultra-portable laptops with SSDs. Although hard drives are still the dominant storage device, hard drive manufacturers are wary of the threat of flash memory.
Perpendicular recording
Perpendicular recording is a data recording technology that allows for greater data densities, which leads to greater drive capacities and faster access speeds. Traditionally, bits of digital data are stored as magnetic information on the hard disk platter with the magnetic poles aligned along the plane of the platter. There is a physical limit to how closely data can be packed while maintaining data stability. Perpendicular recording technology overcomes this limit by aligning the poles of magnetic information perpendicular to the platter using a different writing mechanism and recording material with higher magnetic fidelity. Whereas traditional longitudinal recording has an estimated limit of 100 to 200 gigabits per square inch, perpendicular recording allows for densities of up to 1000 gigabits per square inch.
Hard drive manufacturers are expected to adopt the technology rapidly because current data densities are near the physical limit. Competitor Seagate was the first to successfully implement the technology, and is currently shipping 3.5" drives with capacities up to 750 GB. In comparison, Western Digital's largest 3.5" drive, which uses traditional longitudinal recording, has a maximum capacity of 500 GB. The company has already incorporated perpendicular recording in its 160 GB Scorpio drives for laptops, and is likely to announce new products with the technology in the future.
Commoditization of PCs
Over the last few decades, PCs have become an increasingly important part of our daily domestic and work lives. PC's are used for tasks ranging from rudimentary email and word processing to advanced computer programming. Commoditization, in the business world, is a process that transforms the market for a unique, branded product into a market based on undifferentiated price competition. The commoditization of PCs would hurt PC manufacturers and OEM suppliers such as Western Digital, as they face intense competition to lower prices. Western Digital is especially vulnerable because it shipped the majority of hard disks for low- to mid-level computer desktops, which are the markets most likely to be commoditized.
Comparison to Competitors
The market is divided into "independent" and "captive" manufacturers. Western Digital and Seagate are independent manufacturers, meaning that they are entirely focused on manufacturing hard disk drives. Captive manufacturers Hitachi, Samsung, Toshiba, and Fujitsu are more diversified companies with a hard drive division. Captive competitors may sell hard drives at break even profit or even at a loss when it can bundle drives with other more profitable components, such as computer memory. This makes competition especially intense and sometimes irrational for independent manufacturers like Western Digital.
Due to the similarities in market share and business focus, Seagate and Western Digital are chief rivals in the market. The two companies' offerings cover 97% and 90% of the market respectively. Both companies produce desktop, mobile, enterprise, and consumer electronics products, and sell mainly to OEMs. Thus, many of the same market forces such as seasonal changes in sales and commoditization of PCs affect the two companies in the same ways.
One particularly important rising competitor to hard drives are flash-memory based solid state devices (SSDs). Unlike hard drives, flash memory are solid state, so they contain no moving mechanical parts, use less power, are smaller and less likely to break. These advantages make flash memory very attractive for use in portable devices such as digital music players and cameras. Flash memory has not replaced hard drives because cost is higher, transfer speeds are slower, and there is a limit of approximately 100,000 read/write operations. However, each of these limitations are being gradually overcome with technological advances. Samsung and SanDisk have announced or released SSDs up to 64 GB that have already began to replace hard drives in ultraportable laptops. Although hard drives are still the dominant storage device, SSDs represents an impending threat to Western Digital's business.
Western Digital has been slower than competitors to incorporate perpendicular recording into its products, which allows for greater data capacities and faster access speeds. Currently it has one product with the technology (160 GB Scorpio notebook drive).
References
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