With growth in the PC industry slower than at any time since the industry’s inception in the early 1980s, the digital data storage witnessed one of  the most challenging years for the industry. Weak PC demand  continued to pressure the industry, a situation that will likely to continue for another six months. Although short term might be painful, there are still many positive signs for the long term. We also believe revenue will grow and gross margins are on the comeback for many reasons. One is due to the increasing demand for network-intensive applications and another is due to the industrial usage shift to network storage. In fact, Dataquest estimates that primary storage spending will grow at a CAGR of 25% from 2000 through 2004. It is no surprise that industry heavyweights such as Dell Computer, Compaq and Sun Mircrosystems are increasing their storage efforts.

Although the price of HDD per Mega-byte is still falling, the rate has slowed. The low cost of storage is making it very attractive for use in emerging applications such as mobile devices, game consoles and audio visual equipment.  Capacity is increasing but will likely slow as well due to the difficulty in technology transition. Last year average capacity for desktop products was 10GB, and year 2001 was around  20-30GB and it will reach 40-60GB in 2002. It is likely that 100% areal density increase per year will not be sustained. The reason is improvement costs outweigh the advantages.  We will likely see that sometime in 2002 areal density growth will start to slow down. A slower technology growth will result in longer product lifetimes and this will translate into higher gross margins and bottom-line profitability for HDD manufacturers.  

The HDD industry has also experienced an increasing demand for drives,  growing from 42 million in 1992 to 200 million drives in 2000 - a 21% CAGR. HDD Shipments growth for year 2002 is expected to increase at 9% year-on-year to 219 million units. The year 2001 also saw  significant changes in  the infrastructure of the Digital Data Storage industry. On April 2, 2001 Maxtor announced the completion of its merger with Quantum’s hard drive business. Maxtor anticipates $120 million to $200 million annual cost savings within two years. Towards the second half of the year,  Fujitsu exited the desktop hard drive business to aggressively pursue the 2.5” (for mobile and desktop applications) and 3.5” enterprise HDD markets. Fujitsu’s exit creates an opportunity to fill demand for 3 million HDDs per quarter and combined with the “new” Maxtor and Seagate's privatization, there clearly is a scenario for more rational industry dynamics in the years ahead. 

Despite the current slowdown in corporate IT spending, the content of modern society is increasingly digital. A Bear Stearns report entitled “Store Forward” suggests that “it is the digitization of information that is driving the data boom. About 80% of the world’s data is now being ‘born’ digital. Some estimates suggest that by 2010, more than half of the world’s data will be in rich content format – graphics, voice, video.” Demand for computer storage is being driven not only by the conversion of “paper” data to electronic data,  but also by new data that is being created as a result of new technologies.

Availability of the Internet.  IDC projects that the number of devices accessing the internet will increase from 237 million in 1999 to 756 million by 2003. This will result in the number of internet data packets to grow at exponential rates. Today, the U.S. and Canada is accounting for approximately two-thirds of the world's internet users, leading to significant growth potential for the rest of the world. 

Broadband Infrastructure Implementation. Advancement in NAS, SAN, and Fibre Channel technology have forced a number of business to implement enterprise applications such as enterprise resource planning and data warehousing to remain competitive. These applications are stimulating increased demand for data storage in corporations.

Emerging Applications. Finally after years of anticipation, a market for HDDs in gaming devices, set-top boxes and satellite televisions officially emerged in the second half of this year with the debut of the Microsoft Xbox, the Apple IPod and other non-traditional devices with rotating magnetic storage. The initial production build for the Xbox will be for a minimum of 1.5 million units and could easily be increased to 2.5 million should the product rollout go well.

These products will represent the largest incremental non-PC disk drive ramp for our industry. IDC predicts that in 2005 over 50 million drives will ship to emerging applications, representing about 13% of all HDDs shipped in 2005. The revenue associated with these emerging applications should represent about 11% of the $29.1 billion HDD opportunity in 2005. Emerging applications will be an added business growth for the HDD industry, representing a segment as large as the traditional Mobile PC or Enterprise segment from a unit perspective.

The long-term storage outlook looks solid as major drive companies are broadening their product focus. We believe future disk drive growth will be primarily in mobile storage, network storage and emerging applications as traditional PC market seems to be near saturation. The disparity between number of drives shipped and components per drive should begin to shrink, fostering a new era of drive profitability. Year 2001 should be the first leg up in the emerging applications and 2002 should hold the first meaningful numbers. 

UC Berkeley Research predicted that humankind created 12 billion gigabytes of data in the past 40,000 years. In the next couple of years, it is estimated that more data will be created than in the last 40,000 years combined. By 2003 there will be 57 billion gigabytes worth of data, with the huge majority in digital form. That said, 57 billion gigabytes of data is a staggering figure!