Disk companies pricing themselves out of business-again: lessons of the past still unlearned.

Disk Industry Overview

At year-end 2002, only a handful of significant disk drive suppliers remained: Seagate, Maxtor, Western Digital, Fujitsu, Samsung, Toshiba, NEC, and Hitachi/IBM (Hitachi Global Storage Technologies). This number may shrink further in 2003. With Hitachi's purchase of IBM's disk drive business, the majority of disk drive producers will become Asian-based, even though the majority of disk drives are still produced by North American-based companies: Seagate, Maxtor, and Western Digital.

Magnetic mass-storage technology advances have enabled the migration of disk units to 3.5-inch and smaller diameter form factors. The 3.5-inch and 2.5-inch form factors are present in all segments of the market: server, desktop, and mobile. The recent introduction of the one-inch form factor may point the way to future configurations of the disk drives in the rapidly growing consumer and portable storage markets. The 1-inch diameter drives currently address a niche market but appear to be headed from lgigabyte to four gigabytes in 2003. There are emerging signs that 2.5-inch form factor disk drives may begin to displace 3.5-inch drives for many applications, due to continually increasing areal recording density and the potential for improved access density.

Areal density has grown at an impressive 60 percent compound annual growth rate, historically, and has accelerated to greater than a 100 percent rate since 1999. We are now approaching the delivery of 70 gigabits per square inch for magnetic disk technology, with demonstrations over 130 gigabits per square inch routinely occurring in laboratories. The first hard disk drives with 80 gigabytes on each side of a 3.5-inch platter and with 40 gigabytes on each side of a 2.5-inch are scheduled to arrive in 2003.

It is likely that the rate of increase for magnetic disk areal density will start to drop below historical rates annually, due to the greater difficulty in making the new technology work. A particular technical challenge will be making magnetic recording heads with track width dimensions that are smaller than the minimum feature size of the optical lithographic equipment used in the semiconductor industry. In the next five years, the likelihood of perpendicular recording using a patterned media may likely appear to further increase recording densities. Thermo-mechanical data writing on plastic substrates is gaining positive test results and may bypass the elusive super-paramagnetic limit completely.

The Access Density Issue

The more strategic question for disk storage may be: "Who needs this much capacity on a single disk drive?" This is a different question than "Who needs this much disk storage capacity?" First we must deal with the access density issue. Disk performance has not kept pace with the growth in disk capacities. More densely packed data means fewer disk actuators for a given amount of storage. Disk storage capacity witnessed exponential improvement during the 1990 decade. Since 1992, the areal density of magnetic disk recording has increased an average of over 60 percent annually. Storage device performance is improving at less than 10 percent annually. Device performance is defined as the maximum number of random I/Os per second a drive can deliver. This can surpass 100 I/Os per second since the average access time (average seek, latency and data transfer) has gone below 10ms per I/O on newer drives. Continual increases in capacity, without corresponding performance improvements at the drive level, create a perfor mance imbalance that is defined by the ratio called Access Density. Access Density is the ratio of performance, measured in I/Os per second, to the capacity of the drive, usually measured in gigabytes (Access Density = I/Os persecond per gigabyte). The disk manufacturers remain primarily focused on driving capacity. This approach is good for storing data but what about retrieving data? If capacity doubled and performance doubled, the access density would remain unchanged. Scaling disks involves more than increasing capacity; performance must increase accordingly.

In reality, the access density has steadily declined, as the capacity has increased substantially. Larger caches and actuator-level buffers help improve overall subsystem performance, and multi-path, switched point-to-point I/O porting builds aggregate throughput. Access density is becoming a significant factor in managing storage subsystem performance and the tradeoffs of using higher-capacity disks must be carefully evaluated as lowering the cost-per-megabyte most often means lowering the performance. In general, very high-capacity disks are not well-suited for applications that have a large number of concurrent users, as too much contention for the actuator results. Future I/O-intensive applications will require higher access densities than are indicated by the current development roadmaps. Higher access densities may be achieved through lowering the capacity per actuator or dramatically increasing the I/O per second capabilities of the drive. The latter is much harder to accomplish, particularly for rand om access applications where a seek (disk arm movement) is required.

Technology Limits

With storage demand currently at 50-60 percent annually, businesses will continue to need more storage. It's no longer clear that they will need it and at the same time want to reduce the number of actuators. In addition, as the capacity of a disk steadily increases, the percentage space utilization of the disk will decrease in order to preserve or maintain acceptable performance levels. In this scenario, the effective price of disk storage begins to increase. How long can the storage industry continue to increase disk drive capacity without providing a corresponding increase in capacity? Are we nearing the end of this trajectory?

For several years, the disk industry expected to reach a point in areal density where the recorded magnetic particles were so closely aligned that they would interfere with each other and become unstable and, therefore, unable to be read reliably. This point is called the super-paramagnetic limit. The limit was expected to occur at about 20 gigabits per square inch, then at 30, then 50, and has yet to occur at over 100 gigabits per square inch. Continual improvements in magneto-resistive head technology and media have, so far, pushed this theoretical limit beyond the laboratory. It isn't clear exactly where the super-paramagnetic limit is.

New Possibilities

Moving past traditional surface recording, there is increased activity in vertical or perpendicular recording. This is a more complicated scheme that records magnetic fields or fluxes perpendicular to the surface, rather than in a horizontal or longitudinal manner. This results in higher areal densities beyond current horizontal recording capabilities. Since the stored bits are located more closely together with perpendicular recording, the raw data rate from the drive will increase. Perpendicular recording may actually exacerbate the access density issue. New heads and media will be required to implement perpendicular recording and the overall cost per gigabyte should increase as a result of implementing these new more expensive manufacturing processes. How far can this possible trajectory go?

The dynamics of the disk hardware industry become increasingly interesting. The dynamics are:

* Disk drive capacity increases ~60 percent per year.

* Disk drive performance improves less than 10 percent per year.

* The $31 billion annual revenues for the disk industry have now fallen below $25 billion, a shrinking industry.

* The price per gigabyte falls 35-40 percent per year.

* Demand for new digital data generated currently grows ~50-60 percent annually.

Note: Unit shipments are less than 50 percent, as installed excess capacity is being used to meet some storage demand.

Conclusion

Where will the real value in the disk industry come from? A business that shrinks its average selling price at 35-40 percent per year doesn't often excite new entrants. Consolidation of storage providers is underway, as profits are harder to generate. Reduced profits mean less money to invest in research and development, potentially slowing down the rate of innovation. Storage vendors need to be financially healthy just like their customers. The storage industry has faced and surpassed technological limits for years, but now it is beginning to confront financial limitations that could impede progress. Furthermore, VC's are investing only in businesses that solve real problems and show a sustainable revenue growth opportunity. The current business model for disk works--if demand is high enough to offset the everlasting price erosion curve. Realistically, this hasn't worked since mid-2000.

At a storage conference recently, someone asked why disk prices have to go down every year in the storage industry? After all, the price of homes, cars, food, insurance, energy, medical services and almost everything else goes up every year. With profits shrinking, companies selling disk storage have been pressed hard financially and are aggressively looking to provide more than just a receptacle for bits. New strategies from storage companies are appearing that emphasize software, solutions, services and numerous other added-value components for the storage infrastructure. The storage industry was a growth industry for over 20 years. It has entered its own dark ages over the past few years, and it will begin a renaissance where the real value of the industry will no longer be based on the data containers but will transition into adding value to the data itself. Where is the value in the disk industry? Is this the end of the disk business as we've known it?

[FIGURE 1 OMITTED]

www.hgst.com

www.fujitsu.com

www.maxtor.com

www.samsung.com

www.seagate.com

www.nec.com

www.westerndigital.com