North America United States
TMT Storage Systems & Devices
23 February 2009
The HDD Industry
Disruptive technologies
Sherri Scribner
Research Analyst
(1) 212 250 5734
sherri.scribner@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Research Product Committee has deemed
this work F.I.T.T. for investors seeking differentiated ideas. We present our
outlook on a number of different trends impacting the HDD industry over the next
five years and find that netbooks represent a disruptive technology that will impact
HDD pricing in 2009. We also assess the threat of solid state drives, analyze the
potential for external back-up drives and update our industry forecasts.
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LOCATED IN APPENDIX 1.
FITT Research
Top picks
Western Digital Corp. (WDC.N),USD14.55 Buy
Companies featured
Western Digital Corp. (WDC.N),USD14.55 Buy
2008A 2009E 2010E
EPS (USD) 4.32 1.59 1.85
P/E (x) 6.4 9.2 7.9
EV/EBITDA (x) 3.9 2.5 2.0
Seagate Technology (STX.O),USD4.19 Hold
2008A 2009E 2010E
EPS (USD) 2.67 -0.70 -0.17
P/E (x) 8.8 – –
EV/EBITDA (x) 5.6 4.5 3.5
Hutchinson Technology (HTCH.OQ),USD2.30 Hold
2008A 2009E 2010E
EPS (USD) -0.67 -3.06 -0.35
P/E (x) – – –
EV/EBITDA (x) 7.4 10.5 2.8
Fundamental: Netbooks represent a disruptive technology
Our proprietary survey on consumer preferences and analysis of current consumer
buying patterns suggests that netbooks are quickly becoming the most popular
form of notebook in the market. Drawing on Clayton Christensen’s book, we find
that the trends in the netbook market clearly represent a disruptive technology to
the PC market. This shift to lower cost notebooks will likely have a negative impact
on pricing in the HDD industry, but a positive impact on unit growth.
Industry: A number of issues are coming to a head in the next five years
We see numerous issues impacting the HDD market over the next five years,
including pricing, solid state drives, external back-up drives, and new HDD
technologies. We believe the most significant issue for HDD companies during
this period will be ASP declines in the 2.5-inch market, which will likely challenge
the current $40 floor price of HDDs. In the longer term, the ability of HDD
companies to produce low-cost drives based on new technologies is a concern.
Thematic: SSDs will challenge enterprise, but notebook threat is limited
Solid state drives represent a clear value proposition in the first tier of the
enterprise HDD market where speed is a priority. The value proposition in the
notebook market is still unclear, and our proprietary survey finds that consumers
are not interested in lower capacities. Lower capacities may be attractive for
networked corporate PCs, but we estimate this segment will fall to 10% in 2010.
Thought-leading: Netbooks will change the HDD market, SSDs will not
The growth in netbooks will challenge the HDD industry and pressure ASPs over
the next two years. In the longer term, we see further growth for the HDD market
as low notebook PC prices spur demand. The impact of netbook growth will likely
result in 2.5-inch HDDs out-shipping 3.5-inch HDDs in 2009, a significant milestone
for the industry. We believe SSDs will remain too expensive despite aggressive
NAND pricing declines, and offer only modest benefits for notebooks.
Focus on companies well positioned to take advantage of netbook growth
Western Digital’s leading market share in the 2.5-inch market and low-cost model
position the company well to weather challenges to the industry over the next five
years. Current economic concerns have pressured the shares and we see a
Buying opportunity. Seagate should remain challenged due to its significant
exposure to the enterprise market and its limited mix of revenue in growth areas
such as 2.5-inch and external drives. Hutchinson’s profitability remains in question.

Table of Contents
Executive summary ........................................................................... 3
Outlook: Everything comes to a head.......................................................................................3
Valuation ..................................................................................................................................4
Risks ........................................................................................................................................4
Netbooks: A disruptive technology ................................................. 5
What are netbooks?..................................................................................................................5
What is a disruptive technology? ..............................................................................................5
Netbooks as a disruptive technology........................................................................................6
Evidence suggests netbook growth will remain robust ............................................................7
Key issues for HDD market ............................................................... 9
Negative mix pressure from netbooks in 2009 .......................................................................10
Longer-term ASP declines suggest a new floor price for HDDs.............................................11
2.5-inch HDDs to out-ship 3.5-inch HDDs in 2009 ..................................................................13
Solid-state drives: A potential disruptive technology.................. 14
SSDs are not a disruptive technology right now.....................................................................14
SSD penetration: The hype versus the reality .........................................................................14
The threat to notebooks..........................................................................................................15
Opportunity in the corporate market.......................................................................................17
SSDs in servers and storage arrays ........................................................................................18
External back-up drives................................................................... 21
New HDD technologies on the horizon ......................................... 23
PMR technology reaches its limits in 3-5 years ......................................................................23
Patterned media: DTR and BPM.............................................................................................24
Heat-assisted recording: HAMR and TAR ...............................................................................25
The HDD market .............................................................................. 26
A bit of history on the HDD industry .......................................................................................26
Industry dynamics since the mid-1970s..................................................................................27
Areal density growth...............................................................................................................28
HDD industry segments..........................................................................................................28
Desktop..................................................................................................................................29
Mobile....................................................................................................................................30
Enterprise...............................................................................................................................32
Small form factor drives..........................................................................................................33
Companies and competitors .......................................................... 35
Seagate Technology (Hold, $4 PT) ..........................................................................................35
Western Digital (Buy, $17 PT) .................................................................................................36
Hutchinson Technology (Hold, $3 PT).....................................................................................37
HDD competitors....................................................................................................................38
Appendix A: survey results............................................................. 39
Appendix B: definitions................................................................... 40