Continued Pricing Power in Store For Data Storage?

Includes: DVMT, STX, WDC
by: William Trent, CFA

The normal trend in technology hardware is for prices to decline. Therefore, "pricing power" can be a relative concept, occurring when prices fall at a slower rate than they normally do.

Looking at the recent PPI data, such a situation may apply in the computer storage industry.

PPI for computer storage

Price declines are as low as they have ever been and the rate of decline has been steadily improving since late 2002. Has the trend run its course or will things get better still? For answers I turned to some recent conference calls.

Western Digital (NYSE:WDC) is indicating that price competition has heated up.

John Coyne

Yeah, I think as an overall statement both in notebook and desktop environments, pricing in the last quarter continued to be competitive. I think as we look forward into the traditional stronger seasonal period in the next couple of quarters, we have already begun to see evidence of our customers understanding that supply is a critical element as well as pricing. And so, I expect that we will see our customers at placing more value on supply and the ability of companies to reinvest in the technologies and the product breadth that will support their future needs.

(Excerpt from full WDC conference call transcript)

Seagate (NASDAQ:STX) isn't looking for the seasonal demand to help much.

Charles Pope

Okay, this is Charles I will answer both of those questions. In the September quarter we have built into the guidance continued aggressive pricing not as aggressive as in the June quarter but still at the low end of range of what is normal and historically in the September quarter we've actually seen a dropped below the normal range. We do not assume that it is prudent to anticipate it dropping below the normal range in the environment that we are in, and so that’s the main reason for not seeing any margin expansion even given the seasonal up tick.

(Excerpt from full STX conference call transcript)

EMC says pricing is always competitive.

Joe Tucci

I've been in this industry now for seven years and it's always been aggressive. So I don't see any significant sea change here in the pricing environment. It's always been a tough environment, we have to always watch our cost, our supply chain and our margins. And I think if you look at our results, I think we're doing a fair job on all three and we will continue to do that. But I don't see any significant huge sea change out there. Is what I call the pricing environment competitive? I sure would. And has it been competitive for a long time? Absolutely.

(Excerpt from full EMC conference call transcript)

Given what the industry representatives are saying, I'm interpreting the fact that price declines being at their best level ever means they are likely to get worse.