Consumers: Thanks for the Memory

Ever-higher-capacity devices at ever-lower costs are sparking a revolution in consumer electronics that's only just beginning

When thieves broke into Ramesh Goonetilleke's Honda Civic in 2002 and stole his stereo for the fourth time in as many years, the project manager for a San Francisco software company decided that was enough. Rather than replace his stereo again, Goonetilleke bought a $400 digital music player made by Creative Nomad, which includes a 20-gigabyte hard drive that easily holds his collection of hundreds of music CDs.

He had audio technicians install a plug-in jack between the front seats and wired it to an amp and speakers in the trunk. For $70 he purchased a remote control that lets him select songs without taking his eyes off the road. "It works pretty well, and for me it has made the CD obsolete," says Goonetilleke. "It's all on my Nomad." While he misses live radio a bit, his new setup has the advantage of avoiding radio's repetitive -- and boring -- playlists.

Goonetilleke is on the front line of a revolution in the consumer-electronics and PC businesses made possible by rapid advances in memory technology. The plunging price and soaring capacity of data storage have begun to radically alter electronic devices and the way people interact with them.


  Hundreds of thousands of consumers are snapping up disk-drive-based music players from Creative Nomad and Apple (AAPL ). Digital cameras that easily transfer images to CDs increasingly endanger the consumer film businesses of Kodak (EK ) and Fujitsu. The latest home PCs can store tens of thousands of songs, which lessens the need to buy CDs, considering how advanced and simple downloading music has become.

Some industry wags forsee a future when music downloads will disappear and PCs will come with huge music libraries already burned onto the hard drive, ready to be activated song-by-song with a one-click credit-card transaction from the user. Video-game consoles will use faster memory-access technology to make possible increasingly lifelike and intricate games. And personal video recorders will replace VCRs and record hundreds of hours of TV programming -- minus ads. "Every new TV set made within the next five years is going to have a rotating magnetic device in it, on it, or near it," says John Monroe, a vice-president for research at tech consultancy Gartner.

That's a bold prediction, but considering the memory sector's recent track record, it could come true. The dozens of companies that vy for dollars in the flash memory and hard-drive storage industry have driven cutthroat competition that plays into the low-price strategies of increasingly dominant electronics sellers such as Dell (DELL ) in PCs and Nokia (NOK ) in cell phones. That has pushed many suppliers out of the field: In the 1980s, dozens of companies made disk drives. Today only seven major players remain, including Seagate (STX ), Hitachi (HIT ), Toshiba, Maxtor, and Western Digital (WDC ).


  A positive byproduct, however, has been eye-popping innovation. Dell, never an early adopter in tech trends, just started shipping a hard-drive-based music player that uses 1.8-inch Hitachi hard-drives holding either 15 gb or 20 gb. A few years ago, flash-memory cards used in digital cameras and music players held 8 megabytes or 16 mb of data and cost $50 to $100. Today, 128-mb flash cards cost less than $50. A 2-gb hard drive used in desktop computers cost $120 in 1997, according to tech consultancy TrendFOCUS. In 2002, a 40-gb drive cost $67 -- a decline of 97%.

"What you pay today buys tons of capacity relative to what you could have gotten even a year or two ago," says Bill Healy, general manger of mobile storage for Hitachi Global Storage Technologies in Silicon Valley.

Just wait: Flash memory cards that hold 4 gb of data will hit the market within a year, effectively doubling the maximum capacity of existing digital cameras. Two-inch hard drives from Toshiba and others are just starting to reach high enough production levels to realize economies of scale, fueled largely by the craze of Apple's iPod and other types of handheld players. And Healy says before long, hard drives as small as a half-inch in diameter will spin inside personal digital assistants, cell phones, and even watches.


  "The hard-disk-drive industry has accomplished things in the last five years that are astounding by any standard and maybe unique in the history of technology," he gushes. "We've basically increased capacity by more than 20 times and dropped the cost [per unit of memory] by half between the fall of 1998 and today," says Gartner's Monroe.

Sales of these devices have blossomed as a result. According to Gartner, revenues from removable solid-state storage devices -- mainly flash cards for music players and digital cameras -- rose more than 70% from 2000 to 2001, from $1.2 billion to $2.1 billion. That has happened even though "the price is being driven down by increasing number of applications," says Brian Matas, vice-president for research at tech consultancy IC Insights in Scottsdale, Ariz. "You can switch [flash memory] from your digital camera to your PC then put it in your MP3 player. It's convenient and easy to use."

In fact, sales of flash memory to the nascent consumer market are rising much faster than those to traditional customers such as cell-phone handset makers. That mirrors what's happening in the hard-drive market, where PC makers still dominate the scene but new consumer products are coming on strong. Of 200 million mobile devices sold in 2002 that included hard drives, only about 7% were something other than laptops, says Gartner's Monroe. Within three years, he predicts, that percentage will rise to several times that figure.


  Huge increases in memory capacity alone aren't sufficient to fuel behavioral changes and demand. Other key factors include the spread of broadband connectivity, consumers' increasing comfort with digital products, and, perhaps most important, consumer electronics that are much easier to use.

Gil Rutkowski, the CEO of Chicago technology services firm Inova Consulting, recently tried out a new 128-mb memory device called Migo from Forward Solutions. Unlike most other keychain devices that come with only rudimentary software to allow for uploads and downloads, Migo came packaged with software that automatically captures key files and settings from e-mail, word processing, Web browser, and presentation programs on Rutkowski's home computer. The software stores these preferences and then seamlessly transfers them to another computer. All Rutkowski has to do is plug the Migo into a USB port on a machine at another office or in an Internet café, and he can work as if he's at his own PC.

When he unplugs his Migo, the software wipes all traces of Rutkowski's files and settings off that other PC. And when he plugs the Migo back into his own PC at home it automatically synchronizes all data and moves all changes to Rutkowski's desktop or laptop, all the while encrypting the process to keep it secure. "For anybody who doesn't want to lug a laptop around, it's essentially instant access to everything they would use daily," he says. I hardly take my laptop home anymore. When I had to give the Migo up for a week I was lost."


  There seems no end in sight for consumer-electronics innovations that will require more storage. For instance, recording high-definition TV signals at home requires up to 10 times the disk space as current digital-TV signals. With HDTV rolling out in most parts of the country, it will be only a matter of time before consumers need 200-gb to 300-gb disk drives in their set-top boxes to hold enough TV programs for later viewing and storage.

Sales of digital cameras, which are projected to double in 2004, to nearly 50 million units, will likewise boost demand for memory and fuel more innovation. And Nelson Chan, a senior vice-president at flash-memory maker SanDisk, envisions other products that would have seemed impossible a few years ago.

Those include solid-state video recorders with no moving parts. And weather-resistant dog tags with a soldier's medical information loaded in flash memory (Chan says flash cards and their data have survived airline crashes). Cheap, compact storage "has enabled new markets we never imagined 12 to 18 months ago," Chan adds. "Now we see a huge opportunity and big changes."

So does Hitachi's Healy, who predicts the gradual evolution of the laptop into a hybrid portable entertainment center, equipped with a high-capacity hard drive. With memory companies delivering plenty of advances and consumer demand for new gadgets and better laptops seemingly insatiable, the smartest memory makers may face a busy and prosperous future.

By Alex Salkever, Technology editor for BusinessWeek Online

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