November 6, 2000 1:15 PM PST

Microsoft picks second hard-drive maker for Xbox

Although Microsoft is signing exclusive contracts for many of the components in its Xbox game console, the software giant is hedging its bets when it comes to hard drives.

Scotts Valley, Calif.-based Seagate Technology plans to announce Tuesday that it has struck a two-year deal to provide drives for the gaming box, according to a company spokesman. Western Digital, a Seagate rival based in Irvine, Calif., announced Oct. 10 that will provide drives for the Xbox, although a source familiar with Microsoft's plans said Seagate is guaranteed at least half of the business.

Seagate will ship a version of its U-series drive used in desktop computers and other consumer electronics devices.

Microsoft's exclusive contracts include a deal with Intel to make a custom version of the Pentium III for the Xbox, as well as an agreement with Nvidia to design two chips--a graphics processor and a chip that combines audio and other functions.

For disk drives, however--which are more easily interchangeable than custom processors--Microsoft decided to go with multiple sources. Microsoft was not immediately available for comment.

The Xbox, due out in time for the 2001 holiday season, has become a key initiative for Microsoft. The software giant plans to spend $500 million to promote the console, which will compete with Sony's recently introduced PlayStation 2.

For the disk drive industry, which has been plagued by falling prices and intense competition, the opportunity to move into consumer electronics is seen as a chance to boost sales.

"The additional demand will be nice," said longtime disk drive analyst Jim Porter, president of Mountain View, Calif.-based Disk/Trend. However, drives for consumer electronics will still make up only a fraction of the industry's 200 million hard drives that will ship this year, he said.

Porter said drive shipments for consumer electronics such as TiVo's digital video recorders and WebTV's set-top boxes will probably total a few hundred thousand this year, a few million units next year, and perhaps 5 million to 10 million units in 2002. Quantum and Seagate have grabbed most of this business, with Western Digital recently trying to grab share, Porter said.

Even if consumer electronics becomes a big market, it is far from a cure for pricing pressure, Porter warned.

"If you think price competition in the PC disk-drive business is tough, wait until you try consumer electronics," Porter said.

 

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