In the cutthroat hard drive manufacturing business, volume is king. Back in the relatively halcyon days of the mid-1980s, it is estimated that more than 200 hard drive manufacturers vied for dominance in such areas as disk density, hard drive size, speed, and latency. It is no surprise then that the industry has become consolidated as it has matured. As of last week, five tech giants ruled supreme over the traditional hard drive market. As of last Monday, that number had fallen to four.
Marvell Technology Group
However, the potential downside for Marvell during this time of industry retrenchment may be substantial. For one, a business that relies too heavily on a single sector or customer has essentially placed all of its highly sophisticated silicon eggs in one basket. Contraction within an industry already wrought with challenges to the dominance of traditional storage media could potentially and significantly affect the fortunes of Marvell. Increased consolidation could also lead Western Digital to demand more favorable terms from the chipmaker -- with such a large market share and dwindling competition, Marvell may have little choice in the matter. In fact, Marvell's most recent earnings statement discloses the risks inherent in its overreliance on any particular customers: "Our sales are concentrated in a few customers, and if we lose or experience a significant reduction in sales to any of these key customers, our revenues may decrease substantially."
As the highly competitive hard drive and wireless industries continue to shrink because of mergers and acquisitions like Western Digital's, Marvell's future performance may be closely tied to the handful of companies it relies on for the bulk of its revenue stream. A war chest of nearly $2.7 billion in cash offers somewhat of an effective buffer against the typical ebb and flow of the highly cyclical industry in which Marvell operates, and a well from which new technologies will undoubtedly flow, perhaps through acquisitions of its own. However, until Marvell diversifies its customer base, the specter of real pain down the line will remain.
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Fool contributor Jeff Saginor does not own shares in any of the companies mentioned in this story. The Fool owns shares of Marvell Technology Group and Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.