French scientist Albert Fert and Peter Grunberg of Germany have won the 2007 Nobel Prize for physics.
They discovered the phenomenon of "giant magnetoresistance", in which weak magnetic changes give rise to big differences in electrical resistance.
The knowledge has allowed industry to develop sensitive reading tools to pull data off hard drives in computers, iPods and other digital devices.
It has made it possible to radically miniaturise hard disks in recent years.
Matin Durrani, editor of Physics World, a journal published by the UK's Institute of Physics, said the award had gone to "something very practically based and rooted in research relevant to industry".
"It shows that physics has a real relevance not just to understanding natural phenomena but to real products in everyday life," he added.
Professor Ben Murdin of the University of Surrey, UK, said giant magnetoresistance, or GMR, was the science behind a ubiquitous technological device. "Without it you would not be able to store more than one song on your iPod!" he explained.
"A computer hard-disk reader that uses a GMR sensor is equivalent to a jet flying at a speed of 30,000 kmph, at a height of just one metre above the ground, and yet being able to see and catalogue every single blade of grass it passes over."
GMR involves structures consisting of very thin layers of different magnetic materials.
For this reason it can also be considered "one of the first real applications of the promising field of nanotechnology", the Royal Swedish Academy of Sciences said in a statement.
"Applications of this phenomenon have revolutionised techniques for retrieving data from hard disks," the prize citation said. "The discovery also plays a major role in various magnetic sensors as well as for the development of a new generation of electronics."
A hard disk stores information, such as music, in the form of microscopic areas that are magnetised in different directions.
The information is retrieved by a read-out head that scans the disk and registers the magnetic changes.
The smaller and more compact the hard disk, the smaller and weaker the individual magnetic areas.
More sensitive read-out heads are therefore needed when more information is crammed on to a hard disk.
"It's no good having computer hard-drives that can store gigabytes of information if we can't access it," said Professor Jim Al-Khalili of the University of Surrey, UK.
"The technology that has appeared thanks to the discovery of GMR in the late 1980s has allowed hard-disk sensors to read and write much more data, allowing for bigger memory, cheaper and more reliable computers."
Last year, US scientists John C Mather and George F Smoot won for their work examining the infancy of the Universe.
They were honoured for their studies into cosmic microwave background radiation (CMB), the "oldest light" in the Universe.