Seagate – Samsung Deal the Storage Industry Impact

Seagate today confirmed rumors aired by the Wall Street Journal yesterday (and predicted by ServeTheHome last month after the Western Digital – Hitachi GST announcement) when it announced its plans to purchase Samsung’s hard drive business for $1.375B. What does this mean to the industry?

As was noted yesterday, the deal makes a lot of sense. Samsung is focusing on its flash storage business where it can leverage technology in its growing array of consumer electronics devices such as phones, tablets, and even ultra portable notebooks. Seagate, on the other hand, gets a big customer list to drive economies of scale.

Why the Customer List?

One may note I singled out the customer list above, and for good reason. If one is managing a big portfolio of drives why does one need to have two 3.5″ 7,200rpm 2TB drives in the market? This is exactly the same question the Seagate – Maxtor integration team faced a few years ago. The outcome of that process was basically that Seagate decided its technology was superior and for the most part the Seagate technology and brand have remained while a significant portion of Maxtor’s customers were supplied with Seagate drives as part of long term contracts with Maxtor.

The simple version of the process that both Seagate and Western Digital will be going through, on the prodcut side, over the upcoming months will be:

1. Evaluate technology advantages of the firms.
2. Evaluate potential IP that can be incorporated into future products.
3. Figure out which technology has better economies of scale given the combined company’s supply agreements.
4. Pick an architecture that meets performance, reliability and production cost requirements and focus on that design for the current state.
5. Add IP to future generations if necessary.

With two major players in the 3.5″ industry for example, Seagate and Western Digital can slow the rapid price declines in the market with price signaling, similar to what airlines do. At the same time, they will have similar economies of scale and get a much stronger position when dealing with suppliers since there are only two major players (Toshiba will be a very distant third without a full product lineup) in the industry.

Looking Forward

The future of the storage industry could see some game changers:

1. Seagate or Western Digital purchasing Toshiba’s hard drive business. Seagate paid a lot less for Hitachi, and may be able to fund either by itself, or with financing  the purchase of Toshiba’s hard drive business. One would suspect the previously #5 maker of drives, Toshiba’s business, would have a lower than $1.375B Samsung unit purchase price. That would mean that at worst Seagate would pick up some significant share with the combined companies at about half the cost of what Western Digital purchased Hitachi GST for.
2. Toshiba builds out a product line to compete in the 3.5″ space. One thing that is common in purchases driven mainly as a vehicle for customer acquisition is that customers use the transition to look for another supplier. If a vendor such as HP decides it does not want to use Western Digital or Seagate going forward, or that it wants a second or third supplier, it may be willing to entertain a Toshiba product. For this to work, Toshiba needs a 3.5″ product immediately as once the acquisitions close, customers will be stuck looking at a duopoly for awhile and Toshiba will be very far behind the leaders in terms of economies of scale.
3. Western Digital purchases Toshiba’s hard drive unit. This would be a solid move but would be tough from an integration standpoint and a cost perspective since the Hitachi deal was quite large.
4. The wildcard is that Toshiba makes some sort of two-generational breakthrough and is able to put out significantly more advanced technology than Western Digital and Seagate and thus gets itself a period with a large technology advantage. I think this is about as likely as a major PC OEM purchasing Toshiba, and therefore not very likely.

Conclusion

My guess is that, unless there are significant advantages to the newly acquired product families, Western Digital’s and Seagate’s designs will be what consumers purchase in the next few years. In the next few months, one can expect that the market will stay competitive, as it must due to antitrust regulation. Within months of both deals closing, I would suspect that storage server and desktop commodity 3.5″ prices will fall at a much slower rate than they have in the past twenty-four months. I think industry eyes will be watching how the integrations go and, potentially more so, what happens to Toshiba.

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