Beginning of the End for Competition in HDDs?

For Seagate, it’s done as the company has just completed the acquisition of Samsung HDD business (see today’s news). All implicated countries accepted the deal without condition but China.

The Chinese Ministry of Commerce (MOC) obliged Seagate to keep the Samsung brand as an independent competitor for at least one year and continue to expand production capacity under the Samsung brand within six months. Furthermore Seagate should not use its market status to substantially transform the current business model by forcing customers to purchase their HDD products. The MOC prohibited Seagate from compelling TDK China Co., Ltd. to exclusively supply recording heads for HDDs to Seagate and its affiliated companies, or limiting its supplies to other HDD manufacturers. And finally Seagate promised to invest at least $800 million annually in R&D and renovation to offer more creative products and solutions to customers in the next three years.

Seagate will be obliged to follow these MOC’s recommendations but it’s not a problem and for a relatively short period. At the end Samsung HDD will be completely integrated under Seagate’s name.

For WD, it will be more complicated. Europe, as well as Australia, approved the acquisition of Hitachi GST but with strong conditions. The approval is conditional upon the divestment of essential production assets for 3.5-inch HDDs, including a production plant, and WD cannot complete the acquisition until it has found a suitable purchaser that is approved by the Commission. Up to know, the US HDD maker has not revealed the acquirer of this divest production.

Now WD is waiting for the approval of MOC to complete its acquisition. We note that MOC was the only one to impose conditions to Seagate, which means it could impose stronger ones than Europe.

At the end, WD will have no choice but accepting them. Probably before the end of 1Q12, there will be only three manufacturers of HDD in the world: Seagate, Toshiba and WD, not including tiny ExcelStor in China. The first two giants will together completely dominate the market, as Toshiba is a dwarf with less than 13% of the global HDD production.

We are not far of the duopoly currently known in the microprocessor industry with healthy Intel and AMD.

This new oligopoly could deeply affect the HDD industry. The first sign is the recent decision, at about the same time, of Seagate, effective December 31, 2011, and of WD, beginning January 2, 2012, to reduce the warranty period of certain units, in some instances from five years to one. It’s not happy new year for their customers. Was it a common decision by the two rivals? Of course not, it’s prohibited. Probably an accident. But in the future, if one of them decide anything, and the other one follows few days after, for example in term of prices, will it be once more an accident for the two public companies? If Toshiba is the only one to offer reasonable prices, it will
be unable to satisfy the total demand. And what will be the interest of
Toshiba not to align its prices with the competition?

Seagate’s CEO Steve Luczo and and WD’s CEO John Coyne are smart guys as far as we know. But they are working principally for their respective board ans shareholders, then their customers.

What we are waiting now is the crucial evolution of the price of their drives. They increase drastically following the Thailand flooding. But the situation is positively evolving in the assembly and components plants and could return to normal conditions in 1Q12. Will the prices come back to the same ones before the flood? We shall see.

One of the main reason advanced by Seagate and WD for their acquisition to regulatory bodies: we need more money to invest in R&D. The increase in areal density is slowing these last years. When there was much more manufacturers having smaller revenues and cash, there was a lot of activity in new technologies. Moreover, Seagate and WD, and even much more after their acquisitions, will have about all the patents on HDDs, which prohibits any new actor to come and compete in this field.

Steve Luczo told us that the most promising technology to come was Shingle Magnetic Recording for higher capacity drives. But we don’t see today anything happening.

In conclusion, this excessive concentration of HDD makers can be suicidal for the storage industry. The biggest advantage of disk drives is their price per gigabyte, and decreasing regularly in the past. If this trend stopped, SSDs and maybe tapes will progressively increase their market share.

Seagate (in collaboration with Samsung) and WD with Hitachi GST are involved in SSDs but are today weak players and not manufacturing their key ingredients, flash chips.