The market of the data storage industry is divided into two types of manufacturers: the independent and captive manufacturers. The independent manufacturers are entirely focused on manufacturing hard disk drives (HDDs) and the captive manufacturers like Hitachi (HICTF.PK), Samsung (SSNLF.PK) and Toshiba (TOSBF.PK) are diversified companies with a hard drive division. The most important difference between the two is that captive competitors may sell hard drives at break even profit or even at a loss when it can bundle drives with other more profitable components, such as computer memory. This makes competition especially intense and sometimes irrational for independent manufacturers like Seagate (STX) and Western Digital Corp (WDC).
Due to the similarities in market share and business focus, Seagate and Western Digital are chief rivals in the market. The two companies' offerings cover 97% and 90% of the market respectively and both companies produce desktop, mobile, enterprise, and consumer electronics products, and sell mainly to OEMs. Thus, many of the same market forces such as seasonal changes in sales and commoditization of PCs affect the two companies in the same ways.
Solid State Devices (SSDs)
The position of both these companies is threatened by the new rising competitor of hard drives: The flash memory-based solid state devices. Unlike hard drives, flash memory are solid state, so they contain no moving mechanical parts, use less power, are smaller and less likely to break. These advantages make flash memory very attractive for use in portable devices such as digital music players, cameras and laptops. SSDs still have a few limitations and problems but these limitations are being gradually overcome with technological advances. So although hard drives are still the dominant storage device, SSDs represents an impending threat to Seagate's and Western's business. Following the International Data Corporation (IDC), sales of SSDs will continue to rise every year until 2015.
"2011 was a record year for the worldwide SSD market, with revenue more than doubling year over year due to strong SSD shipment growth in the enterprise and client segments," said Jeff Janukowicz, research director, Solid State Storage and Hard Disk Drive Components at IDC.
"The increasing use of flash in enterprise solutions, explosive growth of mobile client devices, and lower SSD pricing is creating a perfect storm for increased SSD shipments and revenue over our forecast."
The SSD industry revenue was of $5 billion in 2011, a more than double increase (105%) over the $2.4 billion of 2010.
It will be very important to see how both data storage companies handle the upcoming of SSDs and integrate it into their business models. This article will focus on their approach on SSD so far.
Seagate on SSD
Seagate's position in the development of the SSD market up to now has been that of a follower of, investor in, and integrator of 3rd party SSD IP rather than an originator of leading SSD technologies. Seagate's highest rank to date in the top SSD companies list was #11 in Q1 2011.
Seagate was a comparatively late entrant to the SSD market launching its first SSDs in December 2009. But Seagate was already corporately aware of SSDs - having launched an unsuccessful lawsuit aimed at STEC (now taken over by Western Digital Corp) the year before.
But the main question is: Why didn't Seagate's dominance in the hard drive market translate into an early dominance in SSDs too?
Well, Seagate misunderstood the potential size of the SSD market opportunity - and didn't think it was important enough compared to other business opportunities in hard drives.
In January 2011, Seagate finally offered to the world a hard hitting rebuttal to the SSD-taking-over-the-world view in an economics focused paper which argued that the reason hard drives would remain the dominant storage technology was because - the company reassured us - it would cost far too much for the SSD market to invest enough resources into replacing hard drives.
But this was not true, if users would start to see unbeatable business advantages from SSDs then the necessary investments would be made to support the larger SSD ecosystem.
When Seagate did begin to realize that the SSD market wasn't going to go away - the SSD market had already grown too complicated for Seagate to understand what was going on and Seagate was in no position to entertain the idea of becoming a credible technology leader.
It's likely that a root cause of Seagate's wrong footedness in SSDs in the 2003 to 2011 years was due to the company's management mistakenly viewing SSDs as just an expensive specialized form of hard drive. Seen from that perspective, hybrid drives and co-existence look like a better solution than they do from a pure SSD perspective.
As Seagate didn't develop an adequate SSD IP set of its own - the company's first SSD products relied heavily on 3rd party IP from LSI (LSI) and SandForce. However after LSI's acquisition of SandForce in January 2012 it soon became clear that LSI was perfectly capable of getting storage OEM customers such as EMC (EMC) and Intel (INTC) on its own. It didn't need Seagate as a route into the SSD market.
More recently - 2012 and 2013 - Seagate has therefore been pursuing the only realistic options left to latecomers in the SSD market - acquisition, licensing 3rd party IP and badge engineering.
These recent steps are positive moves - either of which - if followed through - could improve Seagate's position within the SSD world.
Only recently (May 2013) Seagate really "impressed" the SSD market by selling 'The Seagate 600 SSD' and 'The Seagate 600 SSD Pro'. The Seagate 600 SSD is the company's first mainstream 2.5-inch SSD. It has capacities up to 480GB and some versions are just 5mm thick, which means they are perfect for ultrabooks. Prices differ from $109.99 to $454.99 depending on the retailer, capacity and thickness you choose.
Western Digital Corporation on SSD
WDC on the other hand, also is a late entrant of the market and has recently decided to buy sTec Inc. (STEC) for $340 million in cash as it also wants to expand its presence in the enterprise solid-state drive market. WDC's CEO said that solid state storage will continue to play an increasingly strategic role in the future of WDC and that this acquisition is again one more building block in his strategy to capitalize on the dramatic changes within the storage industry by investing in SSDs and other high-growth storage products.
WDC started its SSD strategy in 2009 by the acquisition of SiliconSystems and really became significant with the 2011 acquisition of Hitachi GST, giving WDC market dominance in SAS SSDs. sTec brings WDC further enterprise SSD strength from its solid design capabilities and a high-performance product portfolio to boost WDC presence in the enterprise SSD market. The sTec acquisition will solidify WDC's position in SSDs while potentially giving Hitachi GST more control over its SSD architecture.
Conclusion on SSDs
SSD is a very competitive and complex set of markets. Even pure SSD companies [like Sandisk (SNDK), Micron (MU) and Fusion-io (FIO)] - which don't have other distractions - have a tough enough time understanding what's the right way to go with products and markets. Even though Seagate and Western Digital Corp.haven't done a lot of effort, they still haven't convinced me that they take SSDs as seriously as they should.
Looking ahead at the challenges and opportunities posed by the SSD market for Seagate and Western Digital Corp.- I think that having to share management time and investment resources between the mutually different interests of solid state and magnetic drive product lines will lead to tensions and conflicts for resources in which the corporate "compromise solutions" aren't always going to be the same as the best of class solutions which the SSD market expects.
The acquisition of sTec is good news for WDC's shareholders as this acquisition was a necessary and logical step in the right direction. For the first quarter of 2013, Seagate and Western stood respectively 15th and 22th on the "Top SSD companies" list. Which made very clear that Western was still lagging behind in the SSD market and had to do something to make the gap a little closer.
Both companies should realize that in the modern era of SSDs - the only thing which can beat an SSD in the market - is another - better SSD. In that context - knowing how to design and build the best or cheapest hard drives - and having routes to market for hard drives is - frankly - irrelevant.
Even though Seagate is (currently) better positioned in the HDD and SSD market, has a higher dividend yield and is more profitable than Western Digital Corp., I'd buy nor Seagate nor Western Digital Corp. today. Both stocks have gone up too much on a year to date basis (WDC went +104% and STX +79%) and I feel that investors are too optimistic about the things these companies have done to prepare themselves for the SSD threat. Further acquisitions and efforts are needed to ensure their position in the market and to ensure long-term EPS growth for shareholders in the future. I have a strong feeling Western Digital Corp.will benefit a lot from its acquisition of sTec (which was standing third in the list of the "Top SSD companies") and I'm curious whether or not Seagate will react actively or passively. For now I just feel that it is too early to make an investment decision yet.