Seagate Has Front Row Seat in Disk Drive Data Boom

Steven Bobson, Europe & Americas Editor
September 19, 2012 /

The disk-drive industry was built on the backs of colorful, bold and fast-moving entrepreneurs who battled so fiercely they sometimes destroyed a business cycle before it was fully mined.

There were more than 100 disk-drive makers in the early 1980s. Boom and bust cycles were common. Today, there are three disk-drive companies:Seagate Technology ( STX),Western Digital ( WDC ) and Toshiba, a result of massive industry consolidation.

The competition remains fierce. Seagate and Western Digital, each with about 40% of global market share, continually leapfrog each other with new advancements. The latest came from Western Digital unit Hitachi Global Storage Technologies, acquired early this year. Last week, Hitachi announced a new “helium-filled hard-disk-drive platform.” Because helium is thinner than air, makers can pack more data capacity into drives that use less power and run cooler.

In March, Seagate announced technology that doubles the storage capacity of current disk drives.

The announcements show how hard both work to continually push the envelope. It’s paramount for several reasons, the most important being that data creation is growing at an exponential scale. Last year, data produced globally passed 1.8 trillion gigabytes, double the amount from 2009. And that will swell another 50% this year, said a study sponsored by storage systems supplierEMC ( EMC ) .

Growing Demand

“The demand for storage is great,” said Patrick O’Malley, Seagate’s chief financial officer. “We’re looking out to the end of the decade and the demand continues to exceed anything we have ever shipped to date.”

The short-term picture is not quite as rosy. Western Digital, at its annual investor’s conference last week, cut sales estimates for the current quarter based on lower-than-expected disk-drive demand.

Seagate will hold its annual investor’s conference Thursday and Friday. O’Malley wouldn’t discuss what Seagate will announce, but it’s expected it could, like Western Digital, cut expectations, said Edward Parker, equity analyst at Lazard Capital Markets.

There is no question that the disk-drive market is facing significant head winds, said Parker, “but with the structural changes and consolidation, the long-term view is still positive.”

A big challenge for now is a slowdown in sales of personal computers, a huge market for disk drives. In late August, research firm IDC lowered its outlook on PC shipments from an annual growth rate of 1.7% in 2011 to 0.9% for 2012. It also said computer server shipments fell 4.8% in the second quarter, the third straight quarter of year-over-year declines.

“The PC market is very weak, and concerns remain as to how strong and when it will bounce back,” said Parker.

PC sales have slowed for several reasons. These include the typical lull in sales that occurs before the arrival of big new technology.Microsoft ( MSFT ) will be shipping a new operating system, Windows 8, next month.Intel ( INTC ) is also getting ready to launch new PC microprocessors. Both events could ignite a new round of PC buying, though for now everyone is being cautious with inventory.

“All this is happening against a weakening economic recovery,” said John Rydning, industry analyst at IDC. “We knew it would be a tough period and will remain challenging through the first half of 2013.”

Despite these woes, shares of Seagate are up 41% this year. Western Digital shares are up 27%.

Industry Recovery

Investor confidence in Seagate and Western Digital has risen for several reasons. One is that the industry recovered faster than expected from the major disruption of production due to flooding in Thailand a year ago, which destroyed manufacturing plants run by Western Digital and Seagate.

Another is due to industry consolidation, which tempered previous episodes of industry imbalance.

The success of Seagate and Western Digital is very important to buyers of disk drives. Being the two dominant suppliers, their major customers are willing to work much more closely with them both, providing advance notice of future technology plans so that both companies can be ready with the right drives at the right time.

“We need to deploy our capital very carefully and selectively and align our product portfolios very well with customers,” said O’Malley.

Another benefit of industry consolidation is more stable pricing. In times past, it was not uncommon for some manufacturers to over-produce in the hopes of gaining market share. If they didn’t get the extra business, prices were slashed to offload excess inventory, thrusting other companies into the red along with them.

Road Bumps

Despite the new stability, bumps in the road still occur. This is happening right now with the rapid embrace of tablet computers — like the Apple iPad — which don’t use disk drives. Tablets use chip-based storage called flash. Seagate and Western Digital are both building expertise with flash storage, but more needs to be done.

“We’re going through a major shift,” said O’Malley.

Though tablets purchases have dampened PC and portable computer sales, there is still an upside for Seagate and Western Digital. Tablets, smartphones and other portable devices are contributing to the explosion in data creation.

Data are being created, collected and analyzed at enormous scales, part of an emerging trend called Big Data. Through mobile devices and social networks, consumers now provide tons of data on what they eat, where they visit, and what they like and don’t. Add in e-commerce on Amazon, eBay and Wal-Mart, data from credit card firms, manufacturers and shippers, as well as shifting economic, weather and population statistics, and the amount of information gets really, really big.

A whole new software industry has been created to make use of Big Data, which need to be stored, at some point, on disk drives. This is happening at the same time another industry movement, called cloud computing, is approaching mainstream acceptance. All manner of data are being stored in massive disk-drive farms, accessible remotely through the Internet, via the cloud.

“At the end of the day all that data needs to be stored somewhere,” said O’Malley. “Every inflection point has a tech transition. Storage is being disaggregated. We might lose in one area but we gain in another.”


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