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Seagate and Western Digital wait for the click of death

Column Lack of competition helps SSD market thrive
Fri Jun 15 2012, 13:25
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lawrence-latif-2-120x194HARD DRIVE MAKERS are playing the role of Nero while they watch their market slowly burn.

Seagate, Western Digital and to a lesser extent Toshiba are starting to see free market economics - or as close as it gets - show their strategy of consolidation and profiteering. With the number of solid state disk (SSD) in the low teens, prices are falling steeply while hard drive makers rely on artificially high prices and shorter warranties to make a quick buck.

Hard drive manufacturers have been operating on wafer thin margins for the best part of two decades. Back in the 1990s there were 10 or so hard drive manufacturers including names such Quantum, Maxtor, Conner, Fujitsu and even IBM, but there's no shame in finding any of those names unfamiliar today, as the industry has systematically cannibalised itself in the name of increasing profit margins.

Even in 2011 there were five players in the hard drive market, with Seagate, Western Digital, Samsung and Hitachi taking the vast majority of sales, with Toshiba left with the scraps. But Hitachi's decision to sell to Western Digital meant Seagate felt compelled to buy Samsung's hard drive business so that it could maintain market share parity.

Samsung's willingness to sell its hard drive business was a sure sign that the game was up for hard drive manufacturers. The Korean firm cashed in its chips and concentrated on SSDs.

Eventually five became three, with Toshiba gaining parts of Hitachi's business only after Western Digital cut a deal with regulators in order to maintain the illusion of a competitive market.

So far the hard drive industry has consolidated - it claims - to save itself, which some would say is simply natural selection. Yet Thailand's floods last year showed industry watchers and consumers what this self-preservation was really all about, that is, the ability to dictate market terms.

The first not so subtle hint of this came when Seagate's CEO Steve Luczo told reporters that he could have raised prices by 40 per cent, but instead chose a 20 per cent price hike despite his company's factories not being affected by the flood waters. Not only did Luczo reveal 20 per cent price increases but subsequent financial results posted by the firm confirmed that the 'supply shortage' that was widely reported simply didn't materialise.

Seagate's latest financials posted in April show it had shipped more consumer drives in its first, second and third financial quarters of 2012 than the respective quarters a year previously, and some of those drives carried a 20 per cent price hike because Luczo and his boardroom chums thought they should capitalise on the fact that consumers have little choice when it comes to hard drives.

What of Western Digital, the company that was supposedly worst hit by Thailand's floods? Well, the firm's most recent financials for the quarter ending 30 March 2012 showed profit up 230 per cent from a year previously, which should be more than enough to overcome the 35 per cent drop in profits in the fourth quarter of 2011 that immediately followed the floods. All in all, I think we can say Western Digital has come out of the whole ordeal smelling a lot better than the flood waters that submerged its factories.

If Seagate is shipping more drives than ever and Western Digital is reaping the rewards of high hard drive prices, why then did both firms almost in tandem decide to slash hard drive warranties to just a single year? Hard drive makers might argue that the warranty period has little to do with the reliability of their drives, which is true. After all a 20 year guarantee doesn't stop a hard drive from following a typical bathtub failure curve, but why then, if the hard drives are just reliable as before, reduce the warranty period to lower your liabilities?

 

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