Unless you live under a rock, you’re probably aware that earnings from tech companies this past quarter weren’t all that great. AMD and Intel both eked out a profit, but the slowing US economy, consumer uncertainty, and weak demand in Europe all took a toll on industry earnings. With millions of people in mortgage trouble and unemployment an issue, it’s a rocky time for a lot of folks…
But you wouldn’t know that looking at Seagate’s profits. Seagate’s revenue for its final quarter in financial year 2012 was $4.4 billion (£2.83 billion), up from $2.85 billion (£1.84 billion) in June 2011. The Thailand floods didn’t hit until October of last year, but full year revenue also rose to $14.94 billion (£9.62 billion) up from $10.97 billion (£7.07 billion) in 2011. Seagate was largely unaffected by the crisis, which has given the firm an advantage – it had no factories to restore. What’s even funnier is that Seagate actually took a pretty hard hit to its enterprise drive shipments this past quarter. Due to supply problems, the company shipped 1.5 million fewer enterprise hard drives than planned.
According to Seagate’s CEO, Stephen Luzco, the company will introduce new enterprise and ultra-thin hybrid hard drives going forward, and is planning to expand its efforts in the SSD space as well. The company believes the HDD supply is now adequate to meet existing and future demand, and predicts revenues of $17 billion (£10.9 billion) or more through the end of calendar 2012, with gross margin above 30 per cent.
Seagate’s gross margin prior to the crash was 19 per cent – which tells us something about where prices are going to head between now and the end of the year. Downward, yes, but not very quickly.
What’s playing out right now is an example of what game theorists call the “prisoner’s dilemma.” In theory, Seagate, Western Digital, or Toshiba could quickly gain market share at the expense of the other two by modestly cutting hard drive prices. All three companies are aware of this option, but in this case, none of them want to take it. After more than a decade of being the red-headed stepchild of the IT industry whose products were simultaneously vital and derided, hard drive manufacturers are enjoying their first windfall profits since 7200rpm consumer drives carried a hefty premium.
Understanding the motivations at work is as simple as running the numbers. Western Digital reported $1.6 billion (£1.03 billion) in net income for financial year (FY) 2012, up from $770 million (£496 million) the year before. That’s a gain of $830 million (£534 million). Seagate’s net income for FY 2011 was $511 million (£329 million). That means Western Digital made $319 million (£205 million) more from higher hard drive prices than it would’ve made if it had held Seagate’s entire market share in FY 2011.
Western Digital doesn’t need Seagate’s market share. What it needs is capital – and lots of it.
One reason WD and Seagate are able to keep prices on a slow downward trend is that OEMs have precious little manoeuvring room when it comes to acceptable replacements. SSD prices may be falling, but a cheap 60GB SSD is no substitute for a 320-500GB HDD – not when your useable space is just 55.1GB, and Windows 7 eats well over 20GB once the hibernation file, pagefile, and Windows installation are all accounted for. Consumer hard drives are relatively safe from SSDs – but enterprise drives are where the money is.
Enterprise drives still have marked advantages over SSDs in terms of capacity, reliability, and cost per GB, but the same high margins that make the drives profitable also make them vulnerable, and both companies know it. Each has to build a roadmap that allows it to preserve existing relationships and continue to sell products into particular markets, even if the nature of those products changes. That means branching into SSDs and new spaces for HDD production.
Seagate is planning to release a third-generation hybrid drive for ultrabooks, while Western Digital is pushing a new line of hard drives designed for small/home office network attached storage platforms. The idea behind the new Western Digital Red (which we recently reviewed) is to establish a line of drives with both firmware enhancements and a management/configuration utility called NASWare.
Longer term, WD has to make decisions about its own place in the SSD industry, and decide what happens to its iconic VelociRaptor drives. While the latest 1TB models are still the fastest mechanical storage money can buy, it’s hard to see how WD will move forward another generation without integrating a cache or taking the product to SSD.
Some commentators are of the opinion that hard drive prices will be largely back to normal by the end of 2012.
We think otherwise and Seagate agrees. When asked, Luzco stated that he thought ASPs would decline by around 5 per cent by the end of September. The company’s prices are going to decline – that’s inevitable – but Seagate is fighting that trend by increasing product mix and emphasising its own most profitable offerings to help OEMs meet their own goals.
Companies like Dell and HP have already bent to Seagate’s will to some degree, and the CEO noted that “with the pricing overall being relatively high compared to pre-flood, a lot of the OEMs have mixed down in order to preserve the budgets that they have going towards storage.”
The advent of USB 3.0 has given Seagate and Western Digital a way to position external drives that are just as fast as their internal counterparts, and external prices never rose as much as standard drives did. Customers noticed the trend and many shifted their buying habits accordingly. The HDD triopoly will keep internal prices on a slow downward ramp, probably by offering higher capacities at a better cost per GB rather than slashing prices on all makes and models to return to pre-flood levels.
Done correctly, this type of adjustment could take as long as a year. The overall hard drive market will maintain at least a 25 per cent average price premium through Christmas, with dips below that mark being offered as the usual Black Friday and Xmas shopping incentives.
By summer 2013, prices should return to rough parity, though it wouldn’t surprise us if premium high-capacity drives retained a 5 to 10 per cent mark-up in terms of cost per GB relative to where they stood in October 2011.
Published under license from Ziff Davis, Inc., New York, All rights reserved.
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