Horizon April 2017 Storage Market Brief

11:06 23 April in Uncategorized

We all know how transformative the use of data has been in our lives, and it will only grow as we become increasingly dependent on our devices to manage our day to day lives. As we move away from distributed computing to the cloud, data capture is exploding with every key stroke tracked, stored, and filed away. The next iterations of technology (IOt, Autonomous Cars, and AI) will amplify the need for storage. Steve Luczo, the CEO of Seagate, stated in his joint report with IDC that 163 zettabytes (16 trillion gigabytes) of storage will be created and replicated by 2025. That would require 16 billion 12 terabyte hard drives.

There are many moving pieces to today’s storage market, with NAND (components used to build SSD) taking center stage. The most talked about piece is the sale of Toshiba’s NAND business and the impact of the ongoing NAND shortage on the storage market.

SSD-there are several underlying story lines that shape the SSD storage market. Front and center is the implosion of Toshiba, requiring Toshiba to sell its interest in its NAND business and the impact on the storage market.   Toshiba has received several bids with two beyond WD’s valuation, resulting in WD screaming foul. WD is claiming Toshiba is contractually obligated to work with them and is threatening to litigate. WD specifically is concerned about Broadcom’s consortium offer of 28 billion. Broadcom fabs WD’s SSD controller, and WD is concerned with Broadcom owning both the controller and the NAND build, putting WD in a position to compete against a supplier. Toshiba has its own SAS design, so the two work together without conflict. Alternatively, WD and the Japanese government do not want to see Foxconn awarded the bid for fear of losing control of intellectual property to the Chinese, who have made it clear of their intent to get into the NAND business.

Similar to the DRAM business, the NAND business is a commodity business prone to boom bust cycles. Broadcom’s bid may make sense in today’s environment but may look grossly overvalued in 2018. The consensus is that pricing will come down between Q4 2017 and Q1 2018 unless supported by a healthy hand set market. Toshiba is not in a position to turn down the high bids.   I am not sure what WD has available for a legal gambit.   Stay tuned; this is not over by a long shot!

There was a recent article in Digitimes with Phison (SSD Controller Mfrg) Chairman KS Pua indicating he expects a NAND spot price correction downwards this quarter due to lighter device builds. We have seen open market pricing settle for client SSD as manufacturers reduce Flash/SSD content within their products. The market pause is most likely tied to a report of slowing PC sales over the last three weeks, which may be related to a supply side issue around memory modules and slowing hand set sales in China.   Despite market price increases slowing, we see this as a pause, and we may see upward pricing pressure when Apple IPhone 8 production ramps up. With NAND manufacturers increasing die density, expect to see handheld manufacturers raise minimum storage requirements, potentially putting pressure on NAND demand.

The enterprise market, which lacks the flexibility of the client market, is seeing some churn. Reducing storage capacity in a data hungry market is not an option for enterprise builders.   After holding out, we are seeing many more enterprise customers entering the market, looking for product. This is directly tied to the NAND manufacturer’s transition from 2D to 3D technology, requiring them to take capacity off line to transition fabs 3D technology, low yields on new die, and/or performance issues as they work through their processes. There are talks of SSD manufacturers overprovisioning to mask QA issues to get their hands on NAND.

Intel has accelerated its transition to 3D technology, creating a rocky transition to the 3720 series replacement for the 3710 series, forcing many OEMs to the streets looking for product. The 400GB is in demand because it is the smallest capacity VMware verified for cache. We have also seen tightness for Samsung’s SM863 and PM863 series as Samsung transitions to the new PM863a series.   Reports are that, after significant delivery delays, Samsung is delivering product but imposing hefty price increase on orders in the pipeline.

Prices will stay firm and spike for specific SKUs within the enterprise market as many SKUs are significantly backlogged. I spoke to one SSD manufacturer who typically supports hundreds of customers directly; however, at this point, it is only supporting 12 to 15 customers directly and doesn’t see that changing until 2018.

Consensus around supply and demand reaching equilibrium varies between CQ4 and 1H’18 with much depending on Micron and Hynix’s ability to ramp production of their 3D NAND. There has been much discussion for the potential of overcapacity in early ’18; however, after reading Seagate CEOs description of escalating data demand and continued likely content growth in smartphones, we may see a deceleration of pricing as opposed to a crash in SSD pricing come Q1 2018.

 

Enterprise HDD-despite losing center stage to SSD rotating media, has not sung its swan song. As detailed in the introduction, demand for data is growing and will continue to grow.  Although HDD shipments fell YoY in 2016, exabytes shipped rose significantly for all HDD manufacturers with Seagate’s exabyte shipments increasing 34% YoY. WDC’s (Includes HGST) experienced an upturn of 31% YoY, and Toshiba’s YoY saw an increase of 11%. Seagate’s CEO, Steve Luczo, stated, “We expect overall exabyte demand to grow double digits in calendar 2017 over 2016.” No longer will HDD be defined in unit volumes but in Exabytes shipped as hard drives target high capacity applications.

Buoyed by the ongoing SSD shortage that has slowed the cannibalization of HDD sales by SSD and demand for data, the hard drive manufacturers have benefited from a healthy enterprise market. As SSD production volumes catch up with demand, HDD focus will continue to transition to applications requiring high capacity, cost-effective solutions, such as video surveillance and cold storage. Based on projections for the growing video surveillance market, valued at $30.37 billion in 2016 and projected to reach $75.64 billion by 2022, the HDD market still has legs. WD upped the ante by introducing its 10 TB video surveillance purple drive.

With data centers (specifically Microsoft) due to refresh to 10TB drives and Hyper Converged Appliance demand for high capacity drives expecting to transition to 10TB cap sized, we expect to see tightening in large cap drives, which will be exasperated by media manufacturer’s unwillingness to increase capacity in a declining market being temporarily supported by the SSD shortage.   The market transition to 10TB is nothing but positive for the HDD manufacturers as they gorge on increased exabyte shipments. WD/HGST are best positioned to benefit from the transition, as they are into their third generation helium drive, which gives them a yield and cost advantage affirmed by their introduction of their 10TB surveillance drive. Seagate, reported to be experiencing growing pains with its first generation helium drive due to a base plate problem with a vendor, may shift resources to 12TB to catch up to its rivals.   Toshiba is following the pack with its recent introduction of its MG05ACA 8TB nearline drive. Toshiba is hoping to introduce its 10TB drive in the next few months and ramp volume for Q3.   However, they have struggled in the past with execution, so it is unclear to what level they can participate in Q3’s refresh.

It is sad to see such a well-respected name, such as Toshiba, in turmoil. Even prior to the bankruptcy, there were questions of Toshiba’s commitment to the hard drive business.   However, the SSD shortage seemed to have invigorated them.   It is difficult to envision Toshiba’s HDD business separating itself from the NAND business, without falling further behind its competitors, due to shared infrastructure costs and leverage with its customer base.

 

Desktop/Notebook-the personal computing market is in decline; however, it has shown signs of stability.   HP’s results came in above Wall Street’s expected results, supported by an increase in personal computer sales. IDC reported the PC market’s first YOY growth for Q1/2017 sales since 2012.   However, it is not clear if this recent strength is sustainable. As previously indicated, PC sales have taken a downturn over the past few weeks. It is not clear if this is a sales related issue or a result of a component shortage.   Rumors are that Samsung and Micron are de-committing on DRAM shipments. If the manufacturers cannot get memory, they will not bring in HDD in without being able to build.

Despite showing signs of resiliency, that does not change the fact that more basic computing functions are moving to mobile devices and tablets, so the PC is becoming a niche product, targeting those requiring additional computing resources that PCs can provide, such as gaming, video editing, and content creation.

Gaming continues to be a bright spot with gamer’s platform of choice being the PC due to the ease of customization and enhancements. Look to see SSD to be the primary benefactor in terms of storage, not HDD, as gaming enthusiasts crave speed.

A slowing PC market doesn’t help Seagate, allegedly building inventory in the SMR (shingled magnetic recording) drives. Although having been successfully qualified with OEMs, they have been reluctant to buy in volumes. Is this a pricing issue or a performance issue?

 

General Thoughts-no longer is data in the back room with the IT department.   It is front and center in everything we do. The magnitude of the volume of data out there that Steve Luczo, the CEO of Seagate, detailed in IDC’s white paper (link below) hit home with me, when I recently tried to open the family’s IPhoto app on our home computer.  After troubleshooting our family computer for sluggishness, I found we had 48,000 photos comprising selfies, texts, random photos, and general nonsense.   My children’s phones were backing up daily to the cloud, to the tune of 100 plus images daily for my fifteen-year-old daughter, which led me to ask how much of this data being saved is meaningful versus digital detritus?

The explosion of data is driving the commoditization of storage and the need for low cost solutions, moving storage away from proprietary storage solutions. Names synonyms with storage, such as Net App, EMC, IBM, and HP, are being pushed aside by the likes of DDN, Pure Storage, Kiminario, Infinidata, and the open compute movement.

http://www.seagate.com/our-story/data-age-2025

 

I would love to hear your thoughts.

 

Please email me at stephen.buckler@horiontechnology.com

 

 

Stephen Buckler

stephen.buckler@horizontechnology.com