Horizon August 2016 Hard Drive Market Brief

15:56 02 November in Uncategorized

Market – manufacturers consolidating supply to align with market demand is old news. The two top of mind questions for storage market participants are how do I position myself to succeed in a cloud-centric market and what will the fall build schedule look like as we exit the summer doldrums?

It has been a slow market with volumes dropping to 100 million units for Q2, but market pundits are forecasting a healthy Q4 and we are starting to see signs of life in August. Looking forward the enterprise market looks healthy, however, there have been questions around the recent optimistic forecasted numbers for the client market. Toshiba recently announced to its Authorized distributors it is putting desktop capacities of 500GB through 3TB on allocation. Is this the first indication that supply will truly tighten over Q4 or a false positive resulting from their rebalancing capacity to focus on more profitable lines?

It is setting up the classic game theory example of the “prisoner’s dilemma”. The simplified version is two men commit a crime together and hide the loot. Both are arrested and face one of two options; to tell on the other and serve a lesser time, possibly losing the loot or keep quiet, serve their time and keep a share in the loot. WD, Seagate and HGST all have been holding firm with pricing. Will they continue to show such resolve as they jockey for position in a quickly transitioning market or will one try to grab market share?

The expected NAND shortage will buy manufacturers much needed time; slowing the replacement of HDD by SSD. One of the Q4 by line is manufacturers’ jockeying for position with hyperscale customers as they transition to 10TB drives.
Western Digital – continues to recast its business to better position itself in an increasingly cloud-centric storage market. Integrating three companies (WD, HGST and SanDisk) into one will wring out costs through targeted headcount reductions as they consolidate redundant positions and integrate central functions across all three companies.

Looking forward, WD continues to reshuffle their portfolio to focus on higher margin drives including large cap drives (6TB, 8TB and 10TB) and hybrid notebook drives while phasing out low cap builds of 1TB and lower.
They just recently started shipping a small volume of 10TB capacities, which is an important drive as WD tries to deliver a one-two punch of large capacity rotating media and enterprise SSD (SanDisk) to meet the needs of the growing date center market.

HGST – with the acquisition by WD, there is little information from HGST. They have fully moved into the new facilities on Cottle Road in San Jose. This facility is also the WD headquarters. There were no supply or pricing issues reported other than the 8TB, which was more driven from Seagate shortfalls in delivery. HGST was the only manufacturer not to raise prices. The general feeling this quarter had enough demand to sustain pricing and sufficient demand to realize improved profitability in Q4 without having to raise prices.

Toshiba -seems satisfied with its eighteen percent market share and don’t seem to have an aggressive, forward-looking strategy. They seem content playing the role of a market laggard with them just getting to 8TB capacities with a 2016 Q4 to Q1 2017 introduction while both WD and Seagate are ramping up 10TB capacities. Their focus is on the lower end of the market by having dropped pricing on the popular 2.5” 1tb by $1.50, which now can now be bought at $42.00. This has helped Toshiba gain market share in the ultra-competitive 1TB 2.5” market. However, Toshiba just announced to their authorized distributors that next month, all of the desktop capacities (500GB, 1TB, 2TB and 3TB) will be officially on allocation.

Toshiba’s approach to building its 8TB drive by adding an additional platter with its high cost (due to the extra platter and two heads) and associated lower performance specs (e.g. greater energy use and higher vibration stemming from the use of an additional platter) seems to support their ambivalence to the market. This, combined with their lack of a clear roadmap, continues to fuel rumors questioning their commitment to the market.

Seagate – has gone through multiple rounds of layoffs, which appear to be hitting long-term Seagate employees the hardest. In a climate of uncertainty, newer employees are hesitant to take the initiative and make decisions. A company that once prided itself on quick resolution and customer satisfaction is now having a tough time quickly responding to pricing or supply questions.
Similar to WD, Seagate is looking to the future focusing on both large capacity drives and SSD with a decidedly different approach. Seagate has opted a foundry independent approach to the SSD market but don’t let this fool you into thinking they are not committed to the SSD market. They work closely with Micron and focus on the cloud and Hybrid drives. Relying on outside suppliers will hurt them if the projected NAND shortage develops, giving WD an upper hand in gaining market share.

Seagate is in lock step with WD with keeping prices firm and eliminating special pricing agreements (SPA). We continue to see supply constraints around 8TB capacities from Seagate.

General Thoughts- It is an interesting foot race between WD and Seagate with both recognizing the role of rotating media and SSD in the growing cloud-based world we live in. Both companies are reshuffling to best position themselves as the market transitions further and further to cloud-based storage. Both are taking very different approaches to integrating SSD into their product portfolios with WD buying a presence and Seagate opting to go out alone with an outsource model.
One cannot ignore Toshiba putting desktop drives on allocation. Does this portend to a broad-based shortage or is a mix issue internal to Toshiba? The combination of manufacturers’ right-sizing their business, raising prices, demand forecasts trending upward and potential NAND shortages indicates a healthy storage market for Q4.

I would love to hear your thoughts.
Please email me at stephen.buckler@horizontechnology.com

Stephen Buckler