Horizon January 2017 Storage Market Brief
Big data is everywhere and growing. The need for speed and low latency is pushing the demand for SSD. However, it isn’t time to write rotating media into the history books. As a whole, storage demand is accelerating to meet big data needs. This shift is putting pressure on an already complex relationship between storage manufacturers and customers. This is fuelled by a quickly evolving storage market and the SSD shortage.
HDD and SSD are inexorably tied together but it isn’t a 1 to 1 relationship with SSD replacing HDD. The HDD demand curve is flattening while the SSD demand curve is accelerating at a 20% annual growth. The need for storage is rapidly increasing, but there isn’t enough current NAND fab capacity to satisfy today’s storage needs. There are market laggards with a large installed customer base that are reluctant to move to SSD. However, SSD will take the rightfully dominant role with the handling of all active data needs while HDD will support the data lake.
The combination of emerging technologies, the migration to SSD, the NAND shortage and the recently announced financial woes of Toshiba create a toxic mix. It was at this time last year, we were unsure if Toshiba was going to exit or remain in the storage market. Today, financial losses tied to their nuclear business are forcing them to raise capital by selling a portion of their flash business. Toshiba holds 35% of the market NAND capacity; it is unclear what impact the sale will have on SSD supply but we are betting on a short term disruption which magnify the existing shortage.
SSD: will challenge end users well into 2017, as manufacturers are reporting that up to eighty percent of current available capacity is sold out. Despite the buzz about the shortage throughout Q4, it seemed that buyers did not want to deal with the shortage until the New Year. We have seen buyers and sellers of SSD come much closer in price expectations with the product trading in the $.30 to $.40 per GB range for mainstream SSD. We also have seen enterprise builders hit the streets looking for the product. Interestingly, the concentration of demand initially centered on Micron and Samsung, yet, demand now includes Intel SSD. This indicates that supply continues to get tighter out there.
Q3 will be pivotal in determining how long the shortage will last. Word on the street is that Samsung is ahead of schedule with their 3D yields for their pilot lines. Some market pundits indicate that this will bring the shortage to an end quickly. Typically, manufactures do not experience the same success when scaling volume production. Additionally, when taking fab capacity offline to convert 2D fabs to 3D fabs production will be interrupted. We expect the situation to only get worse before it improves. We expect to see the shortage to carry well into Q4.
It is hard to tell when supply will catch up with demand. The commodity memory market is subject to extremes that lead to boom-bust cycles. Clearly we are in a boom cycle for memory producers. Competing demand for NAND capacity from the release of the new iPhone and Samsung Galaxy phones will complicate the picture. As referenced earlier, Toshiba’s financial woes will only exasperate this already complex situation. Currently we are hearing customers indicate that Toshiba will not be supporting them with client SSD. Once manufacturers get new capacity up and running it will be a very different ball game. We expect prices to significantly drop which will significantly alter the storage landscape.
Enterprise HDD: clearly, the enterprise market was helped by the SSD shortage. Performance drives (10k and 15 RPM) have seen an increase in demand after experiencing a precipitous drop over previous quarters. This played a significant role in sending Seagate stock soaring. The increase is attributed to end users substituting HDD for SSD because they couldn’t lay their hands on SSD. We also continue to see demand for low cap enterprise drives as manufacturers move away from building lower capacity drives to focus on the more profitable large capacity drives.
Despite hearing Intel reporting that they are expecting a decline of 1% to 7% in its servers business and Amazon reporting slowing growth of 47% Y/Y compared to 55% Y/Y last quarter we are bullish on Q1 enterprise demand. The manufacturers have already cut costs and capacity to survive in a market of sub 90 million quarterly unit volumes. This has resulted in supply trailing demand. We feel the intensifying SSD shortage will allow HDD to temporarily cannibalize SSD enterprise sales, offsetting a general slowdown in the enterprise business space.
Taking a macro view one has to ask if SSD spells the demise for rotating media. Yes and no. SSD fetches a premium over HDD and cost is always a key variable. However, end users look at total cost of ownership. SSD makes up for its higher per GB pricing with marked improvement in performance and the need for fewer servers that offsets the price premium. HDD manufacturers are very aware of the changing landscape. For the short term, they will continue to push the cost advantage of HDD. This is demonstrated by the manufacturers recently introducing both 12TB and 14TB capacities. Inevitably HDD will be consigned to bulk storage which will be hastened once the 3D NAND fabs ship in volume.
Desktop/Notebook: Q4 is in the books and results have been stellar giving the HDD manufacturers a much needed lift in the face of a declining market. HDD demand is expected to fall due to seasonality supported by Intel guiding downward, however, the SSD shortage will continue to prop HDD sales. Further evidence that the SSD shortage will HDD sales is manufacturers telling their NB customers to leave their 2.5 bays in place for the foreseeable future.
The open market has seen a surge in demand for low cap drives (500GB, 750GB and 1TB) for both notebook and desktop drives. HDD manufactures have been consolidating build capacities and focusing on higher-margin enterprise products. OEMs are left out in the cold with several well know OEMs looking for significant quantity to support aftermarket service demand.
General Thoughts: at this point it is all about the SSD shortage. Clearly the storage market will look very different once the NAND manufacturers increase unit volume shipments. Until then expect a rough ride and for things to get worse before they get better.
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