Seagate and Western Digital Should Worry About Flash!

Implications: The only thing preventing flash memory from taking over the notebook market is price.  With prices on flash currently in free-fall, that barrier is likely to be reduced or removed in the next few months.  Seagate and Western Digital’s patents are not likely to protect their market share.

Analysis: The interview with Bill Watkins, the CEO of Seagate, in the attached article is very interesting in terms of his view of the market for notebook drives.  To summarize, he feels the notebook hard drive market is safe from flash memory primarily because of the price barrier, and if that fails he plans to use Seagate’s patent portfolio for defense.  Although Seagate and their primary competitor, Western Digital, sell hard drives into many different markets, the notebook market provides a significant share of their revenue, and is one they would be very reluctant to give up.

Watkins’ assessment of the price disparity is certainly true today.  He cites the example of Apple’s Macbook Air where the flash drive imposes a price premium of 70+%.  That pricing differential is sufficient to relegate the flash-equipped MacBook to niche status, and the hard drive manufacturers need not worry.  However if the price of flash memory were to drop by, for example, 75%, then the price differential on the MacBook would be more like 10-20%.  At that point flash-equipped notebooks would no longer be in niche status, but would become the mainstream.  Many people would be willing to pay 10-20% more to get flash instead of a hard drive.

Flash drives have many advantages over hard drives, particularly for notebooks.  They are quieter, use less power, are more robust, and in most applications provide better performance.  Hard drive manufacturers have made remarkable advances in recent years in making drives smaller, faster, larger in capacity and better able to withstand the rigors of the notebook life.  Nonetheless, because flash has no moving parts, it is clearly superior in most ways to hard drives.  In particular, they are not subject to many of the failures that still plague hard drives.  Despite the continuing advances in hard drive technology, they are still mechanical devices that can be surpassed in performance and durability by a solid-state device.

Seagate and Western Digital have been depending on the price differential between hard drives and flash to protect their market.  Given the fact that a minimum 50% reduction in price for flash will be required to allow it to capture significant market share, and probably 70-80% reductions will be needed before the hard drive manufacturers really start to suffer, the hard drive manufacturers’ market share has seemed safe for the next couple of years at least.  The recent rumblings from the flash manufacturers, however, is calling that assumption into question.  Suddenly it seems quite possible that flash could drop 50% in price in just a few months, and a 70-80% reduction in price could happen in as little as a year or so.

Watkins’ fallback strategy of patent protection offers some hope, since Seagate and Western Digital have a vast portfolio of patents protecting the ways information can be organized and stored in digital media.  On the other hand, they are facing formidable foes in the form of Samsung, Intel and SanDisk, among others.  Samsung and Intel in particular have vast legal resources to call on.  Patent litigation tends to drag on for years before reaching any kind of resolution.  Even if Seagate eventually wins at some level in patent litigation they’re likely to get nothing better than a financial settlement.  While it is possible that someday Samsung, SanDisk and others could be prevented from selling flash replacements for hard drives, that seems VERY unlikely.  Seagate’s patent portfolio could potentially earn revenue from the flash manufacturers, but it is highly unlikely such revenue would ever replace what they stand to lose.

The final answer is yet to appear, but at this point Bill Watkins’ optimism seems based on very shaky assumptions.  The probability that flash memory will become the dominant storage media for notebooks is growing by the day.  Hard drives may soon be relegated to the “value” notebooks.