While Seagate officials fervently described how good its purchase of rival hard disk drive (HDD) maker Maxtor will be for the company, the bid left some analysts scratching their heads.
Seagate executives stressed
that the $1.9 billion acquisition of Maxtor would help Seagate achieve greater scale, reduce product costs and allow it to offer more innovative products at more competitive prices.
But that position raises an interesting question: Who will Seagate compete against if the HDD powers keep picking each other off?
The HDD market was once a healthy space buoyed by innovation and competition from Quantum, IBM and a raft of other players.
Consider this: Seagate has the lion’s share of 30 percent of the HDD market, according to researcher iSuppli. Western Digital and Hitachi follow with about 18 percent and 15.5 percent, respectively. Maxtor rounds out the top four at 13.5 percent. Should Seagate successfully consume Maxtor, it will have almost half the market.
Analysts like Taneja Group Founder Arun Taneja find this notion lamentable.
“Look at the way the hard disk drive market has gone now over the last 20 years,” Taneja said in an interview after Seagate announced its intent to buy Maxtor. “None of the guys in the industry have consistently made money.
They have not found the formula. All they seem to do is consolidate. This is just another example of that.”
“For whatever reason, the whole industry seems to fight on price and that’s what causes these companies to continue to consolidate,” he continued. “I’m not sure if it’s very good for the end user in the final run because it limits choice.”
He isn’t alone in his observation, according to Pund-IT analyst Charles King.
“I think that over the last couple of years, it’s become obvious the disk drive has been going through the same commoditization pressures that were commonly associated with the processor market a few years ago,” King said.
King added, “It’s notable to see what happens as larger vendors who may have started with a technology, or really depended on it for quite a while, eventually abandon that technology as it becomes harder and harder to make a buck there. IBM’s sale of its HDD unit to Hitachi a couple of years was a signal of sorts that that kind of thing was happening.”
But Taneja said the consolidation isn’t relegated to HDDs. He wondered how mergers and acquisitions in other parts of the storage sphere will affect customer choice.
“I’m concerned about the storage industry becoming more and more of an oligopoly,” Taneja said. ” I think this is one more step. Look at the market for fiber channel HBAs [host bus adapters]. It’s basically two companies — Emulex and QLogic — that hold 75 or 80 percent of the market.”
“The same thing is holding true if you look at the large, monolithic disk arrays. That market is between EMC, HDS and IBM. Sun and HP buy and resell HDS. Those three have got the whole market covered.”
Still, Taneja said the increasing paucity of HDD vendors makes him wonder if the space is eventually headed to a showdown between two vendors, where customers are faced with more of a Coke or Pepsi, or Republican or Democrat type of market.
Not to denigrate Seagate for its latest move, both King and Taneja said.
“This will probably centralize operations for Seagate and help them drive additional savings,” King reasoned. “Over time it could help bring the prices of drives down more so than we’ve seen up until now.”
That was certainly the thinking behind the deal, according to Seagate CEO Bill Watkins.
“This has been a competitive industry and always will be,” Watkins said on a conference call to sell the deal to investors Wednesday. “We anticipate a competitive industry as we go forward, requiring increasing resources to offer all of the products to a growing customer base.”
“My hat’s off to Seagate,” Taneja said. “In spite of the fact that they are a very large company, their nimbleness has been surprising to me. There’s a bunch of other programs that they are in the middle of that I’m aware of that are not public yet, but they are very impressive.”
Until then, stay tuned for 2006.