There is a saying in Chess ‘ Monkey see check, monkey do check. We were tempted to classify the deal announced this week between Seagate and Samsung as such a case. Putting someone in check in chess doesn’t win you the game, unless they have no way out of it, but in this case both moves ‘ Seagate and Samsung, and the one a few weeks back between Western Digital and Hitachi GST are closer to being sacrifices.
Put yourself in Samsung’s position. You are a global leader in Flash memory, and it’s a tough ride. You need all the cash you can get to stay in pole position, but this is a landgrab for a technology that is going to be the dominant storage technology of our generation. It turns out that you have a considerable holding in the technology ‘ rotating disk drives ‘ that drove the previous round of storage technology and what a round it was.
Since the invention of the Winchester Disk drive back in 1973, it has been a helter-skelter ride to own the intellectual property behind disk drive technology, and just as important to have both market and mind share. Western Digital and Seagate have been in the business for most of that time, and can’t help but need to maintain their momentum as number one and two in disk drives for as long as we can remember.
Western Digital came to disks out of storage controllers for mainframe drives back in the 1980s while Seagate began as Shugart in 1978. Both companies tend to sue just about anybody when they enter the disk drive market for the first time. We remember Cornice (RIP) which in the early parts of this decade tried to put 1 inch disk drives into handsets. Actually Samsung was involved in that one too, and used the product in one phone, before Flash swept past it and took that market lock stock and barrel. The legal actions over intellectual property brought by Seagate did Cornice no favors at the time.
Back then Samsung itself was working on a 0.85 inch disk drive for phones, as were others, including Seagate eventually. But in the end, Flash memory, which is lighter and uses less power than disk drives, stole the handset market.
There are still a lot of storage revenues to be had in disk drives mostly in enterprise IT, but all the smart money on consumer devices is on flash memory, so when Western Digital decided to shell out $4.3 billion to buy Hitachi Global Storage Technologies, it was really about self-preservation in a declining market. The same unit was sold by IBM to Hitachi back in 2003 for just over $2 billion.
We said that the time that the sale by IBM was about video and multimedia and ways to store it on portable devices. Initially Hitachi stole away the early iPod deal from fierce rival Toshiba, which made the original 1.8 inch disk drives in the very earliest iPods. Hitachi provided a 1 inch drive to Apple back in 2004.
Now Hitachi will add some $1.5 billion a quarter to Western Digital, to its existing $2.5 billion a quarter, making it by far the largest disk drive builder in the world with revenues of $16 billion. However Seagate had overtaken Western Digital in the last few quarters around $200 million ahead each quarter, and would have been miffed by the move.
Whether it was Samsung who picked up the phone to say, ‘Would you like our disk business,’ or Seagate who said, ‘You don’t want the dirty old disk business, you’ve got Flash’ we don’t know. But we could imagine that Samsung was dying to offload a business which was perhaps less promising long term than Flash Memory.
The deal was for just $1.375 billion, which will be paid by Seagate to Samsung in the form of 50% stock and 50% cash. The means that around 9.6% of Seagate’s shares go to Samsung who will have a seat on the board, and in return it gets rights to sell Samsung Flash memory. The two already had patent swapping agreements in hard drives.
Samsung doesn’t break out its disk drive sales but if we assume the same price as the Hitachi deal, this is an operation roughly one third of the size of Hitachi GST, and will bring Samsung perhaps up to $3.2 billion a quarter or a $12 billion business, still substantially behind Western digital.
By comparison Samsung’s Nand Flash operation and DRAM memory revenues have reached 6.04 trillion Won, around $5.6 billion, or $22 billion a year.
All of which implies that Samsung has neatly got itself out of a big, but dying technology where it occupied 4th or 5th place, and landed a new partner in its core memory business which is being driven by a portable media explosion.
Samsung will in a heart-beat establish its Flash into Seagate’s enterprise solid state drives (SSDs), solid state hybrid drives and other products while Seagate will make drives for Samsung for PCs and notebooks. They are unlikely to ever appear in anything smaller, such as a tablet.