Why Seagate Had To Buy Samsung’s Hard Disks

Samsung Electronics put its hard disk drive (HDD) manufacturing business up for sale on 18  April. The news was barely out when the second-largest player in the world market, Seagate Technology, went to the bank, counted out $1.375 billion and offered to take it over.

Samsung, of course, accepted on 19 April. The move better coordinates the two companies’ existing partnership for NAND flash development. It also will put Seagate back into the ballgame against market share leaders WD.

The HDD business is all about scale

WD, formerly known as Western Digital, controls about 49 percent of the HDD market following the March 2011 acquisition of Toshiba’s HDD business for $4.3 billion (£2.6bn). Seagate owned 29 percent of the market coming, and thanks to the Samsung deal will now own 40 percent.

Seagate also makes NAND flash solid-state drives, which most IT people believe are the long-term future of storage media, but it simply had to take the opportunity the Korean IT giant set in front of it. It really had no other choice or else WD would run away with the bulk of the business, even though Seagate isn’t exactly the most financially healthy company in the world right now.

The HDD business is all about scale. Something storage analyst Mark Peters told eWEEK in analysing the WD-Toshiba deal two months ago holds up well for an analysis of this deal.

“A huge amount of this is about scale, economies of scale, scale of R&D, scale of portfolio … and did I mention scale?” Peters, a senior analyst at Enterprise Strategy Group, told eWEEK at the time. “Making money in this high-volume business requires scale in most respects.”

What does this merger do to the market and all its smaller players?

“Well it certainly looks like a two-horse race with WD now,” Yankee Group analyst Zeus Kerravala told eWEEK. “I think the competitive environment for the rest of the field is now very difficult. Seagate now can extend their value propositions to other Samsung products, such as PCs. So they can control the drives and some of the end markets, too. That’s a powerful combination.”

The NAND flash agreement between Seagate and Samsung was also a key part of this transaction.

“Seagate also gets caught up in flash; Samsung was much further ahead there,” Brian Babineau, a vice president at Enterprise Strategy Group, told eWEEK. “But the market consolidation is an obvious benefit; getting ahead in emerging technology markets is not so obvious, but critical.”