HDD Disruption

WDC is one of my investments. This year until quite recently I added 140 more shares, mostly between 28 and 35. Biggest part in the low range. I have not added much more because of some of the reasons I talk here below. WDC is an old (and very generous) friend, I had a couple of times before bought and sold it. This is what I just replied to one of my network investor/friends:

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Don’t take too seriously my comments because even if all consumers end up using SSDs, storage will keep growing and have to be stored in the cloud. That is in enterprise data centers, in HDDs, or in external storage in private clouds which is a fancy word for an external hard disk basically, or a disk just used to store your media. Good thing is that only two companies, in practical terms, sell HDDs, so WDC is well positioned for that.

Note also that tape is still 50% of all the enterprise storage, and as HDDs get cheaper they replace magnetic tape as the cheapest total cost of ownership to store data in enterprise.

In any case there is a disruption on consumer PC/notebooks, specially due to the fact that HDDs are less and less present in notebooks. They are replaced by SSDs. Add to that the fact that tablets are cannibalizing notebooks, not completely, but at least to a material extent. And tablets don’t even have an HDD. That’s not the end of the HDD because even then most storage will not be destroyed, it simply shifts elsewhere and ends up in a hard drive anyways.

Most people use tablets and smartphones and generate lots of content, videos, pictures… Some is erased but a lot is stored on Facebook, YouTube, or on a drive somewhere on the internet or their house. So those new computing gadgets are helping to generate content too, quite a lot it could be argued.

But the point is that a big transition is coming and maybe WDC has troubles to sell well HDDs to enterprises or to private clouds (for common users in their house). On the other hand if WDC seizes the opportunity they could even end up better than in the past. That’s why they are so focused now on selling private home solutions around storage. Historically WDC has always ended up better after every market transition. So based on history, WDC is excellently positioned. Actually based on cash flows and balance sheet it is very well positioned too. And finally based on its stock price the margin of safety seems quite good.

I do not think they will have troubles in this inflection point we are going through. That’s why I bet on them. But I do recognize that a disruption is happening just now. Where PCs and specially notebooks are being used less and even then the few that are used use less HDDs because they are being replaced by SSDs. So I think that soon all the sales they make to notebooks and PCs with hard drives could disappear or be severely reduced. That’s not necessarily a problem, because by then they will be selling more branded external stuff and more to enterprise. But that process is difficult to quantify and maybe what they lose there due to the reduced hdd PC/notebook sales is more than what they win at the end.

Anyways those are some of the negative things only, which is good to have them in mind. The good thing is that the stocks seems already priced for that. So anything that goes a bit better or less worse than expected will help the stock.

Ahh another thing I have my doubts about is the new CEO. I liked more John Coyne. He seemed more rational. Then again the new one seems Ok, I might be wrong and maybe he is even better. Maybe he takes a bit more risk which might be good.

One thing I never liked much about WDC is that they could have expanded into storage and the cloud more aggressively but lost a lot of market to companies such as EMC. EMC added value around storage solutions, beyond hardware, and got a profitable segment of the market. WDC just stuck with hardware, and even there, their penetration into SSD has been slow in my oppinion.

Now they are changing and trying to catch up. I had never seen them talking so much about SSDs and storage solutions as in their last analyst meeting. I sense that they are worried about it. Actually they said that, even though they do not talk about it, they are investing a lot in SSDs and solutions around storage. Which is good probably, but my point is they could have done it before, more proactively, instead of reactively. Note also that in their last conference call the new CEO used the word cannibalization in the context of SSDs and HDDs (or tablets and notebooks, which is the same), that’s the first time they recognize that publicly.

I might sound pessimist but I’m not, I’m just critical with the things I own maybe more critical than the bulls :).

Anyways all that we have talked about, the WDC cheapness, is also true and I do think that the company is well run. It’s top in its industry and we will end up doing quite well. I just give you some reasons of why I do not invest a lot more than what I currently have. Then again, at even lower prices, after yet another reassessment, I could probably end up adding much more.

Cheers !
jrv

PD: I use a cheap and basic photo camera to film stuff. It does not, as the huge majority, have an HDD. But it does generate big files which I copy to my PC or external disk. I only upload some to YouTube because upload speeds are still to slow, once they get faster a bigger explosion of data will follow. I’m sure those files are stored in a HDD disk somewhere, making the cloud and WDC grow. For example this is a Capoeira video from my son, the little blond one, practicing with the famous “Maeste Besouro”:

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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10 Responses to HDD Disruption

  1. Sean Brown says:

    What about SSDs in the data center though? Seems like SSDs are already becoming a good option for “high-performance” cloud-app needs (see http://gigaom.com/cloud/rackspace-breaks-out-block-storage-with-disk-and-ssd-options/ ). If nothing else, couldn’t SSD competition squeeze HDD margins even more?

  2. jrv says:

    Yep sure SSDs are in enterprises and they will become cheaper. But as you mention, they are needed along with “high performance” data. And high performance data is a minority. Note though that HDDs become cheaper and as data keeps growing enterprises will always go for the lower cost of ownership when deciding where to store.

    SSD are mainly used for “hot data”, high performance needs, like database access. Anyways SSDs are sold by companies like WDC or Seagate too. Data that is accessed very frequently is ideal for SSDs. SSDs are not used for the data that is accessed less frequently or for back ups (warmer and cold data). And that is the vast majority of data, and will always be. As long as HDD manufacturers can keep on bringing their costs down margins can be maintained, or even increased or decreased. It depends on who gets their costs down faster. As I see it as long as there is a cheap and good solution for storage there is a market for it.

    Note also that around 50% of the enterprise data is still in magnetic tapes and HDDs are taking over magnetic tapes as they become cheaper.

    What should be remembered is that data is tiered. That means that depending on the use and type of data it is decided in what sort of storage it is kept.

    Google or Facebook have their vast majority in HDDs (Tape is used for back ups in the case of Google). Enterprises compress data to store it or scale down the resolution of pictures and videos because it is too costly to store all the users media in the highest resolution.

    Conclusion: As long as data is not frequently accessed, like most of it is and probably will keep on being, then there is no need to use the most expensive storage for it. HDDs are still much cheaper than SSDs and are a good solution for most of the data, i.e. the one that is not accessed very frequently. That’s why HDDs are useful and magnetic tape still is present. That’s why I will probably not store anytime soon my terabytes of video data in SSDs. For my operative system I like to have an SSD but for most of the data I generate I prefer to use HDDs.

    Cheers!
    jrv

  3. Sean Brown says:

    Thanks for the good post as well as the reply. It is a very interesting space to be sure. The cost curves on the next 1-2 generations of NAND fabs will be important, IMO. Also important is whether gross profit $/gigabyte (or maybe, per X% of factory capacity) sold to a cloud provider like GOOG is as high as gross profit $/gigabyte or gross profit $/% of factory capacity sold through smaller drives to a home or enterprise PC vendor like Lenovo or HP. I am sure many people have talked about this but haven’t looked closely enough at the space to know.

  4. jrv says:

    Thanks Sean,

    Indeed costs are different depending on the product (performance, specification, added value, form factor) and client (enterprise, OEMs, distributors). Enterprise storage is growing but is still small compared to private storage. It’s possible to see product sales prices depending on the client but not so easy to find out costs per product. Enterprise is more profitable. That’s part of the the reason why margins are higher since the Hitachi acquisition. Besides WDC, there are less manufacturers now, just Seagate and Toshiba. On the buying side clients are now more fragmented. That gives HDD players bigger pricing power than in the past, where the situation was the opposite.

    SSD players are still very fragmented, it’s hard to make a profit. Intel has a good chance in succeeding there if you ask me, as well as the traditional storage companies such as STX/WDC by selling total tiered solutions and focusing their R&D in that area. I doubt that pure SSD players have a good chance.

    It’s not possible to know what technology will emerge or do better. Fortunately it is possible to study how companies have adapted and profited from changes in the past, and WDC has done quite well in that sense. Reasons are due to its outstanding operational efficiency, sales and client focus, vertical integration, adaptability and innovation.

    A few years ago WDC was just a medium player exclusively in PC consumer HDDs (not even notebooks). Little by little it has conquered adjacent markets in quite a difficult industry against major competitors, recessions and a flood that destroyed a huge part of its manufacturing capacity. Meanwhile its equity kept on growing.

    Cheers!
    jrv

  5. Sean Brown says:

    Good observations, especially about WDC management. Capital allocation seems extremely (too) conservative though.

    It is interesting that Intel sold its JV stake in two NAND fabs to their partner Micron, while at the same time expanding a flash-memory supply agreement and keeping half of Micron’s purchase cash at Micron as a deposit on future NAND supply. It implies that INTC agrees with you (NAND ROIC will be poor but the market for solutions incorporating NAND will be sizable and/or high-margin).

    I’m not sure if you’ve run across this study, but it is intriguing with good data points and advocates for the use of rewritable Blu-Ray for a lot of former tape backup.

    http://webcache.googleusercontent.com/search?q=cache:http://www.hie-electronics.com/wp-content/uploads/2012/06/cost_advantage_per_terabyte.pdf

    How long do you think the tape migration will last and do you think HDD will capture the lion’s share of those gains?

  6. jrv says:

    I think HDDs have a high chance to replace magnetic tape on enterprise. Tape has come down steadily in the last few years as a percentage of enterprise storage. It used to be much more. WDC just launched disks filled with hydrogen instead of air. That has a nice chance of succeeding in the enterprise market, they have more capacity and are more energy efficient.

    I also tend to think that WDC is too conservative, I would have liked more that they invested bigger amounts in storage solutions beyond hardware and also more in SSD technology. Now they are catching up but I would have liked them to invest more aggressively a couple of years back. I prefer them doing that than giving back money via dividends, share repurchases or hoarding cash. The new CEO, who did a very good job turning around Hitachi, seems more aggressive in that sense.

    Indeed Intel has not yet been able to make money with SSDs, even though they sell very good ones. SSDs are a bit like HDDs a decade ago. Intel is no exception, it’s full of companies making SSDs, mostly losing money. Hardware is a small part of the total enterprise storage expenditures that’s why many are interested in penetrating beyond that.

    Thanks for the pdf file, very interesting ! I had not heard of Blue Ray as a threat to either SSDs, HDDs or Tapes. The paper implies that its a very good solution for storage. I’ll investigate more on the subject and why I had never heard of it more. At a certain point common re-writable DVDs were quite cheap and I stored some movies there. But I stopped doing it because even though they said they were re-writable a lot of them failed. I did not like to have several disks spread around, too much overhead costs… I found it very annoying to physically have to put the disk in the player in order to see the media. So at the end I just opted for storing all in external HDDs, it is practical and easy to re-write. The ongoing cost is basically 0 since they are most of the time turned off. Unplugged external disks have a much lower chance of failure. Of course all technology changes. It would be nice if they could put the blue ray media inside of a disk and if the total capacity was much bigger. That would help eliminate the costs and needs of having to maintain several blue ray units. Anyways if someone is doing R&D in that sort of things it’s probably the storage companies. Enterprises use RAID HDD storage solutions and when a disk fails data is not lost. But unless you make two copies on blue ray you will lose the data for ever if it fails. Then again I have yet to see serious studies showing failure rates on blue rays. Here is an interesting discussion among various people about the benefits of storing in blue ray versus HDD.

    Another evolution that will make stored data explode even more is when faster upload rates become more available, apparently most of the data generated is never stored at all and is erased fast. All this reinforces my belief that the cheaper and more reliable HDDs get the better. The more they can be used for storage by reducing the total cost of ownership for enterprises. The capacity is in place and it has proven to be a practical solution. Even then as of now lots of data cannot be stored due to high costs so the more their prices drop the better for the storage world.

  7. Sean Brown says:

    Yes, for home theater purposes, seems like HDD is clearly the way to go. In an instance of enterprise migration from magnetic tape, 1) HDD power output/cooling costs will likely be much more material + important/unavoidable and 2) manual retrieval of the disc may or may not be as big of an issue. (If the files used to be on tape, I know access/retrieval is quite cumbersome in most cases, no?)

  8. Sean Brown says:

    http://www.extremetech.com/computing/126195-sonys-optical-disc-archive-30-blu-ray-discs-in-a-1-5tb-minidisc-like-cassette

    Sony has recently released a Blu-Ray based storage solution. The above link has some interesting comments in the comments section talking about tape – it is a hassle, very hard to find info on it, needs to be kept at very specific temp and humidity, etc.

    Of course, if you can get HDD power consumption/heat output down enough, it will start to steal tape storage share much faster, too. Seems like both disc-based (Blu-Ray/BDXL discs with 100-128GB of space) and HDD will take tape share, probably biased toward HDD unless Sony makes a major push here.

    The kind of hybrid drive found at http://www.discarchival.com/ is an interesting concept as well. Again, seems it will fall to Sony – for better or worse – as the main patent-holder behind Blu-Ray to either push these solutions or allow HDD RAID to take the lion’s share of tape over time.

  9. jrv says:

    Hi Sean,

    Enterprise is a minor part of total storage. I have not found yet any storage company mentioning Blue rays as an important source of enterprise storage. It’s not mentioned even as a small percentage of enterprise storage in data centers. I guess there must be a reason why. On the other hand if I just read the paper you send me it seems to be the best for enterprise but why is it not already there then ?

    There could be some costs involved that as of now make it not practical. Maybe there are costs when you take into account all factors, like the reading capabilities that have to be put in place. Or the surface in order to store the same amount of data is too big. Or the capacity to massively build the media is not in place. The reading devices are too expensive ? I do not know exactly why but when I check Seagate and WDC’s technical presentations no one mentions optic storage in data centers as a source of storage, so I guess there must be a practical reason for that.

    I’ve found one university working on Blue Ray storage that promises 1TB on the size of an HDD disk: check here if you are interested.

    The comments made by the storage newsletter imply that there are several associated costs not addressed yet:

    Here start-up Folio Photonics didn’t reveal the durability of its new optical disc. It says that it has to “make only slight adjustments to a standard disc reader to enable it to probe and read the data.” The capacity of 1TB to 2TB is well suited, archiving the equivalent of one of the most common HDDs.

    But the problem here will be to press an optical disc with as much as 64 layers at a reasonable price a well as to find enough partners to build an international standard for the removable media.

    There are many promising technologies around being developed, like holographic storage. Then again I think that the storage companies have an advantage since they are already capitalizing on the current solutions and research, develop, or acquire promising techs.

    Cheers!
    jrv

  10. jrv says:

    Very interesting Sony device, but I suspect that the reader device alone will be quite more expensive than an HDD (which has the read head included). I also read on Wikipedia about the 200 GB Sony Blue Ray disk on the works. Thanks for the interesting link about the German company that sells Blue Ray storage devices. Here is a better link: http://www.hit-storage.com/. They have as client a Chinese bank with a 2K Terabyte installation, not huge but nice to have.

    Tape is indeed sensible to temperature, humidity and magnetism. Several components that make the data center too have the same problem. Probably data center at specific conditions have to be maintained not only due to tapes. Sequential read access is quite good and fast on tapes. The problem is random read. But for lots of back ups that does not matter much. After all, tape is dirty cheap, capacity to build it is huge, and it keeps also getting cheaper.

    Blue rays have not yet penetrated the data centers. Some associated costs probably exist (standardization, productive capacity…). Magnetic tape just a few years ago was quite bigger and now it’s around 50%. SDDs took out HDDs in the top tier and HDDs took out tapes in the lower tier.

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