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09
December
2011

Seagate leaves a bad taste?

Seagate's auction approach to pricing during the HDD shortage won't win them any friends in the future, says a source within the industry.
It's been a busy time for everyone within the HDD market. Teams have been working 14 to 15 hours a day in the recent wake of unprecedented flooding in Thailand.

These floods, of course, have wrecked havoc on the HDD market, where Thailand produced roughly 45 percent of the worlds supply in the first half of 2011.

An industry insider, who asked not to be named, has said it isn't just this immediate impact of the flood that's evident – the initial panic, prices that rose 25 percent per day – but the potential long term effect of manufacturer reactions to the event.

The behavior of companies like Seagate and Western Digital in today's tough times, suggests the source, will impact how OEMs will deal with them in the future.

To put it another way, the short-term impact of the floods is important, but what happens in six to eight months time, when the water recedes and is replaced by some form of normalcy, that's worth thinking about too.

This could be worrisome for Seagate.

”Western Digital is probably worse off (than Seagate) and they are sitting there trying to do the best they can to continue to do business. But Seagate, where they are playing the auction approach – whoever is going to pay the most money is going to get the product, publicly coming out and saying that - has left a real bad taste in many OEMs mouths right now,” explained the source, who works within the industry.

”We are going to dissect this business and, when it is all said and done, you are going to see the OEMs do the same,” the source continues. “With our meetings we've had recently with some major OEMs - they are not going to forget. I've heard on numerous occasions that the way that Seagate is playing this, (OEMs) are not happy”.

While selling to top bidder has won Seagate a larger market share today, the source claims, it could end up hurting them when supply levels are back to normal.

”OEMs are doing business with (Seagate) because they have to right now. Once everything is back to normal, I feel that they are going to lose a lot of market share for that”.

Seagate did not comment directly on this article, however a representative from the company pointed me towards two of the most recent public statements the company has made on the flooding in Thailand.

In one of the statements, an interview with AllThingsD, CEO Steve Luczo discussed the price situation in the wake of the flooding.

“...since spring of 2010, the price erosion has been higher than normal, which would show that supply is greater than demand. And what this flood has done is drive the supply curve down, while the demand curve has stayed constant. For OEMs , you’re seeing an average increase of about 20 percent, and in the channel [resellers who sell parts to smaller PC and server vendors], probably much higher. So all the sensational quotes you see about pricing are about those that occur in the channel, where we have no control whatsoever”.

For Luczo, the problem seems to be with channel supply, not OEMs. Seagate is attempting to drive down prices, he said, but the shortage naturally creates price increases.

“...at the OEM there will be shortages in some high-value areas like enterprise storage or cloud computing. You’re going to have to see price increases, because there’s such big shortages”.

Analysts predict that deliveries will ramp up in March, with prices stabilizing in Q2. It's not until Q3 that prices are going to come back down to levels before the floods.

It will be interesting to see what happens then.
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