Can Seagate gain more than Maxtor will lose?

"With the increased scale of the combined company," Seagate CEO Bill Watkins said in this morning's statement, "we can reduce overall product costs and provide more innovative products at more competitive prices." The combined company expects to save $300 million in supply chain and research/development costs during its first year of joint operation. Perhaps by coincidence, $300 million is the termination fee that Seagate would pay to Maxtor should the acquisition deal fail to be completed.

What isn't yet clear from today's news is which product lines will remain following the acquisition, and which will disappear. Just two days ago, Maxtor issued a press release stating it was preparing to introduce its next generation of storage technologies at the upcoming CES conference next month. "I don't think there's any tips or intimation we were given on the [conference] call this morning," said IDC's John Rydning, "of what products are going to survive and which ones would remain." He did hear that the current line of Maxtor DiamondMax drives - that company's high-performance line, which recently saw accelerated production volume - will probably have ample time to run its course in the market before the acquisition is completed late next year.

In the enterprise, Maxtor is noteworthy as a supplier of drive equipment to network storage leader EMC; the fate of that lucrative contract is, at this point, unknown. Seagate, meanwhile, has seen recent successes as a supplier of hard drives for digital video recorders. In June of this year, Seagate announced a dramatic shift toward perpendicular recording technology, starting with its Momentus product line, stating that all new product lines would incorporate perpendicular by the end of next year. Perpendicular recording rearranges bits stored on a disc platter in a new way that dramatically improves bit storage densities, without having to increase the thickness of the underlying magnetic substrate. Maxtor actually led the research revolution in perpendicular storage, through its MMC Technology division, with some of the first working prototypes as early as January 2002. However, Seagate managed to beat Maxtor to market, putting Maxtor in the humiliating position of having to make a comeback in a field it pioneered.

But Rydning believes it could still be many years before all hard drives use perpendicular recording, and for some product lines, the changeover may not even be necessary. Seagate's Barracuda 7200.9, which has just been released and which Patrick Schmid and Achim Roos reviewed just last week, presents customers with 160 Gb per platter while extending the shelf life of the industry's longitudinal legacy recording scheme. The older scheme means lower manufacturing costs, while enabling price premiums that increase margins. "That definitely gives Seagate a very cost-effective desktop technology for a long period of time," stated Rydning.

Given the fact that the lifespan for the last generation of longitudinal drives, at 80 Gb per platter, was extended to four years, Rydning added, "there's a very good possibility that 160 Gb per platter could have a four-year, or even longer, lifespan." So even Maxtor's legacy of leading the way in perpendicular research (if not in production) may not have played into Seagate's decision.

Publicly estimating the combined company's market share in the 40 percent range may not have been a wise move for Seagate, if it expects this deal to be cleared by federal regulators smoothly. Observers - most notably on television - have recently commented that Seagate has a stake in extending its market share, in order to gain credibility and clout in marketing high-capacity, small form-factor hard drives for the emerging consumer electronics market, particularly to MP3 player manufacturers. But Rydning disagrees. "At IDC, we feel that the whole flash-vs.-small-form-factor-disk-drive debate's been overhyped," he told us. As a measure of total disk drive units shipped, he reported, small form factor sales to the CE market comprise only 3% of shipments. The principal environment for HDDs today, he said, are still applications with high storage requirements. On the other hand, hard drives in that segment should not be considered threatened by flash, whose own capacity increase does not yet measure up. Pronounced Rydning, "We don't see flash or any other technologies overtaking disk drive technology in many years."

While one less hard drive manufacturer may populate the landscape in 2007, there will still be five major manufacturers and three minor ones. Seagate, Western Digital, Hitachi (which acquired the HDD manufacturing facilities of IBM), Toshiba, and Samsung are the big players now, with Excelstor, GS Magic, and Cornice still struggling to carve a slice the market for themselves. Some market observers tend to think there remains plenty of room for further mergers and acquisitions, so long as the number of companies in that market is greater than one. Rydning disagrees, stating that with this merger, that might be it for now. Especially in the desktop segment, he believes, "there probably are not too many scenarios left where there's an opportunity to take strengths from one company to strengthen the weaknesses of another."