We have seen two major hard drive deals in the last two months, with Seagate (s stx) Tuesday agreeing to buy Samsung’s hard drive business in a deal valued at $1.375 billion. Last month, Western Digital said it would purchase Hitachi’s hard drive (s wdc) business for $3.4 billion (it closed last week) as webscale computing drives the market to rationalize.
A combination of factors are changing the dynamics of the storage industry as broadband adoption drives new services and makes it less important to store music, movies and other files on a PC’s hard drive. Thus, while solid state drives using flash memory are about 10 times more expensive on a per-megabyte basis, more and more laptops are incorporating them. And now that we have the ability to stream music and store files in the cloud, a huge hard drive on a laptop just isn’t as important. Plus, more and more consumers are opting for smaller, sleeker mobile computers and devices that don’t have room for bulky hard drives.
However, that same trend has led to a massive build-out of storage in the cloud by players ranging from Amazon (s amzn) to Apple (s aapl), and while those data centers will have SSDs, they will still have plenty of cheaper storage in the form of hard drives. Additionally, faster broadband has led to the creation of services such as Google (s goog), Facebook and other web-based applications that require huge amounts of storage at cheap prices (you can’t pay top dollar if you’re selling ads for pennies). So in the new, low-margin, competitive market, consolidation makes sense.
Under the terms of the deal, Seagate will pay Samsung for its hard drive business while Samsung gets 9.6 percent stake in Seagate. Seagate will also supply Samsung with hard drives for its computers and consumer-electronics products, while Samsung will supply Seagate with flash memory for enterprise SSD products. With this deal, Seagate extends a partnership it already had with Samsung that helps it access flash memory for building out higher margin SSDs, while Samsung through its stake in Seagate gets to continue to ride the demand curve for spinning disks.