A Bigger Western Digital, But Is it Better?

Arthur Cole

Solid-state drives (SSDs) have made substantial inroads into enterprise environments, but let's face it: Hard disk drives (HDDs) continue to provide the overwhelming majority of storage capacity around the globe.

But with continued pricing pressures cutting margins on HDDs ever tighter, it's no wonder the industry is ripe for some consolidation. And by "some" I mean a lot.

The sheer size of the new entity produced by the merger of Western Digital and Hitachi Global Storage Technologies will be enough to take one's breath away. The merger itself is valued at $4.3 billion and will put nearly half of the world's hard disk market under its control. And this came at a time when Western Digital had already emerged as the leading drive manufacturer, edging past Seagate in total shipments in the past two quarters.

A key factor to keep in mind, though, is the enterprise industry's insatiable demand for storage, particularly extreme scale up and scale out options for highly virtualized environments, according to Gerson Lehrman Group's Thomas Coughlin. Western Digital already had the lowest development costs, and Hitachi Global Storage provides a dramatic increase in manufacturing capability while allowing the combined company to shed the highly convoluted production and distribution system that Hitachi had built up over the years.

Another interesting aspect of the merger is the fact that Japanese companies are notoriously reticent to sell off their business units-especially to foreigners, says Daisuke Wakabayashi in The Wall Street Journal. The last notable divestiture was mobile firm NTT DoCoMo's sale of its minority stake in AT&T Wireless to Cingular, a move that didn't even involve a home-grown business. The decision by Hitachi represents new thinking in Japanese board rooms that soup-to-nuts conglomerates don't necessarily hold a competitive advantage, particularly in boom-to-bust industries like storage.

That's a lesson that Western Digital might come to appreciate before too long as well, according to conceivablytech.com's Kurt Bakke. The fact is, with disk-free tablets set to supplant more and more netbooks and laptops, demand for smaller HDDs could start to wane. And while Hitachi's innovative SSD technology will help shore up one of Western Digital's weak spots, it's unclear whether SSDs will help recoup the $4.3 billion investment in a significant way.

Conventional wisdom holds that big mergers are usually more trouble than they are worth, what with the enormous challenges of systems integration, manufacturing, sales and distribution streamlining and the overall blending of corporate cultures. But in a commodity industry like disk drives, size is not necessarily a bad thing-as long as Western Digital continues to focus on keeping prices low and resilience high.

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