Will Windows 8.1 Kill the Local Hard Drive?

Microsoft's (NASDAQ: MSFT  ) update to its Windows operating system, Windows 8.1, brings deep integration with its online storage service, SkyDrive. Whereas before, SkyDrive had simply acted as a cloud storage solution, now it functions as a sort of automatic, online backup, allowing users to carry their Windows setup from one PC to another PC.

As cloud storage continues to replace local files, the demand for hard drives should decline, putting pressure on Seagate (NASDAQ: STX  ) , one of the largest producers of hard drives following its acquisition of Samsung's (NASDAQOTH: SSNLF  ) business.

Marrying SkyDrive with Windows
One of the best new features of Windows 8.1 is its integration with SkyDrive. Like Apple's iCloud, SkyDrive can serve as an online backup, storing local files and settings on Microsoft's servers. Users of multiple Windows PCs will find this SkyDrive integration especially helpful.

Transferring a file from one PC to the next once required a physical medium, like a jump drive. The rise of cloud storage solutions like DropBox and Google Drive alleviated this need somewhat, but SkyDrive integration takes it to the next level. Now built into Microsoft's operating system, users need not concern themselves about actually uploading the file to the cloud -- Microsoft does it automatically. When they sign into a different PC with their Microsoft account, it will be there waiting.

Perhaps in the past, a user may have kept a copy of a given file on each of their PCs, taking up space on multiple hard drives. The SkyDrive integration renders this practice obsolete; according to Microsoft, SkyDrive users need about 80% less disk space.

Hard drives are going away
This is obviously problematic for a company like Seagate, which continues to rely on the sale of hard drives. As traditional PC form factors have been replaced by mobile devices like smartphones and tablets, Seagate has seen its price-to-earnings ratio driven into the single digits.

The vast majority of mobile devices don't have hard drives, and as consumers and business users buy a tablet in place of a PC, that's likely one less sale for Seagate -- last quarter, sales were down 24% from the prior year. But even worse, hard drives could even vanish from traditional PCs.

Microsoft's Surface Pro, its tablet that doubles as a laptop (and a desktop when paired with Microsoft's new dock), uses a solid-state drive, not a hard drive. Samsung, too, has cut down on its hard-drive usage -- many of its Ultrabook laptops don't have them.

I think Samsung's decision to sell its hard drive unit to Seagate is quite telling. One of Samsung's greatest strengths is its vertical integration: Samsung makes many of the components that go into its devices, from its displays to its chips, to its memory. This control over its supply chain gives it a great advantage over its rivals -- it was enough to scare Nokia away from Android.

Samsung used to make its own hard-drives as well, but sold the division to Seagate two years ago. That's worked out great for Samsung -- in exchange for the unit, it received stock in Seagate, which has skyrocketed in value since the sale. But longer term, it seems clear that Samsung doesn't think it will use many hard drives in the future, otherwise it probably would've kept the unit alongside its other component businesses.

But all is not lost for Seagate
To be fair, not everything is bad for Seagate. Those files stored in Microsoft's SkyDrive are sitting somewhere on a server, and there's a good chance that server uses a hard drive. But can Seagate rely on the cloud to offset continuing PC weakness?

Back in May, Seagate shares rallied after the company reported stronger earnings than anticipated. Much of that strength came from better than expected cloud demand, but as Seagate told Reuters, only 20% of the company's revenue was coming from the cloud. Then, in July, Seagate shares tumbled about 10% after earnings -- cloud-related revenue was only 8-9% of Seagate's total revenue, not enough to offset PC weakness.

The same questions hover over Seagate's move into solid state. While Seagate has sold solid state drivers to enterprise users for years, it's a newcomer in the consumer market. Its first consumer solid state drive, the 600 SSD, just went on sale this year. Notably, Seagate doesn't enjoy the same market position in solid state as it does in hard-drives -- there, Seagate is up against market leaders like SanDisk, Micron, and most notably, Samsung.

Storage is moving online
The shift toward cloud storage has been building for years; Microsoft's integration of SkyDrive with Windows should only accelerate that trend. More PC users are going to be storing their files online -- not on their local hard drive.

Samsung clearly doesn't see much of a future for hard drives, otherwise I doubt it would've sold its hard drive unit to Seagate. Admittedly, Seagate could find some respite in cloud-related demand, though it's far from guaranteed.

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  • Report this Comment On October 20, 2013, at 11:25 AM, denrilio wrote:

    I switched all my Windows OS to Ubuntu 12.04 OS. I downloaded it FREE. It is Linux based (as Apple OS) with built in security software! Ubuntu includes a wowd processor, spreadsheet and office software at no addional costs. So, why continue with upgrading Microsoft software at considerable costs when Ubuntu is avaible at NO COST!

  • Report this Comment On October 22, 2013, at 6:55 AM, laurentbalmelli wrote:

    I disagree with the premise "As cloud storage continues to replace local files, the demand for hard drives should decline, putting pressure on Seagate ". This is actually the opposite that is going to happen. Cloud storage requirements include redundancy and resilience which typically are not satisfy by local HDD users. As a results, for every Gb stored in the cloud, 2-3 Gb are needed to satsify the above requirement. Hence storage needs (and the need for HDDs) is going to grow steadily, not decrease. The most interesting aspect about this discussion is that Wall Street has been consistently wrong about the HDD market for the last 4 years which has given a tremedous opportunity for investors in STX. I am very surprised that the author still doesn't get it after all this time.

  • Report this Comment On October 22, 2013, at 7:00 AM, laurentbalmelli wrote:

    The only thing that the author got right is "The shift toward cloud storage has been building for years; Microsoft's integration of SkyDrive with Windows should only accelerate that trend. More PC users are going to be storing their files online -- not on their local hard drive."

    and I would add: "Guess what devices will be used to support that growth?... well HDDs"

    It is really surprising to find such an article after a stock went from $9/share in 2008 to $50/share today. You got to love people in finance and their understanding of technology.

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