Following a round of consolidation in 2012, prices in the hard drive market have stabilized, and the two major remaining companies, Western Digital (NASDAQ:WDC) and Seagate (NASDAQ:STX), will likely reap continued profits from this mature business for years to come. However, it is an unwritten rule in a competitive economy that those who are not going forward will eventually go backward. The hard drive providers seem to understand this well, and each is seeking revenue growth by expanding its product portfolio with new offerings. Let's take a look at the new initiatives at Western Digital, and what growth they might bring for the company.
Flash-based solid-state drives, or SSDs, have been an exploding trend in the storage industry over the last several years. Thanks to their higher speeds, lower power consumption, and greater ruggedness, flash-based SSDs have become the standard storage technology in mobile phones and tablets, and are also making inroads into enterprise and client PC storage. SSDs will not fully replace the significantly cheaper hard-drive technology any time soon, but they are certainly a large and growing opportunity.
Not surprisingly, SSDs are the biggest area of expansion for Western Digitial right now. Along with its in-house efforts, Western Digital also acquired three SSD-related companies, Virident, sTec, and VeloBit, within the last year. The work seems to be paying off, and in the last quarter, Western Digital's SSD business was up 45%, year over year. Management has also stated it expects to outpace the SSD market growth rate of 30%-40% over the long term.
However, competition in the SSD industry is intense, with Seagate recently making its own big SSD-related acquisition, SandForce, and also looking to SSDs for growth. More importantly, the few remaining flash chip makers are increasingly providing their own SSDs rather than selling the chips as components. As an example, Micron Technology (NASDAQ:MU) has increased its SSD sales sequentially by 50% percent in the most recent quarter, and it is now using 20% of its NAND flash production for its own SSDs, compared to 12% just a quarter earlier. It seems inevitable that this trend will push up the cost of flash for companies like Western Digital, and it might eventually make it hard for them to compete with vertically integrated companies like Micron.
Besides SSDs, Western Digital is also offering hybrid drives, which are a combination of flash memory and a traditional hard drive. The flash memory acts as a cache for the hard drive, increasing speed and system responsiveness, and decreasing power consumption by allowing the disk drive to spin down more frequently. According to Western Digital, the prevalent use of hybrid drives is in notebook computers, though Seagate also offers a 5-millimeter hybrid drive that is being included in tablets.
While it sounds good in theory, Western Digital's hybrid drives don't seem to have found an audience yet. During the most recent earnings conference call, management said hybrid drives have not been that "compelling of a product," and have not met their original, fairly modest expectations. Management further stated that Western Digital will continue to work on the situation, conferring with customers and adjusting the price and the capabilities as needed.
Your private cloud
A third interesting initiative within Western Digital is My Cloud, a network-attached hard drive that is meant to be installed at home, but can be accessed by users from anywhere over the Internet through a PC, smartphone, or a tablet. Basically, My Cloud is a cheaper and more privacy-conscious alternative to cloud storage providers such as Dropbox.
According to management, My Cloud has been a success so far and continues to be an opportunity down the line. While My Cloud is ultimately a traditional hard disk drive, the interesting and innovative part of this product are the complementary services and mobile applications Western Digital is providing to make My Cloud useable and useful. In this sense, My Cloud is emblematic of the company's pledge to provide value for customers, even if this means moving away from selling products to selling more complete end-user solutions.
Western Digital is looking for growth by expanding into SSDs. Though it seems to be making good progress at the moment, the fact that flash chip makers are increasingly providing their own SSDs might eventually drive up flash costs and cut into Western Digital's margins. The company might have a better long-term plan with initiatives such as My Cloud, which takes Western Digital's existing hard disk products and packages them up in innovative ways that are attractive to end users.
Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.