After the Floods

November 27, 2011
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Floods in Thailand have destroyed 40% of the world’s hard disk manufacturing capacity in a natural disaster that could initiate a technological turning point for the home entertainment industry.

The global demand for hard disk drives (HDD) in Q4 this year will exceed 180 million units, according to Seagate, one of the largest producers. The Chinese media organisation Digitimes predicts a shortfall in HDD supply of between 35-40% however, which will push up the cost of almost everything digital from games consoles and set-top boxes to personal computers.

Significantly, the burgeoning smartphone and tablet sector is almost untouched by the discrepancy between HDD supply and demand.

As economic theory predicts, the result of this mismatch has been a sharp rise in prices at every point in the supply chain and end-users pay twice as much for the same device as they did over the summer. For example, the Seagate 2TB drive that was available from Amazon for less than £60 in August is on sale today at £119.04, reduced from the list price of £230.99.

The HDD shortage does not affect only the world of consumer electronics. To bring faster broadband to rural areas through “fibre to the cabinet” (FTTC) requires roadside “mini-exchanges” that are crammed with disk drives. Many more drives are installed in the giant data centres that power the Cloud to provide space for storage-hungry services such YouTube and Netflix and a home for the data services offered by Google and Amazon.

It is hard to imagine how our online world would function without the HDD, which has grown from a few megabytes in the 1980s to the capacious monsters of today. With increased storage has come a rapid fall in hardware prices, which is why the industry uses the “price per gigabyte” as a measure of cost effectiveness for a single drive. In 1995, a gigabyte would make a £5,000 hole in the budget. Earlier this year, the same capacity was on offer for £0.08 per gigabyte and even today, £0.16 a gigabyte sounds remarkably cheap.

The Apple data centre in North Carolina cost a reputed $1 billion to build and equip, and the installed storage for iTunes alone is said to be 12PB. A petabyte (PB) is 1,000 terabytes (TB), which is 1,000 gigabytes (GB). Apple might have yet one more reason to thank Steve Jobs, who pushed through his dream of computing in the Cloud at a time when the price per gigabyte was as low as it has ever been.

In early October, financial news service Wall Street Transcript published an analyst’s report on the data storage sector that said while demand had grown at 15% a year, the rate of supply increase was just 8% p.a. Since data centres rely on storage, the outlook for HDD makers looked very good with an opportunity to stabilise prices and possibly even claw back some of the margins that had been lost in a highly competitive business environment.

Then came the news that residents were leaving Bangkok to escape the floods that had already inundated the countryside to the north of the city.

More than 600 people died and thousands were made homeless by the onrush of water and it is unlikely that many people knew or cared that the Thai capital was also home to 40% of the world’s HDD manufacturing capacity. In mid-November, as the CE industry absorbed the news, Digitimes forecast that the Q4 output from the factories that survived of the four largest HDD companies is unlikely to top 100 million units. This leaves 80 million or so boxes without a storage device at their heart.

The implications for some product categories migh be profound.

When TiVo almost single-handedly created the DVR sector at the Las Vegas CES event in January 1999, DVD was the biggest show in town. The HDD-based video recorder seemed like a very expensive alternative to the long-established VHS tape format and everyone believed that recordable DVDs were just around the corner. Why pay $25 a gigabyte when a 4.7GB DVD-R promised a permanent copy at a fraction of the price?

TiVo launched in the UK, only to withdraw 18 months later. The company returned in 2009, in a successful partnership with Virgin. Today, UK consumers understand the benefits of the DVR, having been educated through many years’ experience with the Sky Plus box. With its integral HDD, the DVR has become the perfect partner for audiences as they go through the digital switchover experience. BT Vision with its V-Box and the more-established IPTV services in Europe such as France Telecom’s Orange TV also offer subscribers local storage devices that contain an HDD.

The STB manufacturers have made the integral DVR a cornerstone of their USP. The YouView box, as far as one can tell, is a Sky+ look-alike with a built-in Freeview tuner and an internet-connected hard drive. It probably seemed like a good idea at the time.

At a time when the price per gigabyte was in free fall, this strategy made sense: the distributed storage model takes the load off the network and even at periods of peak demand, local playback is unaffected by broadband buffering delays. The potential shortage of hard drives combined with their rising cost, however, might push operators towards the network DVR (nDVR) solution.

When they move subscribers’ locally stored content to a network data centre, as with UltraViolet, operators adopt the Apple iCloud model that Jobs espoused. It’s no longer necessary to make multiple copies of your holiday videos for family members when they can be uploaded to the data centre where friends and relatives may watch whenever and wherever they want. Broadcast TV and film content remains secure in its Cloud. It is streamed to subscribers from whichever HDD happens to be free at that moment and then disappears back into the Cloud the moment after it is viewed. The smart TV doesn’t need a local HDD once it gets its entertainment from the Cloud.

Expensive and unreliable HDDs in games consoles add to their cost but do not enhance play now that faster broadband has tamed latency problems. The Sony PlayStation Network and Xbox Live have shown the way to online multiplayer gaming with conspicuous success: the inbuilt 1TB HDD is an overkill way to store game scores. Now that multiple devices can host the same game in continuous play, to provide large amounts of local storage appears to be an expensive luxury.

In the previous decade, it seemed for a while that every home would one day have a mini-data centre under the stairs: half a dozen large HDDs that whirr away at the beck and call of every Media PC in the household. That was before the iPhone and the iPad made the physical location of the storage irrelevant. Content is wanted wherever the user happens to be. Gone are the days of going home for entertainment: it comes to you and follows you wherever you might be. In these circumstances, network-attached local storage seems to be an anachronism.

There is a more fundamental point behind all this innovation. Left to market forces, changes would be evolutionary and probably take several years. But the loss of 40% of HDD manufacturing capacity almost overnight poses a fundamental question for the factory owners: “Do we rebuild or replace what has been lost?”

Smartphones and tablets have no HDD, nor do most cameras, personal music players and other mobile devices. Local storage taken care of with solid-state media cards, which in future will upload their content wirelessly to the Cloud whenever the opportunity arises. The “disk crash” with its consequent loss of data, becomes a bad memory.

An increased number of portable computing devices have large solid-state drives (SSD) built in. They are silent, very fast, generate almost no heat and can be dropped accidentally from the desk with no more than cosmetic damage to the device. Compared to the price per gigabyte of electro-mechanical HDDs they are an extravagant luxury, especially within data centres, which still have space for as many drives as the industry can make.

But prices for solid-state memory have fallen sharply and capacity continues to rise, as any buyer of memory cards will know. In a report earlier this year, the research company Gartner suggested that the price per gigabyte of an SSD will fall below $1 (£0.65) by the second half of 2012. That is eight times the price per gigabyte of an HDD in August 2011. After the Bangkok floods, it is just four times what consumers now pay for a gigabyte.

The industry says it could take one year to 18 months to rebuild the HDD capacity that was destroyed in November but it means re-investment in a technology that can trace its ancestry back to 1956 in the face of a flood of another kind.