Seagate’s Surveillance Drives Could Provide Near-Term Benefit

Seagate Technology (NASDAQ:STX) recently unveiled its seventh generation surveillance drives, which primarily target small and medium businesses (SMB). ^[1] Seagate’s primary competitor Western Digital (NASDAQ:WDC) also debuted its surveillance class hard drive under the WD Purple brand name. ^[2] The surveillance market has been on a strong growth spree over the last decade, with major corporations and governments opting for video surveillance of their premises. The growing need for security and surveillance is not only seen in developed countries, but also in emerging markets across some parts of Europe and Asia.

Surveillance storage can be split into various storing technologies, including network attached storage (NAS), unified storage, storage area network and digital video recording (DVR). A major portion of video surveillance is done on a large scale with surveillance companies using big data, NAS, SAN or unified storage solutions offered by providers such NetApp (NASDAQ:NTAP) and EMC (NYSE:EMC). High security risks, coupled with technological advances in security systems, have prompted even the small-scale businesses to deploy surveillance systems. Seagate is now looking to provide DVR-based storage solutions for small scale/in-house surveillance systems. Casinos and manufacturing plants are among the various small and medium businesses that the company intends to target for this purpose. As the demand for surveillance in SMBs increases over the next few years, Seagate could derive meaningful growth in its non-compute storage segment from surveillance storage. However, adoption of video-surveillance-as-a-service (VSaaS) and IP-based surveillance (which means surveillance over a network) offered by third-party providers could reduce demand for small-scale/in-house surveillance in the long run.

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Storage Breakdown in Video Surveillance

Traditional video surveillance consisted of installing cameras at strategic locations with most of the monitoring done manually. Over time, the high cost of employing manpower and a high frequency of overlooked events caused the shift towards storing video footage. According to a report published by Transparency Market Research, the global video surveillance market is about $15 billion at present, and is expected to grow at a CAGR of over 19% through 2019 to $43 billion. ^[3] Recording and video storage currently accounts for about 35% of entire surveillance hardware market, the report adds.

However, video-surveillance-as-a-service (VSaaS) and IP-based surveillance offered by surveillance providers decrease the requirements of individual storage units in surveillance systems. The entire shift of IT centered around infrastructure to IT-as-a-service is bolstered by cost-cutting benefits due to the low initial investment and maintenance costs and manageable technical expertise required. As a result, the shift of in-house surveillance to VSaaS, cloud based storage and surveillance over a network appears inevitable. An estimate by Markets and Markets highlights a similar trend. According to their research report, video surveillance storage market is expected to grow at a CAGR of 16% to become a $10 billion market by 2018. ^[4] Given the expected overall surveillance market size, the share of surveillance storage could decline to about 27% by 2018.

Seagate’s Surveillance Drives

Seagate’s new surveillance drives offer storage solutions to primarily small and mid-level surveillance systems. Seagate touts that its drives work flawlessly for at least one million hours before failure, a strong claim given that surveillance-class hard drives are used 24 hours a day, compared to regular HDDs that typically run 8 hours a day. Additionally, the new drives can record video footage from up to 32 camera channels, which is an ideal number for small-scale surveillance. ^[5]

It is likely that hard disk manufacturers Seagate and Western Digital tap into the SMB surveillance storage market space over the next couple of years and witness a near term increase in sales of non-compute units. However, the anticipated growth in VSaaS and IP-based third-party surveillance options in the long run could trickle down to all market segments including small-scale surveillance. Consequently, the use of these storage drives designed by Seagate specifically for use SMBs could ultimately become redundant. Taking a moderate assumption, if the overall non-compute units outsell our forecasted figures by 3-4% in the next two years, we could see an upside of only about 2% to our $51 price estimate for Seagate.  However, the company could benefit in the long run if it shifts focus towards enterprise-level hardware storage arrays for the surveillance market.

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1. Seagate’s Seventh-Generation Surveillance Hard Drive, Seagate Press Room, February 2014 [↩]
2. Western Digital Debuts Surveillance-class Hard Disk Line, Western Digital Press Release, February 2014 [↩]
3. Global Video Surveillance And VSaaS Market Worth $43 Billion, PR Newswire, October 2013 [↩]
4. Video Surveillance Storage Market Worth $10 Billion By 2018, PR Newswire, February 2014 [↩]
5. Seagate Announced 7th Gen Surveillance Drives, Tech Radar, February 2014 [↩]