How Will LSI Buying SandForce Shake Up the SSD Market?

Half a day after LSI announced plans to acquire SandForce for roughly $400 million, we’ve been able to make the rounds with industry contacts to more fully understand the implications of the deal. In the immediate term, there will be no changes, the deal should close in the first quarter of next year, and even when LSI takes over, they’ll largely be absorbing SandForce into their ecosystem. But after the dust settles, what does the deal mean to LSI, SandForce, SandForce licensees and the millions of client and enterprise users who are buying SandForce based products?

Half a day after LSI announced plans to acquire SandForce for roughly $400 million, we’ve been able to make the rounds with industry contacts to more fully understand the implications of the deal. In the immediate term, there will be no changes, the deal should close in the first quarter of next year, and even when LSI takes over, they’ll largely be absorbing SandForce into their ecosystem. But after the dust settles, what does the deal mean to LSI, SandForce, SandForce licensees and the millions of client and enterprise users who are buying SandForce based products?

Why Did SandForce Sell?

Before going too far down the road, perhaps the first and easiest question to answer is why SandForce sold at all. SandForce is a venture-backed company that started about five years ago. They’ve had four rounds of investment which experts estimate totals around $60 million dollars, with the most recent round of $26 million closing in September of last year. Doll Capital Management and Storm Ventures invested in at least the last three of the four rounds and were probably part of the impetus to exit the investment. The venture space is under tremendous pressure to show returns, especially as firms try to raise new funds; posting exits is the best way to remind investors that venture funds are a viable investment vehicle.

Was LSI The Right Buyer?

On the surface LSI may not look like an obvious candidate to buy SandForce. While they use SandForce technology in their WarpDrive line of PCIe SSDs, they’re not a heavy user of the technology in the way OCZ, Corsair, Patriot, OWC and other vendors are, some of which base their entire SSD business on SandForce’s ability to create processors and reference designs for them to work off of. LSI does however touch many areas of the storage business, odds are you have more LSI parts in your computer than you know of – they’re a part of everything from network cards to hard drives.

Even though $400 million seems like a steal, there aren’t that many companies who can swallow a bite that large. By comparison, OCZ bought Indilinx earlier this year for $32 million in stock, roughly 10% of the market capitalization of OCZ.

Other contenders for SandForce may have included obvious players in the storage space, Intel, Micron, Seagate and even Western Digital could have benefited from adding the SandForce intellectual property and product team to their respective companies. In fact, any one of those guys could have come in, bought the company, then cut the legs out from under their rivals by ceasing to sell the processors outside the company. Given Intel switched from their own SSD controller technology in their latest high-performance SSDs to Marvell, scooping up SandForce could have been a logical fit since they’re already using someone else’s technology for a critical component. But for a variety of reasons, such an aggressive move wasn’t made and LSI ended up with the prize, which actually fits well with their business model of providing value-add technology and components.

Competing Interests or Perfect Alignment?

What is likely good news to the dozens of SandForce licensees is that LSI doesn’t plan on branding their own SSDs outside of the PCIe space and isn’t going to stop selling processors to whoever wants them. What could have been a devastating blow to several companies has turned into a win. LSI has deeper capabilities than SandForce on its own to continue innovating with the processor and software that goes along with it. That means a better product with more features, keeping those who use the SandForce processor at the top of the SSD game. Given the lack of alternatives for companies who don’t own their own SSD processors, the LSI acquisition is very good news.

The most obvious issue could be between LSI and OCZ, who makes the Z-Drive R4, a direct competitor to the LSI WarpDrive line. LSI didn’t appear bothered by the Z-Drive R4 though, in our call they indicated that they haven’t actually sold against it in the channel. Either the PCIe market is so large they haven’t bumped into each other yet, or they’re selling into enterprise customers at different points on the scale. Either way, both LSI and OCZ seem inclined to grab market share away from Fusion-io, who was specifically highlighted as the main competitor in the PCIe SSD space by LSI’s CEO.

The Future of SandForce

LSI isn’t just going to sit on the SandForce technology and add their processor sales to the bottom line though. LSI sees tremendous potential for their own line of PCIe SSDs in the enterprise space, which of course are powered by SandForce processors. In fact, LSI sees the total addressable market of the PCIe SSD space at $2 billion over the next few years. That should keep them more than busy, while still innovating with both the processor and related software.

Both client and enterprise users should see benefit as well. LSI should make the processors better, infusing new technology to deliver lower latency, increased reliability and more robust compatibility. With top line speeds already nearing the limits of the SATA 6Gb/s interface, LSI should be able to help drive improvements in the controller to make the SSD experience faster throughout different usage scenarios. There is quite a bit of upside for end users as well – think of all the possibilities around LSI’s existing technology being pushed down. CacheCade caching software with a small SSD in front of a giant hard drive anyone?

Net Result

The deal is a win for LSI, a win for SSD companies who use SandForce processors and a win for consumers that buy their SSDs. The list of losers is a bit more ambiguous at the moment; if anyone should be nervous though it should be JMicron, Marvell, Samsung, Intel, OCZ and everyone else in the SSD processor space. It’s not that they can’t compete, they all certainly have viable offerings, but with LSI DNA being infused into what is already the fastest SSD controller on the market, this is definitely a shot across the bow. 2012 should prove to be an interesting year in the SSD controller space; who stands up and delivers a superior product and who withers under the pressure, falling behind in the race to power the rapidly expanding SSD storage market.