If an electric car lasted a hundred years but cost $500,000 to buy, would it be a bargain? Solid state storage systems cost 30 times as much as the hard drives they might someday replace, but they last much longer and fail less often. So are they still cost-effective?

Here are the metrics: a two-terabyte hard drive sells for roughly $100 at retail this holiday season. Industry research suggests that around 95% of the units will last for more than a year. Around 80% will last at least four years. And around 50% of them will last six years or more.

The warranty expense rate, meanwhile, is likely to be in the range of 1.0% to 2.5% of the price. But that's the manufacturer's price, not the retail price. Rather than make some complicated assumptions, let's settle on a warranty cost of $1.00 per unit, or in round numbers, 50 cents per terabyte.

A solid state drive, in contrast, may last forever. After all, there are no moving parts or friction. Let's say 95% will last 10 years or more. But there's a big price difference for the same amount of storage space. For instance, there's a 64-gigabyte model selling for $100 at retail, and there's a 128-gigabyte unit selling for $150. So that's between $1,200 and $1,600 per terabyte of capacity -- 24 to 32 times as much as a hard drive.

Let's say the warranty expense rate for a solid state drive ranges between 0.5% and 1.0% of price. And let's say the retail markup is 40%. That's still between $3.60 and $9.60 per terabyte, which is between 7 and 19 times as much as a hard drive costs its warranty provider for the same capacity.

Comparing Data Storage Technologies

Therefore, in terms of warranty costs, there is still a definite difference between the traditional and the new technology data storage warranty costs. To reach this conclusion, we began with a list of 44 manufacturers of data storage systems and components, including not only current market leaders such as Seagate Technology, Western Digital Corp., EMC Corp. and NetApp Inc., but also former market leaders such as Maxtor Corp., Storage Technology Corp., and Iomega Corp., which are now part of Seagate, Oracle, and Lenovo, respectively.

We also included all of the up-and-coming storage technology providers, specifically the solid state and flash memory manufacturers led by SanDisk Corp. and Spansion Inc. Next year, though, that list will get shorter, because Spansion is to be acquired by Cypress Semiconductor Corp., which like Oracle and Lenovo, are part of other industries.

The traditional disk drive manufacturers continue to fight for market share with the solid state and flash drives, which are now nearing a terabyte in capacity. Given that the new technologies have no moving parts, run cooler, create less noise, and use less power than traditional hard drives, one would expect those differences to show up in warranty expense rates.

Let's start with the total data storage industry warranty expenses. In Figure 1 we're counting warranty claims paid across 47 quarters, from the beginning of 2003 until the third quarter of 2014. Note that the quarterly total remained very close to $150 million from 2003 through 2010, before staging an increase that looks to have lasted for almost four years.

However, the industry's claims total is actually now decreasing a little bit, from $573 million in the first nine months of 2013 to $564 million in the first nine months of 2014. And once the fourth quarter numbers come in next March, the industry may see its first annual claims decline since 2004-2005.

Among the top vendors, SanDisk and Seagate saw the biggest claims reductions. For the first nine months of 2014, SanDisk was down 37% to $14 million, while Seagate was down 11% to $163 million. EMC was one of the very few to see an increase, with claims jumping from $128 million in the first nine months of 2013 to $167 million this year.

Warranty Accruals

Accruals, surprisingly, have bounced around more than claims from one quarter to the next. In Figure 2, we see several peaks and several troughs, but again it's around a $150-million-per-quarter average.

The highest mark was set at the end of 2005, when Maxtor, EMC, Seagate, and Western Digital all had a bad quarter at the same time, and the industry total hit $218 million as a result. The low mark was set in the middle of 2010, when Seagate and EMC made unusually small warranty accruals, and the industry total dropped to $102 million.

For the first nine months of 2014, accruals for these companies are actually down by a significant amount, suggesting expectations of decreasing sales, decreasing expense rates, or both. So far, data storage manufacturers have reported only $442 million in warranty accruals for the first nine months of 2014, down from $513 million in the same period of 2013.

This time, the younger companies are clearly leading the way, with NetApp cutting accruals by 38% and SanDisk cutting accruals by 28%. Among the top five, only Western Digital increased its accruals, but by only $7 million to a $135 million total for the first nine months of 2014.

Compared to Sales

The easiest way to tell whether the declines in expenses are due to declines in sales or declines in warranty costs is, of course, to look at sales. According to our tally, these data storage companies have seen a 3.3% increase in product sales so far this year, which is in contrast to a 1.7% drop in claims and a 14% drop in accruals.

In other words, it's not the sales that are declining, it's the warranty expenses. And therefore the trend seen in Figure 3 comes as no surprise. Over time, the data storage manufacturers have gotten better and better at reducing the cost of warranty, despite the rising capacities of those products, in some cases the shrinking physical size, and at least in years past the lengthening of some of their warranties.

Back in 2003, these manufacturers were spending 2.0% to 2.4% of their product revenue, on average, to finance their warranties. Now, they're spending only 1.0% to 1.4%, after almost 11 years of constant cost-cutting. In the third quarter of 2014, in fact, their average accrual rate fell below one percent for the first and only time so far.

A true picture of warranty expenses among the data storage manufacturers therefore needs to combine these metrics. As seen in Figure 1, claims totals have risen in recent years, though not in 2014. As seen in Figure 3, claims costs represent a declining share of revenue, which means sales are rising faster than claims.

Meanwhile, as seen in Figure 2, accruals are more or less the same as they've been, though again they are down in 2014. The data in Figure 3 suggests that while the amount has been fairly steady, the ratio between accruals and sales has also been declining. And this suggests that the product is getting better, less costly to repair and less likely to need a repair.

The one we can't explain is Figure 4. This is simply a chart expressing the total amount of money in the warranty reserve funds of the 44 companies at the end of each of the past 47 quarters. It's risen from a low of $621 million in early 2004 to a high of $1.054 billion in early 2012. And it's fallen in every quarter since, to its most recent level of $883 million.

Warranty reserves have fallen by 10% in the past year, with greater-than-average declines seen by NetApp, Seagate, EMC, Quantum Corp., and Brocade Communications Systems, among others. SanDisk, Spansion, and Overland Storage Inc. were among the few companies to boost their reserve levels in the past year.

The thing is, these manufacturers are quantifying their vision of the future through their warranty accounting. They expect the trend seen in Figure 3 to continue -- expense rates continue to fall -- so they're setting aside less and less. And that causes warranty reserve balances to decline.

For instance, let's look closer at Seagate Technology, which has allowed its reserves to fall to $273 million in September 2014, their lowest level since 2006. In Figure 5, it's obvious why: the company's claims rate is back to where it was in 2005, before there were five-year warranties and before Maxtor was acquired. And if it's spending only 1.5% of its revenue on claims, it doesn't need $400 million in its reserve fund.

However, it's also important to note that beginning in early 2011, Seagate has allowed its accruals to drop below their replacement level, meaning that more is always going out in claims than is coming in as accruals. This depletes the reserves over time. Then again, time has proven them right, because in the time since Seagate cut its accrual rate below 2.0%, its claims rate has declined to 1.5%. In other words, the company predicted declining expenses and its prediction came true.

Western Digital did much the same thing, at about the same time. In early 2011, it began to reduce its accruals significantly, as can be seen in Figure 6 below. But at least initially, claims didn't follow. In fact, the claims rate briefly rose above two percent. But the company stuck with the new accrual rate, setting aside between 1.05% and 1.25% of its revenue for 12 straight quarters. And then finally, in the fiscal quarter ended October 3 of this year, its claims rate fell to 1.25%.

It's not the lowest-ever that warranty expense rates have been at Western Digital, but it illustrates how a company can signal where it believes its product reliability and repair costs are headed. The accrual rate is the early warning indicator, and it's confirmed by the claims rate after some time has passed.

Quite the opposite thing happened to Western Digital in 2004, for instance. At a time when both its claims and accrual rates were around two percent, the company suddenly began increasing its accruals, as if it saw increased warranty expenses on the horizon. The company's accrual rate peaked at nearly 2.7%. but the claims rate kept falling until the end of 2007. And the company built up warranty reserves it didn't really need.

But before we create an impression that massive mistakes were made, we should note that both Seagate and Western Digital kept their expense rates within sight of each other at all times. This is to be expected with established manufacturers whose product lines are relatively mature and whose failure characteristics are fairly well understood.

Solid State, Fluid Expense Rates

Compare and contrast these with the next two charts, which represent two of the "pure plays" in solid state storage technology. Everybody is making flash memory now, but SanDisk and Spansion make little else. And, as can be expected with new manufacturers whose product lines are relatively young and whose failure characteristics are not yet well understood, we see a bit more volatility in their warranty expense rates.

In Figure 7, we can see that SanDisk chose to make no accruals in three of the past 47 quarters, giving it a 0% accrual rate. In 2009, after claims rates rose, so did accrual rates. And then, once the crisis passed, warranty expenses fell back to relatively low levels.

That's the takeaway from this chart: although the expense rates are more volatile, they're almost always lower than they are for the traditional hard drive makers. And given the absence of moving parts, friction and heat, that's to be expected with solid state storage technology.

Then again, as can be seen in Figure 8, Spansion had its own manufacturing excursion in 2008. There's no data for 2003 (when it was still a joint venture between AMD and Fujitsu Ltd.), so we're looking at only 44 quarters of data. But those data points are just as volatile as can be expected of a new company with a new technology.

We're not saying that solid state technology is better or worse than traditional hard drive technology. All we're saying is it's less mature, and therefore more unpredictable from a reliability/cost point of view. Hard drives were invented in the 1950s and hit their stride in the 1980s. Solid state drives have been around since the 1980s, but their prices were too high to allow for mass production until much more recently.

Data Storage Reliability Studies

Hard drives are typically warranted for three years, though their median life expectancy is closer to six years, according to one study. That study also found that 80% of all hard drives last for at least four years. But 5.1% fail in the first year.

In contrast, solid state storage systems can last much longer. Some manufacturers cover them with "lifetime" warranties, though most have now chosen a concrete number between three and 10 years. But we still don't know how long they might really last, though one recent study spotlighted a Samsung solid state drive that's already survived the equivalent of more than a thousand year's worth of typical usage and is still working!

SanDisk now sells a 64-gigabyte for around $100. Seagate's 2-terabyte Barracuda disk drive is around the same price, though it has more than 30 times the capacity. One can find discounted 128-gigabyte flash drives on sale for $50, but in no case can we find one that has a lower cost per gigabyte than a hard drive. So the price advantage still trumps differences in reliability and longevity.

It must have been the same the warranty managers who had to deal with the early days of electric cars, flat screen televisions, microwave ovens, and other brand new technologies. You think they're a design improvement, and you hope they'll cost less to fix, will last longer and will need fewer repairs. But you're not sure, and neither are your actuaries. So you raise accruals, then you cut them, then on second thought you raise them again. And claims rise, then fall to zero, then they rise and fall again.

Eventually, after 15 or 20 years of experience, you get really good at predicting the warranty cost of the next generation of the product line, and you can sleep through the night. And your claims and accrual rates flatten out and decline. But there are still some surprises, so you sleep with one eye open, focused on the smartphone next to your bed.