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Comment by aes256 | Hacker News Reader

This was a one-off event that I'm sure the hard drive manufacturers themselves will be taking steps to prevent reoccurring.

What else can Backblaze do? Stockpile drives? The hard drive industry moves fast, with major product releases every 6-12 months and constant price reductions; this would almost certainly increase the cost to the end user.

No business can adequately prepare for a supply shock like this. Imagine airlines facing a 300% increase in the price of fuel. Almost every single one would go out of business.

In this case, would you be berating the ingenious airline that goes out of its way to track down fuel at a cheaper price, finding a low-cost fuel that they can easily refine themselves to aviation fuel, so as to honour their commitments to their customers and avoiding raising their prices?

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> Imagine airlines facing a 300% increase in the price of fuel. Almost every single one would go out of business.

No. They use hedges to control their cost (this is the original point of hedging...). If a company is reliant on a constant supply of hard-drives and doesn't want to be exposed to the risk of extreme price jumps it should probably do the same.

Airlines have long term fuel contracts to smooth out the short term price changes, but beyond that they just pass it on to consumers.

e.g. http://www.delta.com/business_programs_services/delta_cargo/... the first column is the fuel surcharge that floats with fuel prices.

The Backblaze article clearly said that paying more for drives and passing it on the customers was an option. They just found a better one. They didn't mention it, but just losing money for a while is also a reasonable option if you don't want to antagonize your customers.

*Yev from Backblaze here -> You're correct, but quick note on this. We're a boostrapped startup, meaning, we need to be constantly profitable in order to pay salary and keep the business going, taking a financial hit was the only real option we could not take, because we would have been out of business very quickly (not good for anyone).

Hedges hit you both ways, though. They save you if prices spike, but also cost you if prices drop.

Given that hard drive prices almost always drop constantly, is that tactic really a good idea? Is it possible to reasonably hedge against price spikes in a commodity whose price you expect to consistently and rapidly drop? (Serious questions, really.)

If prices are actually expected to drop, that should already be factored into the price of hedging the commodity.

How would that work, exactly? Would you set up a contract whereby you can buy hard drives according to a price schedule which decreases according to a set schedule, where that price decrease has you paying a bit more than the expected market price, but is guaranteed and thus protects you from increases?

If prices are expected to drop, your hedge would be for that somewhere around the price you expect it to be wouldn't it? Say you expect 3TB hard drives to be $110 in 3 months and the current price is $130. You may buy a contract for $115/hd - if someone is willing to sell you that contract.

Typically if you're hedging a commodity for actual use, what you're trying to do is to lock in your cost and not to make money out of it. Let's look at an airline for example. The price of oil currently is $90/barrel and I think it might go up even more to $120/barrel. I buy a contract for 100 barrels of oil at $100/barrel deliverable in 3 months. Say I use 100 barrels of oil every 3 months. I now know that my fuel cost is now $10,000 for those 3 months. This then allows me to price my product based on that $10,000 assumption.

In the case of hard drives, I have no idea if it would be a good idea to hedge since the prices keep on dropping and the Thailand flood is not an everyday occurance and in general prices of hard drives are pretty stable and don't fluctuate like oil prices. But fundamentally, you're not trying to avoid losing money; you're trying to lock in your cost so you can price your service accordingly and not be in a bind if the price of your commodity fluctuates.

In what real-world scenario would airlines respond to a short-term rise in the cost of fuel by finding a new low-cost fuel and refining it themselves to fuel engines designed and tested with existing fuels?

Obviously I'm no expert on aviation fuels, I'm just trying to make an equivalent (most probably fictional) scenario for the industry.

In this case internal drives are ordinary aviation fuel, external drives are the alternative fuel, the price of which has been largely unaffected by the supply shock, and the process of taking the external drives apart to reveal internal drives is the equivalent of a simple refining process that turns the alternative fuel into ordinary aviation fuel.

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