Western Digital 2006 Annual Report Download - page 22

Changes in product life cycles could adversely affect our financial results.
Product life cycles have been extending since the middle of calendar year 2002 due in large part to a decrease in the
rate of hard drive areal density growth. However, there can be no assurance that this trend will continue. If longer product
life cycles continue, we may need to develop new technologies or programs to reduce our costs on any particular product
to maintain competitive pricing for that product. This may result in an increase in our overall expenses and a decrease in
our gross margins, both of which could adversely affect our operating results. If product life cycles shorten, it may be more
difficult to recover the cost of product development before the product becomes obsolete. Our failure to recover the cost of
product development in the future could adversely affect our operating results.
If we fail to make the technical innovations necessary to continue to increase areal density, we may fail to remain competitive.
New products in the hard drive market typically require higher areal densities than previous product generations,
posing formidable technical and manufacturing challenges. Higher areal densities require existing head and media
technology to be improved or new technology developed to accommodate more data on a single disk. In addition, our
introduction of new products during a technology transition increases the likelihood of unexpected quality concerns. Our
failure to bring high quality new products to market on time and at acceptable costs may put us at a competitive
disadvantage to companies that achieve these results.
A fundamental change in recording technology could result in significant increases in our operating expenses and could put us
at a competitive disadvantage.
Currently the majority of the hard drive industry uses giant magnetoresistive head technology, which allows
significantly higher storage capacities than the previously utilized thin-film head technology. However, the industry is
developing and now implementing new recording technologies that may enable greater recording densities than
currently available using magnetoresistive head technology, including perpendicular, current perpendicular-to-plane,
and tunneling junction technology, each of which represent a significant change in fundamental recording technology.
The industry is experiencing a fundamental shift in recording technology, this shift in technology is difficult to
implement and historically, when the industry experiences a fundamental change in technology, any manufacturer that
fails to successfully and timely adjust their designs and processes to accommodate the new technology, fails to remain
competitive. There are some technologies, such as heat assisted magnetic recording, that, if they can be implemented by a
competitor on a commercially viable basis, will represent a revolutionary recording technology that could put us at a
competitive disadvantage.
As a result, we could incur substantial costs in developing new technologies, such as, heads, media, and tools to
remain competitive. If we fail to successfully implement these new technologies, or if we are significantly slower than our
competitors at implementing new technologies, we may not be able to offer products with capacities that our customers
desire. Furthermore, as we attempt to develop and implement new technologies, we may become more dependent on
suppliers to ensure our access to components that accommodate the new technology. For example, new recording
technology requires changes in the manufacturing process of media, which may cause longer production times and reduce
the overall availability of media in the industry. Additionally, the new technology requires a greater degree of integration
between heads and media which may lengthen our time of development of hard drives using this technology. These
results would increase our operating costs, which may negatively impact our operating results.
The difficulty of introducing hard drives with higher levels of areal density and the challenges of reducing other costs may
impact our ability to achieve historical levels of cost reduction.
Storage capacity of the hard drive, as manufactured by us, is determined by the number of disks and each disk’s areal
density. Areal density is a measure of the amount of magnetic bits that can be stored on the recording surface of the disk.
Generally, the higher the areal density, the more information can be stored on a single platter. Historically, we have been
able to achieve a large percentage of cost reduction through increases in areal density. Increases in areal density mean that
the average drive we sell has fewer heads and disks for the same capacity and, therefore, may result in a lower component
cost. However, because increases in areal density have become more difficult in the hard drive industry, such increases may
require increases in component costs. In addition, other opportunities to reduce costs may not continue at historical rates.
Our inability to achieve cost reductions could adversely affect our operating results.
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