Western Digital 2006 Annual Report Download - page 27

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The hard drive industry is highly competitive and can be characterized by significant shifts in market share among the major
competitors.
The price of hard drives has fallen over time due to increases in supply, cost reductions, technological advances and
price reductions by competitors seeking to liquidate excess inventories or attempting to gain market share. In addition,
rapid technological changes often reduce the volume and profitability of sales of existing products and increase the risk of
inventory obsolescence. We also face competition from other companies that produce alternative storage technologies like
flash memory. These factors, taken together, may result in significant shifts in market share among the industry’s major
participants. In addition, product recalls can lead to a loss of market share, which could adversely affect our operating
results.
Some of our competitors with diversified business units outside the hard drive industry may be able to sell disk drives at lower
margins that we cannot match.
Some of our competitors earn a significant portion of their revenue from business units outside the hard drive
industry. Because they do not depend solely on sales of hard drives to achieve profitability, they may be able to sell hard
drives at lower margins and operate their hard drive business unit at a loss while still remaining profitable overall. In
addition, if these competitors can increase sales of non-hard drive products to the same customers, they may benefit from
selling their hard drives at low margins. Our results of operations may be adversely affected if we can not successfully
compete with these companies.
If we do not successfully expand into new hard drive markets, our business may suffer.
To remain a significant supplier of hard drives, we will need to offer a broad range of hard drive products to our
customers. We currently offer a variety of 3.5-inch hard drives for the desktop, enterprise, CE and external storage
markets, and we also offer 2.5-inch form factor hard drives for the mobile, CE and external storage markets. However,
demand for hard drives may shift to products in smaller other form factors, which our competitors may already offer. We
recently entered into the sub-2.5-inch hard drive market with a 1.0-inch hard drive product, however the demand for the
1.0-inch form factor drive is significantly less than our initial estimates of this market, thus impairing our ability to
realize revenue from this product.
In addition, the desktop and enterprise markets are transitioning from parallel interfaces, such as PATA and SCSI, to
serial interfaces, such as SATA and SAS, to handle higher data transfer rates. We currently offer SATA products; however,
the transition of technology and the introduction of new products are challenging and create risks. For example,
acceptance of the SATA interface may not continue to grow, or customers may choose to purchase alternative interfaces
that may not be compatible with future generations of SATA hard drives. Moreover, our customers may require new
SATA features that we may not be able to deliver in a timely and cost effective manner.
While we continue to develop new products and look to expand into other hard drive markets, the success of our new
product introductions is dependent on a number of factors, including difficulties faced in manufacturing ramp, market
acceptance, effective management of inventory levels in line with anticipated product demand, and the risk that our new
products may have quality problems or other defects in the early stages of introduction that were not anticipated in the
design of those products. Further, we need to identify how any of the hard drive markets that we are expanding into may
have different characteristics from the desktop market, such as, demand volume growth rates, demand seasonality,
product generations development rates, customer concentrations, and cost and performance requirements, and we must
properly address these differences. If we fail to successfully develop and manufacture new products and expand into new
hard drive markets, customers may decrease the amount of our products that they purchase, and we may lose business to
our competitors who offer these products.
Expanding into new hard drive markets exposes our business to different seasonal demand cycles, which in turn could adversely
affect our operating results.
The CE markets that we are attempting to expand into have different seasonal pricing and volume demand cycles as
compared to the PC market. By expanding into these markets, we become exposed to seasonal fluctuations that are
different than, and in addition to, those of the PC market. For example, because the primary customer for products such as
consumer handheld devices and game consoles are individual consumers, these markets experience a dramatic increase in
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