Western Digital 2012 Annual Report Download - page 26

significant focus on price and availability of product. In addition, the PC market is experiencing a shift to notebook
and other mobile devices and, as a result, more computing devices are being delivered to the market as complete sys-
tems, which could weaken the distribution market. If we fail to respond to changes in demand in the distribution
market, our operating results could suffer. Additionally, if the distribution market weakens as a result of a slowing PC
growth rate, technology transitions or a significant change in consumer buying preference, or if we experience sig-
nificant price declines due to demand changes in the distribution channel, then our operating results would be
adversely affected.
Loss of market share with or by a key customer, or consolidation among our customer base, could harm our operating results.
During the year ended June 29, 2012, 50% of our revenue came from sales to our top 10 customers. These cus-
tomers have a variety of suppliers to choose from and therefore can make substantial demands on us, including
demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the suppli-
er. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If
we lose a key customer, if any of our key customers reduce their orders of our products or require us to reduce our
prices before we are able to reduce costs, if a customer is acquired by one of our competitors or if a key customer suf-
fers financial hardship, our operating results would likely be harmed.
Additionally, if there is consolidation among our customer base, our customers may be able to command
increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addi-
tion, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross mar-
gins are diminished, we could decide not to sell our products to a particular customer, which could result in a decrease
in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replace-
ment of our products by the combined entity with those of our competitors and cancellations of orders, each of which
could harm our operating results.
Our entry into additional markets increases the complexity of our business, and if we are unable to successfully adapt our business processes as
required by these new markets, we will be at a competitive disadvantage and our ability to grow will be adversely affected.
As we expand our product line to sell into additional markets, the overall complexity of our business increases at
an accelerated rate and we become subject to different market dynamics. The new markets into which we are expand-
ing, or may expand, may have different characteristics from the markets in which we currently exist. These different
characteristics may include, among other things, demand volume requirements, demand seasonality, product gen-
eration development rates, customer concentrations, warranty and product return policies and performance and com-
patibility requirements. Our failure to make the necessary adaptations to our business model to address these different
characteristics, complexities and new market dynamics could adversely affect our operating results.
Expansion into new hard drive markets may cause our capital expenditures to increase, and if we do not successfully expand into
new 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 or 2.5-inch hard drives for the desktop, mobile, enterprise, CE and
external storage markets. However, demand for hard drives may shift to products in form factors or with interfaces
that our competitors offer but which we do not. Expansion into other hard drive markets and resulting increases in
manufacturing capacity requirements may require us to make substantial additional investments in part because our
operations are largely vertically integrated now that we manufacture heads and magnetic media for use in many of the
hard drives we manufacture. If we fail to successfully expand into new hard drive markets with products that we do
not currently offer, we may lose business to our competitors who offer these products.
Our vertical integration of head and magnetic media manufacturing makes us dependent on our ability to timely and cost-
effectively develop heads and magnetic media with leading technology and overall quality, and creates additional capital
expenditure costs and asset utilization risks to our business.
Under our business plan, we are developing and manufacturing a substantial portion of the heads and magnetic
media used in the hard drive products we manufacture. Consequently, we are more dependent upon our own
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