Seagate 2004 Annual Report Download - page 26

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Table of Contents
digital music players and gaming devices, with many more applications emerging such as digital still and video cameras, personal
digital assistants, automotive systems, global positioning navigation systems, home entertainment systems, cell phones, personal
media players, and other converged hand
-
held devices;
•
a continued growth in consumer and commercial client computing systems. We believe that a portion of the growth, particularly in
the mobile computing market, is a result of consumers shifting from desktop computers to notebook computers, a trend that we
believe may be accelerating; and
We believe that for some of the fastest growing applications described above, particularly in consumer electronics, the demand is focused
on higher capacity products.
Historically, the disc drive industry has exhibited a seasonal decline in unit demand during the first half of each calendar year. Given the
dramatic rates of growth exhibited by the consumer electronics applications in the March 2005 and June 2005 quarters, there was no traditional
seasonal decline experienced by the disc drive industry in fiscal year 2005. This lack of seasonality is unprecedented in the disc drive industry
and there can be no assurance that this will occur again. Given the highly seasonal nature of consumer electronics products generally, the
traditional seasonal decline in unit demand could be even greater in future years.
Second, our industry has been characterized by continuous and significant advances in technology, which have contributed to rapid
product life cycles, the importance of being first to market with new products and the difficulty in recovering research and development
expenses. However, we believe that our industry is currently in a period in which the rate of growth in areal density has slowed due to
increased technological complexity. The slowing rate of growth in areal density has contributed to:
•
a renewed growth in enterprise storage applications fueled by mission critical and non-mission critical applications across multiple
interfaces as well as increased storage needs as a result of expanding regulatory requirements.
•
an increase in the rates of overall price erosion, particularly in periods where there are few new products, as the slowing rate of
growth in areal density results in longer product cycles which permits more competitors time to enter the market for a particular type
of disc drive and, accordingly, increases competition based on price;
•
an increased importance of successfully executing product transitions, as factors such as quality, reliability and manufacturing yields
become of increasing competitive importance; and
Currently, the industry is in the midst of significant product transitions and new product introductions, which we believe, in some cases, have
significantly stimulated the growth of new markets. Disc drive unit shipments in fiscal year 2005 were approximately 24% higher than those in
fiscal year 2004. We believe that this growth has begun to and will continue to place strain on industry capacity and availability of certain key
components such as media and heads, particularly in connection with the demand for higher capacity products. The lead times and capital
requirements necessary to build component capacity can be substantial. This strain on industry and key component capacity may be reducing
the potential for excess industry supply and accelerated price erosion and may be increasing the potential for market share shifts among
industry competitors due to product availability. This dynamic may also slow the rate of industry cost reductions.
Finally, to the extent that our industry builds product based on expectations of demand that do not materialize, the distribution channel
may experience an oversupply of products that could lead to increased price erosion. The industry exited the June 2005 quarter with what we
believe to be more than 5 weeks of distribution channel inventory.
Seagate Overview . We are a leader in the disc drive industry with products that address substantially all of the available consumer
electronics, mobile computing, enterprise and desktop storage markets. We maintain a
24
•
an increase in the required amount of components to meet demand, particularly with respect to higher capacity products.