Seagate 2004 Annual Report Download - page 51

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Table of Contents
Changes in Information Storage Products—Future changes in the nature of information storage products may reduce demand for
traditional disc drive products.
We expect that in the future new personal computing devices and products will be developed, some of which, such as Internet appliances,
may not contain a disc drive. While we are investing development resources in designing information storage products for new applications, it
is too early to assess the impact of these new applications on future demand for disc drive products. We cannot assure you that we will be
successful in developing other information storage products. In addition, there are currently no widely accepted standards in various technical
areas that may be important to the future of our business, including the developing sector of intelligent storage solutions. Products using
alternative technologies, such as semiconductor memory, optical storage and other storage technologies could become a significant source of
competition to particular applications of our products.
For example, semiconductor memory is much faster than disc drives, but currently is volatile in that it is subject to loss of data in the
event of power failure and is much more costly than disc drive technologies. Flash EEPROM, a nonvolatile semiconductor memory, is
currently much more costly than disc drive technologies and, while it has higher read performance than disc drives, it has lower write
performance. Flash EEPROM could become competitive in the near future for applications requiring less storage capacity than that required in
traditional markets for our products.
High Fixed Costs—Our vertical integration strategy entails a high level of fixed costs.
Our vertical integration strategy entails a high level of fixed costs and requires a high volume of production and sales to be successful.
During periods of decreased production, these high fixed costs have had, and could in the future have, a material adverse effect on our
operating results and financial condition. For example, in 1998 our predecessor experienced a significant decrease in the demand for its
products, and because our predecessor was unable to adequately reduce its costs to offset this decrease in revenue, its gross and operating
margins suffered. In addition, a strategy of vertical integration has in the past and could in the future delay our ability to introduce products
containing market-leading technology, because we may not have developed the technology and source of components for our products and do
not have access to external sources of supply without incurring substantial costs.
Research and development expenses represent a significant portion of our fixed costs. As part of our vertical integration strategy, we
explore a broad range of ways to improve disc drives as well as possible alternatives to disc drives for storing and retrieving electronic data. If
we fail to develop new technologies in a timely manner, and our competitors succeed in doing so, our ability to sell our products could be
significantly diminished. Conversely, if we over invest in technologies that can never be profitably manufactured and marketed, our results of
operations could suffer. By way of example, we have incurred expenses in exploring new technologies for storing electronic data, including
perpendicular recording technology, which involves a different orientation for the magnetic field than is currently used in disc drives, and heat
assisted magnetic recording technology, which uses heat generated by a laser to improve storage capacity. We believe these new technologies
could significantly improve the storage capacity of disc drives over the long term. To date, we have not yet developed a commercial product
based on these technologies. Furthermore, based on our recent experience in the industry with respect to new product introductions, we believe
that the rate of increase of areal density is slowing as compared to its previous levels, which has lengthened the life cycles of existing products
and may further postpone returns on our investments in new technologies. If we have invested too much in new technologies, our results of
operations could be adversely affected. In addition, as we increase our capacity and capital spending, as well as replace our existing assets with
new, higher cost assets, we expect that our depreciation expense will increase, which will contribute to our high level of fixed costs and reduce
our earnings. This could cause the market price of our common shares to decline.
Customer Concentration—Consolidation among our customers could cause sales of our products to decline.
Mergers, acquisitions, consolidations or other significant transactions involving our customers generally entail risks to our business. For
example, IBM, which is one of our key customers, merged its disc drive business
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