Seagate 2006 Annual Report Download - page 42

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Table of Contents
Product Life Cycles and Changing Technology
Our industry has been characterized by significant advances in technology, which have contributed to rapid
product life cycles, the importance of either being first to market with new products or quickly achieving product
cost effectiveness as well as difficulty in recovering research and development expenses. Also, there is a continued
need to successfully execute product transitions and new product introductions, as factors such as quality, reliability
and manufacturing yields become of increasing competitive importance.
To address the growing demand for higher capacity products, the industry is undergoing a transition to
perpendicular recording technology, which is necessary to achieve continued growth in areal density. Perpendicular
recording technology poses various technological challenges, including a complex integration of the recording head,
the disc, recording channel and drive firmware as a system, and involves the use of certain precious metals, such as
ruthenium, which has been in limited supply and increasingly expensive.
Seasonality
The disc drive industry traditionally experiences seasonal variability in demand with higher levels of demand in
the second half of the calendar year. This seasonality is driven by consumer spending in the back-to-school season
from late summer to fall and the traditional holiday shopping season from fall to winter. In addition, corporate
demand is higher during the second half of the calendar year when IT budget calendars typically provide for more
spending. We expect normal industry seasonal patterns of increased demand for the September quarter.
Recording Media
Consistent with our expectations that the disc drive industry will continue to consolidate and integrate, Western
Digital is in the process of acquiring Komag, a third-party supplier of recording media. Although this transaction
may limit Komag’s supply of media to the disc drive industry in the long-term, we believe that there is adequate
supply to meet currently identified industry demand, and that there is enough time to readjust supply chains if
needed.
Raw Material Constraints
Perpendicular recording technology requires more layers and the use of more precious metals and scarce alloys
in the sputtering process required to create such layers. As a result, products utilizing perpendicular recording
technology are more sensitive to fluctuations in prices and availability of precious metals and scarce alloys such as
platinum and ruthenium. As product offerings transition to perpendicular recording technology, companies will be
required to maintain an increased inventory of these precious metals and scarce alloys.
Industry Supply Balance
Finally, to the extent that the disc drive 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, excluding Seagate, exited the June 2007 quarter with what we believe to be less than five
weeks of distribution inventory in the desktop channel, which is consistent with historical seasonal patterns.
Seagate Overview
We are the leader in the disc drive industry with products that address the enterprise, desktop, mobile computing
and consumer electronics and branded solutions storage markets. The Seagate 3.5-inch and 2.5-inch disc drive units
used in our branded storage products are reported in the desktop and mobile market information, respectively. We
maintain a highly integrated approach to our business by designing and manufacturing a significant portion of the
components we view as critical to our products, such as read/write heads and recording media. We believe that our
control of these key technologies, combined with our platform design and manufacturing, enable us to achieve
product performance, time-to-market leadership and manufacturing flexibility, which allows us to respond to
customers and market opportunities. Our technology ownership, combined with our
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