Western Digital 1998 Annual Report Download - page 25

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The enterprise portion of the hard drive industry is more concentrated than the desktop portion, with the largest
competitor, Seagate, having market share in excess of 50% until the recent entrance of Quantum and the Company as
competitors. The other major competitors in this market are IBM and Fujitsu. The number of competitors in this market
has increased with the recent entry of Quantum and the Company, and competition may continue to grow if Maxtor
enters the enterprise market. With more competitors, price competition in the enterprise market is greater than in the
past, and the Company expects that price competition will continue to increase, with resulting pressure on margins.
In general, the unit price for a given product in both the desktop and enterprise markets decreases over time as
increases in industry supply and cost reductions occur and as technological advancements are achieved. Cost
reductions result primarily from volume efficiencies, component cost reductions, manufacturing experience and design
enhancements that are generally realized over the life of a product. Competitive pressures and customer expectations
compel manufacturers to pass these cost reductions along as reductions in selling prices. The rate of general price
decline accelerates when some competitors lower prices to absorb excess capacity, liquidate excess inventories or
attempt to gain market share. Competition and continuing price erosion can adversely affect the Company's financial
condition or operating results in any given quarter. Often, such adverse effects cannot be anticipated until late in the
quarter, as happened during 1998.
Rapid Technological Change and Product Development
The demands of hard drive customers for greater storage capacity and higher performance have led to short
product life cycles, which require the Company to constantly develop and introduce new drive products on a cost-
effective and timely basis. The Company's ability to fund research and development to support rapid technological
change depends upon its operating results and cash flows; reductions in such funding could impair the Company's
ability to innovate and compete. Because of the Company's anticipated reliance upon IBM technology for new high-
end desktop PC products, the Company will be subject to risks associated with IBM's research and development as
well as its own. See "Technology License and Component Supply Transaction with IBM."
MR heads, which enable higher capacity per hard drive than conventional thin film or MIG inductive heads,
became the leading recording head technology during 1998. Several of the Company's major competitors incorporated
MR head technology into their products much earlier than the Company and, with higher capacity drives using MR
heads, some of the Company's competitors achieved time-to-market leadership with certain MR products. The
Company substantially completed its transition of desktop hard drives to MR head technology by the end of 1998. The
Company continues to manufacture hard drives with thin film inductive heads for the lower capacity points of the
enterprise market. Failure of the Company to regain time-to-market leadership with products incorporating MR head
technology in a timely manner, to qualify these products with key OEM customers, or to produce these products in
sufficient volume could cause further erosion of the Company's market share and have an adverse effect on the
Company's financial condition or operating results.
MR head technology has inherent areal density advantages which have resulted in an increase in the slope of the
areal density curve, i.e., areal density is increasing at a more rapid rate than before. Because of the component cost
savings inherent in increases in areal density, this more rapid increase has shortened product life cycles and enhanced
the importance of time-to-market leadership. Use of GMR heads will result in a further increase in areal density, and
although the integration of GMR heads in hard drives is not expected to be as complex or difficult as the transition
from thin film to MR technology, the Company needs to achieve time-to-market leadership with hard drives
incorporating GMR heads. Failure to achieve time-to-market leadership could have an adverse effect on the
Company's financial condition or operating results.
Due to short product life cycles, the Company regularly engages in new product qualification with its customers.
This customer qualification process is usually complicated, difficult and lengthy. Any failure or delay by the Company
in qualifying new products with customers could adversely affect the Company's financial condition or operating
results.
The Company's continued success in the enterprise hard drive market is heavily dependent on the successful
development, timely introduction and market acceptance of new products, and failure to achieve such success could
adversely affect the Company's financial condition or operating results. The Company's current line of enterprise