Western Digital 2003 Annual Report Download - page 31

Changes in the markets for hard drives require us to develop new products.
Over the past few years the consumer market for desktop computers has shifted signiÑcantly towards lower priced
systems. According to data released by International Data Corporation Tracker in December 2002, systems priced below
$600 currently comprise the fastest growing segment of the consumer market for desktop computers. Although we were
late to market with a value line hard drive to serve the low-cost PC market, we are now oÅering such value line products
at prices that we view as competitive. However, if we are not able to continue to oÅer a competitively priced value line
hard drive for the low-cost PC market, our share of that market will likely fall, which could harm our operating results.
In addition, the PC market is fragmenting into a variety of computing devices and products. Some of these products
may not contain a hard drive. On the other hand, many industry analysts expect, as do we, that as communications are
increasingly converted to digital technology from the older, analog technology, the technology of computers and consumer
electronics will continue to converge, and hard drives will be found in many consumer products other than computers. For
example, several game console manufacturers have expressed support for hard drives in their products. However, market
acceptance of the use of hard drives in game consoles remains in its early stages. In addition, some consumer electronics,
such as PVRs and DVRs, may require attributes not currently oÅered in our products, which may result in a need to
expend capital, increasing our overall operational expense. If we are not successful in using our hard drive technology and
expertise to develop new products for the emerging consumer electronics market, or if we are required to incur signiÑcant
costs in developing such products, it may harm our operating results.
If we do not successfully expand into new hard drive market segments, our business may suÅer.
To remain a signiÑcant supplier of hard disk drives, we will need to oÅer a broad range of disk drive products to our
customers. We currently oÅer a variety of 3.5-inch form factor hard disk drives for the desktop computer market.
However, demand for desktop hard drives may shift to products in smaller form factors, which we do not currently oÅer,
but which some of our competitors oÅer. In addition, the desktop PC industry is transitioning to higher speed interfaces
such as SATA to handle higher data transfer rates and 80 GB per platter technology for increased capacity. The Company
currently oÅers SATA and 80 GB per platter products, however, the transition of technology and the introduction of new
products is challenging and creates risks. While we continue to develop new products and look to expand into non-
desktop applications such as consumer electronics and mobile products, the success of our new product introductions is
dependent on a number of factors, including diÇculties faced in manufacturing ramp, market acceptance, eÅective
management of inventory levels in line with anticipated product demand, and the risk that our new products will have
quality problems or other defects in the early stages of introduction that were not anticipated in the design of those
products. If we fail to successfully develop and manufacture new products, customers may decrease the amount of our
products that they purchase, and we may lose business to our competitors who oÅer these products or who use their
dominance in the enterprise or mobile market to encourage sales of desktop hard drives.
We depend on our key personnel and skilled employees.
Our success depends upon the continued contributions of our key personnel and skilled employees, many of whom
would be extremely diÇcult to replace. Worldwide competition for skilled employees in the hard drive industry is
intense. Volatility or lack of positive performance in our stock price may adversely aÅect our ability to retain key
personnel or skilled employees who have been granted stock options. If we are unable to retain our existing key personnel
or skilled employees or hire and integrate new key personnel or skilled employees, our operating results would likely be
harmed.
Loss of market share with a key customer could harm our operating results.
A majority of our revenue comes from a few customers. For example, during 2003, sales to our top 10 customers
accounted for approximately 55% of revenue. These customers have a variety of suppliers to choose from and therefore
can make substantial demands on us. Even if we successfully qualify a product with a customer, the customer generally is
not obligated to purchase any minimum volume of products from us and is able to terminate its relationship with us at
any time. Our ability to maintain strong relationships with our principal customers is essential to our future performance.
If we lose a key customer, or 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, our operating results would likely be harmed. For example, this occurred with
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