Western Digital 2005 Annual Report Download - page 33

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density mean that the average drive we sell has fewer heads and disks for the same capacity and, therefore, may result in a
lower component cost. However, because increases in areal density have become more difficult in the hard disk drive
industry, such increases may require increases in component costs. In addition, other opportunities to reduce costs may
not continue at historical rates. Our inability to achieve cost reductions could adversely affect our operating results.
Increases in areal density may outpace customers' demand for storage capacity.
Historically, the industry has experienced periods of increased areal density growth rates. Although in recent years
there has been a decrease in the rate of areal density growth, if industry conditions return to periods of increased growth
rates, the rate of increase in areal density may exceed the increase in our customers' demand for aggregate storage
capacity. This could lead to our customers' storage capacity needs being satisfied with more lower-cost single-surface
drives, thereby decreasing our revenue. As a result, even with increasing aggregate demand for storage capacity, our ASPs
could decline, which could adversely affect our results of operations.
Changes in the markets for hard disk drives require us to develop new products and new technology.
Over the past few years the consumer market for desktop computers has shifted significantly towards lower priced
systems. If we are not able to offer a competitively priced hard disk drive for the low-cost PC market, our share of that
market will likely fall, which could harm our operating results.
The market for hard disk drives is also fragmenting into a variety of devices and products. 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 disk drives will be
found in many CE products other than computers.
In addition, we expect that the consumer market for multi-media applications, including audio-video products,
incorporating a hard disk drive will continue to grow. However, because this market remains relatively new, accurate
forecasts for future growth remain challenging. Moreover, some of the devices, such as personal video recorders and
digital video recorders, or other products outside of the CE market, may require attributes not currently offered in our
products, which have resulted in a need to expend capital to develop new interfaces, form factors, technical specifications
or hard disk drive features, increasing our overall operational expense without corresponding incremental revenue at this
stage. If we are not successful in using our hard disk drive technology and expertise to develop new products for the
emerging CE market, or if we are required to incur significant costs in developing such products, it may harm our
operating results.
If we do not successfully expand into new hard disk drive markets, our business may suffer.
To remain a significant supplier of hard disk drives, we will need to offer a broad range of hard disk drive products
to our customers. We currently offer a variety of 3.5-inch hard disk drives for the desktop computer and CE markets,
and we also offer 2.5-inch form factor hard disk drives for the mobile market. However, demand for hard disk drives
may shift to products in smaller form factors, which our competitors may already offer. We recently announced our entry
into the sub-2.5-inch hard disk drive market with a family of 1.0-inch drives, which we expect to ship in the future. We
face various challenges in manufacturing a 1.0-inch hard disk drive because it requires the development of new
manufacturing technologies and processes. If we are not able to adequately address these challenges, our expected
shipment of this product may be delayed, resulting in a delay in our ability to realize revenue from this product.
In addition, the enterprise and desktop PC markets are transitioning from the PATA interface to higher speed
interfaces such as SATA to handle higher data transfer rates. We currently offer SATA products; however, the transition
of technology and the introduction of new products are challenging and create risks. For example, acceptance of the SATA
interface may not continue to grow, or customers may choose to purchase alternative interfaces that may not be
compatible with future generations of SATA hard disk drives. Moreover, our customers may require new SATA features
that we may not be able to deliver in a timely and cost effective manner.
While we continue to develop new products and look to expand into other applications, the success of our new
product introductions is dependent on a number of factors, including difficulties faced in manufacturing ramp, market
acceptance, effective management of inventory levels in line with anticipated product demand, and the risk that our new
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