Western Digital 2006 Annual Report Download - page 26

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We are subject to risks related to product defects, which could result in product recalls and could subject us to warranty claims
in excess of our warranty provisions or which are greater than anticipated due to the unenforceability of liability limitations.
We warrant our products for up to five years. We test our hard drives in our manufacturing facilities through a
variety of means. However, there can be no assurance that our testing will reveal latent defects in our products, which may
not become apparent until after the products have been sold into the market. Accordingly, there is a risk that product
defects will occur, which could require a product recall. Product recalls can be expensive to implement and, if a product
recall occurs during the product’s warranty period, we may be required to replace the defective product. In addition, a
product recall may damage our relationship with our customers, and we may lose market share with our customers,
including our OEM customers.
Our standard warranties contain limits on damages and exclusions of liability for consequential damages and for
misuse, improper installation, alteration, accident or mishandling while in the possession of someone other than us. We
record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional operating
expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our products. If
these additional expenses are significant, it could adversely affect our business, financial condition and results of
operations.
Current or future competitors may gain a technology advantage or develop an advantageous cost structure that we cannot
match.
It may be possible for our current or future competitors to gain an advantage in product technology, manufacturing
technology, or process technology, which may allow them to offer products or services that have a significant advantage
over the products and services that we offer. Advantages could be in capacity, performance, reliability, serviceability, or
other attributes.
Higher capacity storage needs have typically been better served by magnetic hard drives than flash memory as hard
drive manufacturers can offer better value at high capacities, while lower capacity needs have been successfully served by
solid state storage such as flash memory technology. Advances in magnetic, optical, semiconductor or other data storage
technologies could result in competitive products that have better performance or lower cost per unit of capacity than our
products. If we fail to be cost competitive against flash memory, we could be at a competitive disadvantage to competitors
using semiconductor technology. For example, flash memory recently achieved improvements in their cost structure and
we believe reduced their pricing, thus more effectively competing with our 1.0-inch hard drive product. If we are unable
to lower the cost structure of future generations of sub-2.5-inch form factor hard drive products through technology
advances such as increased storage capacity, this product category could be at a competitive disadvantage to flash
technology.
Further industry consolidation could provide competitive advantages to our competitors.
The hard drive industry has experienced consolidation over the past several years, including the recent acquisition of
Maxtor Corporation by Seagate Technology. Consolidation by our competitors may enhance their capacity, abilities and
resources and lower their cost structure, causing us to be at a competitive disadvantage. Additionally, continued industry
consolidation may lead to uncertainty in areas such as component availability, which could negatively impact our cost
structure.
Sales in the distribution channel are important to our business, and if we fail to maintain brand preference with our distribu-
tors or if distribution markets for hard drives weaken, our operating results could suffer.
Our distribution customers typically sell to small computer manufacturers, dealers, systems integrators and other
resellers. We face significant competition in this channel as a result of limited product qualification programs and a
significant focus on price and availability of product. If we fail to remain competitive in terms of our technology, quality,
service and support, our distribution customers may favor our competitors, and our operating results could suffer. We also
face significant risk in the distribution market for hard drives. If the distribution market weakens as a result of a slowing
PC growth rate, technology transitions or a significant change in consumer buying preference from white box to branded
PCs, or we experience significant price declines due to oversupply in the distribution channel, then our operating results
would be adversely affected.
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