Western Digital 2010 Annual Report Download - page 27

properly adjust our supply to these new demand cycles, we risk having excess inventory during periods of low demand
and insufficient inventory during periods of high demand, which could adversely affect our operating results.
Selling to the retail market is an important part of our business, and if consumer spending decreases, or if we fail to maintain
and grow our market share or gain market acceptance of our branded products, our operating results could suffer.
Selling branded products is an important part of our business, and as our branded products revenue increases as a
portion of our overall revenue, our success in the retail market becomes increasingly important to our operating results. If
consumer spending decreases as a result of the recent uncertainty and volatility in global economic conditions, our
operating results could suffer because of the increased importance of our branded products business.
We sell our branded products directly to a select group of major retailers, such as computer superstores and CE
stores, and authorize sales through distributors to other retailers and online resellers. Our current retail customer base is
primarily in the U.S., Canada and Europe. We are facing increased competition from other companies for shelf space at a
small number of major retailers that have strong buying power and pricing leverage. If we are unable to maintain effective
working relationships with major retailers and online resellers, or if we fail to successfully expand into multiple channels,
our competitive position in the branded product market may suffer and our operating results may be adversely affected.
Our success in the retail market also depends on our ability to maintain our brand image and corporate reputation.
Adverse publicity, whether or not justified, or allegations of product quality issues, even if false or unfounded, could
tarnish our reputation and cause our customers to choose products offered by our competitors. In addition, the
proliferation of new methods of mass communication facilitated by the Internet makes it easier for false or unfounded
allegations to adversely affect our brand image and reputation. If customers no longer maintain a preference for WD»-
brand products, our operating results may be adversely affected.
Additionally, we face strong competition in maintaining and trying to grow our market share in the retail market,
particularly because of the relatively low barriers to entry in this market. For example, several additional hard drive
manufacturers have recently disclosed plans to expand into the external storage market. As these companies attempt to
gain market share, we may have difficulty in maintaining or growing our market share and there may be increased
downward pressure on pricing. There can be no assurance that any new products we introduce into the retail market will
gain market acceptance, and if they do not, our operating results could suffer.
Loss of market share with or by a key customer, or consolidation among our customer base, could harm our operating results.
During the year ended July 2, 2010, a large percentage of our revenue, 53%, came from sales to our top 10
customers. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us,
including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the
supplier. Even if we successfully qualify a product with a customer, the customer is not generally obligated to purchase
any minimum volume of products from us and may be able to cancel an order or 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, 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, if a customer is acquired by one of our competitors or if a key customer suffers financial
hardship, our operating results would likely be harmed.
Additionally, if there is consolidation among our customer base, our customers may be able to command increased
leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a
result of increased leverage, customer pressures require us to reduce our pricing such that our gross margins are
diminished, we could decide not to sell our products to a particular customer, which could result in a decrease in our
revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our
products by the combined entity with those of our competitors and cancellations of orders, each of which could harm our
operating results.
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