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This excerpt taken from the WDC 10-K filed Nov 20, 2006. Industry
We develop and manufacture hard drives for the desktop, mobile,
enterprise, CE and retail markets. We believe that growth in the
sales of hard drives has outpaced growth in the sales of all
desktop and notebook computers (“PCs”) over the past
five years. Based on industry data, in calendar 2001 there were
approximately 50% more hard drives sold in the market than PCs.
In contrast, in calendar 2005 there were approximately 74% more
hard drives sold in the market than PCs. We believe the
following factors primarily drive this accelerating growth of
hard drive sales versus PC sales:
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These factors and our product expansion efforts in the last two
years have gradually increased our percentage of revenue derived
from non-desktop sources. In 2006, 71% of our revenue was from
desktop computers and 29% was from non-desktop sources, compared
to 79% of our revenue from desktop computers and 21% from
non-desktop sources in 2005.
For further discussion of the risks of the hard drive industry,
please see Item 1A of this Annual Report on
Form 10-K.
PC
Market
The PC market consists of the overall hard drive market for
desktop and notebook computers. Consumers use PCs in homes,
businesses and multi-user networks. PCs use software
applications for word processing, spreadsheet, desktop
publishing, database management, multimedia, entertainment and
for other needs. Hard drives store both PC software applications
and the data used by the applications.
We believe that the demand for hard drives in the PC market has
grown in part due to:
We believe several other factors affect the rate of PC unit
growth, including maturing PC markets in North America and
Western Europe, an increase in first-time buyers of PCs in Asia,
Eastern Europe and Latin America, and the lengthening of PC
replacement cycles.
Mobile
Market
We expect the mobile market, which consists primarily of
notebook computers, to continue to grow faster than the desktop
or enterprise markets in the next three years. We believe that
the demand in the mobile market has grown from approximately 16%
of the overall hard drive market in calendar 2003 to 21% of the
overall hard drive market in calendar 2005.
As the mobile market evolves to a higher volume market, we
believe customers are placing increased emphasis on attributes
such as quality, reliability, execution, flexibility, and
competitive cost structures of their hard drive suppliers. These
are the same attributes that have mattered for many years to
customers in the high-volume desktop market.
Enterprise
Market
The enterprise market for hard drives includes workstations,
servers, network attached storage, storage area networks, and
other computing systems or subsystems. Historically, hard drives
for this market segment have utilized several interfaces,
including the Small Computer Systems Interface
(“SCSI”) and Fibre Channel Arbitrated Loop. Beginning
in 2003, these traditional enterprise interfaces have been
supplemented or have been replaced in certain storage
applications by SATA hard drives featuring an interface
technology supported by industry standards. SATA hard drives
typically cost less than SCSI hard drives while offering higher
capacities and maintaining similar reliability, scalability and
performance.
We believe that enterprise uses of SATA hard drives will
continue to increase. During the past few years a new disk-based
back-up
application has emerged with high-capacity SATA hard drives
augmenting SCSI hard drives, tape and optical media. This new
application, popularly referred to as “near-line”
storage, has created a growth market because hard drives
back-up or
access data more quickly than tape or optical solutions, and
quickly retrieve critical
back-up or
near-line data. The availability of SATA hard drive solutions,
which are more cost effective than SCSI hard drives, promotes
the increasing use of hard drives in near-line storage
applications.
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Enterprise-class SATA drives are becoming commonplace for
IT infrastructure applications such as databases, scientific
computing, web caching and electronic mail. These applications
have become an important market for large capacity SATA hard
drives. We believe that this market will consume a growing
portion of the highest capacity hard drives in the next three
years.
Consumer
Electronics Market
The use of hard drives in CE products has been a major growth
area in recent years. Today’s three largest segments of
this market are:
Since 1999, DVRs have been available for use in home
entertainment systems and they offer enhanced capabilities such
as pausing live television, simplifying the process of
recording, cataloging recorded television programs and quickly
forwarding or returning to any section of a recorded television
program. Additionally, digital video disk (“DVD”)
recorders increasingly incorporate hard drives to allow for DVR
functionality and faster recording of content onto removable
DVDs. The market for these products favors large capacity hard
drives and continues to grow in Japan, North America, and
Europe. Additionally, the rest of Asia Pacific shows strong
interest in this market. We believe growth in this market will
continue to build demand for higher capacity hard drives.
Hard drives with
1.8-inch or
1.0-inch
form factors primarily address the consumer handheld device and
portable external storage markets. The majority of hard drives
used in portable media players that play both digital audio and
video content are
1.8-inch
form factors.
External
Hard Drive Market
Most new PC systems include high-speed external interfaces, such
as
FireWiretm,
USB 2.0 or Ethernet network connections that permit users to
supplement the storage space of their PC systems or home and
small office networks with the use of external hard drives.
Users store additional programs or multimedia content, and back
up internal hard drives with external hard drives. Although
external hard drives are a small part of the overall hard drive
market, we believe that sales will continue to grow. External
storage can often be the easiest, quickest or only way of adding
additional storage capacity to either a desktop or notebook
computer. In addition, there is opportunity for external storage
in CE products as a way of expanding storage capacity in these
devices.
Other
Market Opportunities
We regularly review opportunities to apply our knowledge of data
storage technology to markets that we do not currently serve.
Based on significant investments we made over the last four
years, we believe we now have the technology building blocks to
increase our overall market penetration and be a full-line hard
drive supplier. Consistent with our measured and deliberate
approach to new market entries in the recent past, our approach
to additional new markets will be based on a careful assessment
of the risks, rewards, requirements and profit potential of such
actions.
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