Telepresence was science fiction in the 50s, a Disneyland attraction in the 60s, and eventually morphed into costly corporate “telepresence rooms” and other high-end systems, which relied on expensive dedicated communications lines.

Vidyo, a start-up company in New Jersey, says it has invented the next generation of teleconferencing that is cheaper and more portable, in part by using the Web to transmit, getting around the need for special communications lines and instead using the Web. It says that it will make teleconferencing available in offices, homes and hotels – and not just in boardrooms.

“Our product is a breakthrough to democratize telepresence and make it more affordable and portable,”  said Ofer Shapiro, chief executive of Vidyo.  Shapiro knows the earlier generation. He led the design team at Radvision in the 1990s that designed a key piece of equipment called a Multipoint Control Unit, or MCU, still in use today. Shapiro thinks it  obsolete.

Most teleconferencing offered today by such dominant players as Tandberg and Polycom, depends on MCUs, which are refrigerator-sized appliances that take television pictures from individual feeds, re-digest them and then put them together as Hollywood Square style pictures on a single screen.

The companies are players in a market projected to explode. Research firm Gartner says Teleconferencing among corporate users is projected to increase nearly 30-fold by 2015, to 200 million from 7 million last year.

Recently Cisco bid to buy market leader Tandberg for $3.4 billion while Logitech, the world’s top computer mouse maker, is to buy privately held video conferencing group LifeSize Communications for $405 million.

One analyst, who asked not to be identified, said that what Cisco bought was market share, an established customer base that includes government agencies, and a system that is standardized to inter-operate with others. Tandberg, the biggest player, and second-placed Polycom together hold around three-quarters of the market.

Vidyo would change those standards. Shapiro’s group has eliminated the MCU, which means that signals don’t need to be re-processed. That and new standards that change how “packets” of information are handled on the Web has eliminated freezing and stuttering videos associated with the Web.

That makes it possible for people to use the Vidyo conferencing system from laptops, and gets rid of dedicated communications. And it means that dozens of people can be on one conference, with the pictures of nine on a screen at any one time. The people appearing on the screen change easily and automatically, depending on who is talking. But it’s not just about who is talking.

“Everyone thinks teleconferencing is about seeing the speaker. No. It’s about seeing people’s reactions. When I see someone on Vidyo I can see what you’re thinking,” said Martin Hollander, senior vice president of marketing at Vidyo.

Even though Vidyo for the moment is only a blip on the screen,  analyst Rohit Chopra of Wedbush wrote earlier this month that he believes it will change the industry.

“A solution which offers a cheaper conferencing experience with higher quality, represents a threat to traditional vendors and could alter the economics of the industry,” Chopra said. He predicted that it could emerge as a disruptive force in the next one to two years.

(Photo of Star Trek set: Reuters)

Chief Executive Mark Pincus said the investment would
alleviate pressure to take the company public.

He said revenue had grown at least as quickly as the number
of employees, which more than tripled this year. A source
familiar with the company said revenue was running at an
annualized rate of more than $300 million.

Sources have previously put that “run rate” at $100 million
in April and $200 million in October.

Industry analysts have speculated that Zynga could raise $1
billion to $1.2 billion in an IPO.

Pincus would not comment on reports that put the valuation
higher, and declined to endorse any figure as accurate.

Zynga makes games played by members of Internet social
networks like Facebook and MySpace, and profits by selling
add-on tools. The game FishVille, for example, lets players buy
virtual food and goods with game cash bought with real-world
dollars. Zynga has said it generates 90 percent of its revenue
by selling “virtual goods”.

Pincus said the investment would give Zynga most of the
advantages of an IPO without having to raise money in public
markets. He said it would allow Zynga to hire more staff and
buy other game development studios.

Digital Sky is making the majority of the new investment,
followed by Andreessen Horowitz and Tiger Global, and
Institutional Ventures Partners, a current investor that has
added to its position in the company.

Zynga would not disclose the stake of the company sold to
the new investors.

This is Russian Internet holding company DST’s second big
investment in a U.S. social media company. In May, it invested
$200 million for about a 2 percent stake in Facebook, and $100
million in July buying Facebook stock from Facebook employees.

DST, which has investments in Russian Internet companies
Mail.ru and Vkontakte.ru, has put some $1 billion into more
than 30 companies since its founding in 2005, it has said.

DST CEO Yuri Milner said in a telephone interview on
Wednesday, along with Pincus, that DST was entirely equity
funded by a combination of Western institutions and some
Russian investors and that DST did not have any debt.

As in the Facebook deal, DST’s investment will not give it
a representative on Zynga’s board of directors.

Pincus said that had the DST investment happened sooner, he
might have been able to bid against Electronic Arts <ERTS.O>
for Playfish, his largest rival.

EA, a publisher of videogames like “Madden NFL”, agreed
last month to pay $275 million in cash for Playfish.
(Reporting by David Lawsky and Alexei Oreskovic in San
Francisco and S. John Tilak in Bangalore; Editing by Lisa Von
Ahn)

Privately held Zynga makes games for social networks and then profits by selling add-on tools. The fish-raising game FishVille, for instance, lets players purchase virtual food and goods with game cash — which can be bought with real world dollars.

The tiny “micropayments” for fish food add up quickly for Zynga, one of the stars in the nascent virtual goods industry, which has attracted Silicon Valley venture capitalists.

Industry watchers speculate that Zynga could raise $1 billion to $1.2 billion in an initial public offering in the near future if it chose to go that route.

But founder and CEO Mark Pincus said at the Reuters Global Media Summit that Zynga is not thinking about going public right now and dismissed talk of a buyout.

“We have not had conversations with companies about buying us.”

“The path that makes sense to me today is to go independently, because we don’t need capital and we’re having fun,” he added

Social games attract hundreds of millions of users around the world. Zynga’s games run on social networks including Facebook and MySpace, directly from the Web and on mobile devices such as Apple Inc’s <AAPL.O> iPhone.

Pincus stressed it’s early in the game for both his company and the industry as a whole. “We don’t think that we would execute better today as a public company.”

He estimated the global virtual goods market currently at around $4 billion and said he expects it to quadruple in the next three to five years.

“Eventually I think more than half of the population of people who are socially connected will participate in social games.”

GROWING FAST

Zynga games get more than a 100 million unique users every month, and the company generates 90 percent of its revenue by selling those people “virtual goods,” at anywhere from $1 to $20, with most priced from $5 to $10, it says.

Two sources said last month the company’s revenue was coming in at an annual rate above $200 million, and the company — with more than 600 employees — is continuing to grow rapidly.

Another big social gaming company, Playfish, was acquired by Electronic Arts <ERTS.O> for $275 million in cash and other considerations last month.

“We would have loved to buy Playfish, we really admire them… maybe if we were public we would have been able to merge some way with them,” Pincus said.

He said that Zynga would likely make small acquisitions each quarter, in order to bring talent in. “We have 300 open positions that we haven’t been able to fill or as they fill new ones open.”

Zynga’s venture backers include Kleiner Perkins Caufield & Byers, IVP, Union Square Ventures, Foundry Group, Avalon Ventures and Pilot Group.

(Reporting by David Lawsky and Gabriel Madway; editing by John Wallace and Carol Bishopric)

Nvidia, which requested the review, will offer the findings
to an International Trade Commission judge in Washington, D.C.,
which is weighing the validity of the Rambus claims against
Nvidia.

The ITC judge, who is not bound by the Patent Office
finding, is expected to make a decision in January that will
serve as a recommendation to the full ITC. The ITC could bar
imports from Nvidia’s overseas suppliers if it finds the
imports to violate Rambus patents.

“This continues our string of victories against Rambus
patents” in the U.S. Patent Office, David Shannon, NVIDIA
executive vice president and general counsel, said in a
statement.

“We believe these patents are invalid and are confident
that a similar decision will be made on the patents that
continue to be examined,” he said.

A spokeswoman for Rambus said, “The patents remain valid
and enforceable as originally issued until the reexamination
proceedings are concluded, including all appeals.”

The 17 claims arise out of three patents. Eight other
claims arising from two other patents at issue in the ITC case
are still being considered by the Patent Office.

Rambus, which has spent $300 million on legal disputes with
chip makers since 2000, wants Nvidia to pay royalties on memory
controller circuits used in Nvidia graphics chips.

In June 2008 Rambus filed suit in federal court in San
Francisco charging that Nvidia had infringed 17 patents.

Nvidia said that two of those claims were dropped quickly
and six are older patents that expire in early 2010.

The other nine patents formed the basis of the action that
Rambus brought before the ITC.

Rambus has since dropped claims on four of them, Nvidia
said.

The ITC administrative process is quicker than the federal
court and could influence the judge in San Francisco, Susan
Illston. Illston suspended proceedings to await the ITC
ruling.

Separately in Brussels, European regulators are set to
accept a proposal by Rambus to cut royalties to settle
antitrust charges, sources have told Reuters. That decision is
expected early next month.
(Additional reporting by Foo Yun Chee in Brussels and Ian
Sherr in San Francisco; Editing by Steve Orlofsky)
((E-mail david.lawsky@thomsonreuters.com; Phone +1 415 677
2505; Reuters Messaging david.lawsky.reuters.com@reuters.net))

Katzenberg, one of the first studio chiefs to embrace 3-D animation in films like “Monsters vs Aliens”, told Intel Capital’s CEO Summit in Huntington Beach, California that he is even more excited about the creative potential of this “scalable multi-core processing”.

“Ten years from now I think this will be a tipping point for how we view entertainment and how entertainment views the world,” he said of the chips, which are still in development.

Katzenberg gave attendees at the conference sneak peeks at footage from DreamWorks Animation’s upcoming 3-D films “How to Train Your Dragon” and “Shrek Forever After”.

He also screened eye-popping sports footage on 3-D-enabled television that he predicted would be in 30 percent of US households by 2013, with early adoption spurred by sports and video games.

Limited processing power for 3-D films has forced animators to work in an assembly line-type fashion, with characters’ faces, bodies, clothing and fur or hair animated by a different artist. Each film requires four years and 400 artists to make, Katzenberg said at a presentation.

BACK TO PENCIL AND PAPER

The new chips will allow artists to return to performing their craft as expressively as they did in the days of pencil and paper, Katzenberg said. “We can envision a day when animators will be able to work on their characters at full resolution and not in pieces.”

He did not comment on whether the new technology would result in job cuts. “We really don’t know yet what the impact on cost and workforce will be,” he said.

Intel Corp has been improving its multi-core chips, and Katzenberg’s vision could be fulfilled within the next few years.

Essentially, each core handles two “threads” at a time, meaning it can handle two tasks. Intel has been multiplying the number of cores in a single chip — the “scalable” of his description — increasing the number of tasks an individual chip can perform.

That increases the speed and lowers the cost of computing the repetitive tasks that form a large part of animation.

Other companies have taken their own approaches to visual imaging, including Nvidia Corp and ATI, a division of Advanced Micro Devices.

Experts say this inevitably will lead to more power for individual users, making it possible for independent film makers to play a larger role in a field that until now has required legions of workers to add special effects and animation.

(Reporting by Gina Keating and David Lawsky; Editing by Tim Dobbyn)

Venture capital-backed start-ups have long held out the
promise of jobs and growth, but attendees at a conference of
start-ups said their offerings are not enough to ignite a
sputtering economy.

The chief executives of some of the more than 400 start-ups
supported by Intel Capital, the venture capital arm of the
world’s largest chipmaker, gathered at a luxury hotel on the
California coast to talk about their futures.

Shortly after the National Venture Capital Association in
Washington said 2,500 venture-backed start-ups have nearly
11,000 jobs available, Intel Capital President Arvind Sodhani
held out the hope in a welcome speech here that innovation from
start-ups will help rekindle prosperity.

But his optimism is for the long-term.

Sodhani said 20 of Intel’s start-ups — most in China,
India, other parts of Asia and Europe — are nearly ready for
initial public offerings. He cited two recent IPOs but would
not predict when over the next two years others might happen.

“Unemployment is going to be sticky for a while … growth
is going to be hard to come by,” he told Reuters.

A Federal Reserve Bank of Philadelphia survey of private
economists this week was equally gloomy: “The job market looks
weaker now than it did three months ago.”

Some start-ups at the Intel conference said they would
welcome help from the government to grow faster.

Christine Lemke and Tony Jebara, co-founders of New
York-based mobile data mining firm Sense Networks, said they
will double their staff of 15 by the end of 2010.

STARTING TO GROW

Jebara said a proposal this week by AFL-CIO leader Richard
Trumka to use the $700 billion Wall Street bailout fund to spur
hiring at small businesses would have a big impact on his
firm.

“Even a small amount of TARP money would really change our
lives,” he said. “If you want to impact Main Street you have to
help out the small guys.”

Those who have grown worry their success is not part of a
bigger trend. David Sun, chief executive of mid-sized Intel
partner Kingston Technology, has lifted his U.S. payroll to 900
jobs from 850 at the start of 2009.

“Just because I’m hiring doesn’t mean the economy is good,”
cautioned Sun, whose California-based memory products company
topped $4 billion in revenue in 2008. “I think my competitors
are fading so I am taking their business.”

Others are more optimistic. Moyses Rodrigues, CEO of
Automatos, a Brazil-based IT management company, laid off
workers in 2009 in the midst of the global downturn but began
hiring late this year to bolster his workforce of 250 for what
he hopes will be strong growth next year.

“This year we fired people … to be prepared for the
crisis and now we are growing,” Rodrigues said. “We are
planning on hiring more people in the U.S. in 2010.”

Sodhani said Intel will continue to invest heavily in
start-ups and not cut back because of the economy.

Other venture firms, which rely on universities and pension
funds for their money, are having a tougher time. The National
Venture Capital Association registered its second consecutive
quarterly decline in fund raising among venture firms last
month. It is now at its lowest level since 2003.
(Editing by Steve Orlofsky)

AMD, whose shares jumped 22 percent, agreed to withdraw essentially all its regulatory complaints and litigation against Intel, ending a global campaign that it has waged on the world’s largest chipmaker for 12 years.

Some analysts said the deal takes the steam out of a pending U.S. Federal Trade Commission investigation into Intel’s business practices.

But others said Intel has critics beyond AMD and its regulatory troubles are far from over. Among Intel’s adversaries are graphics chip maker Nvidia Corp and New York Attorney General Andrew Cuomo.

Intel Chief Executive Paul Otellini denied any wrongdoing by the company but said it decided to settle the dispute with AMD to avoid the risk of a triple-damages finding by a jury.

“Intel got the fact that it was a major risk of a huge settlement in front of a jury,” said Broadpoint Amtech analyst Doug Freedman. “It removes the coin-flip of a jury trial.”

AMD has argued that Intel used illegal means to preserve its 80 percent share of the global market for central processing units, which are the brains of personal computers.

Regulators in Asia and Europe have agreed, imposing fines and other remedies on Intel. The U.S. Federal Trade Commission is close to filing its own complaint, sources have said.

FTC Chairman Jon Leibowitz said the agency will review the settlement and could not comment further because of its ongoing investigation. Otellini said Intel will meet with the FTC to explain the settlement.

Experts have said it is in Intel’s interest to resolve its antitrust troubles as quickly as possible so it does not wind up like Microsoft Corp, which has spent a decade fighting competition agencies around the world.

IN COURT AGAINST NVIDIA

If the FTC goes ahead with its complaint, Intel will have to address broader questions on its business practices that go beyond its dealings with AMD.

“If they (FTC) were going to file a lawsuit, they’re going to file a lawsuit. It will have no impact,” John Briggs, antitrust attorney with Axinn Veltrop Harkrider LLP said of the AMD settlement.

The AMD deal covers central processing units and has nothing to say about the fast-growing market for graphics processing units, which facilitate pictures and video on PCs.

Graphics chip maker Nvidia is already in Delaware court with a patent dispute with Intel, and said its ability to compete is being squelched by the larger company.

“We would be extremely disappointed with a decision to drop the FTC case. We don’t think that protects consumers for current technology, as well as future technology,” said Nvidia’s general counsel, David Shannon.

New York Attorney General Andrew Cuomo has separately filed an 83-page lawsuit last week asserting that Intel threatened computer makers and paid billions of dollars in kickbacks to maintain its market dominance.

A source familiar with the matter said the AMD-Intel settlement does not change the attorney general’s complaint.

“We strongly disagree with the New York Attorney General’s case, and believe the complaint is entirely without merit. Discounting and rebates are standard business practices and perfectly legal,” Otellini said.

Intel has hired WilmerHale partner and antitrust specialist Douglas Melamed to fill its vacant general counsel position, a source familiar with the company said.

GLOBAL SETTLEMENT

AMD agreed to drop a lawsuit against Intel in Delaware and two cases in Japan, saying the settlement creates a level playing field and is “a pivot from war to peace.” AMD noted though that some narrow issues on Intel rebates remain.

The two companies also sealed a five-year cross license deal and gave up any claims of breach from a previous licensing agreement, paving the way to make AMD fully “fabless.”

AMD had spun off its chip fabrication factories into GlobalFoundries, but was forced to maintain a majority ownership because of existing licensing provisions.

An independent GlobalFoundries is expected to combine with Chartered Semiconductor Manufacturing Ltd in Singapore because both companies have heavy investment from Abu Dhabi’s sovereign wealth fund.

“It will take time for people to understand how operating conditions in the processor business have changed. But make no mistake, they have changed,” said AMD CEO Dirk Meyer.

Analysts expect AMD, which reported its 12th consecutive quarterly loss last month, to use the settlement to pay down some of its $3.2 billion of debt.

“It eliminates a large amount of uncertainty for both companies. $1.2 billion is a lot of money and I believe AMD will use it to accelerate their debt payment,” said Joanne Feeney of FTC Equity Capital Markets.

Shares of AMD jumped $1.16 to $6.48, lifting its market value to about $4.3 billion from $3.6 billion.

Shares of Intel fell 16 cents to $19.68, in line with the broader decline on Nasdaq.

Intel chipmaker adjusted its fourth-quarter outlook due to the settlement, raising its spending forecast to $4.2 billion from $2.9 billion. It said its effective tax rate would be about 20 percent, down from 26 percent. (Additional reporting by Steve Eder in New York, Yun Chee Foo in Brussels, Gabriel Madway and Ian Sherr in San Francisco, and Diane Bartz in Washington) (Writing by Tiffany Wu, editing by Gerald E. McCormick, Dave Zimmerman and Bernard Orr)

The invention, called Stoba, was developed at the
Industrial Technology Research Institute (ITRI), Taiwan’s
national research organization.

When lithium-ion batteries develop internal shorts they can
quickly heat up to as much as 500 degrees centigrade (932
degrees Fahrenheit) and catch fire or explode.

Stoba sits between the positive and negative sides of the
battery and when the battery hits 130 degrees centigrade (266
degrees Fahrenheit), Stoba transforms from a porous material to
a film and shuts down the reaction.

“We have introduced a totally new material to the battery,”
said Alex Peng, the senior researcher who led a team that
developed the new material over four years.

The danger of exploding lithium batteries is so great that
last month the U.S. Transportation Department issued a
“hazardous materials” notice.

“Many persons who ship lithium batteries do not recognize
the hazards… fires in aircraft can result in catastrophic
events presenting unique challenges not encountered in other
transport modes,” the government said.

Peng said battery makers in Taiwan are in the testing stage
and have ramped up manufacturing of Stoba-equipped cells to the
thousands. They expect to begin shipping in the first quarter
of 2010, he said.

Peng, in Orlando, Florida, to get an award, said by phone
that Stoba will add only two percent to three percent to the
cost of manufacture. He said he wants to try selling the
technology to major laptop and phone manufacturers.

Potential customers include Sony Corp <6758.T>, Dell Inc
<DELL.O>, Hewlett-Packard Co <HPQ.N>, Acer Inc <2353.TW>, Apple
<AAPL.O>, Nokia Corp <NOK1V.HE>, and others.

ITRI has applied for 29 patents in the United States,
Taiwan, Korea, China and Japan for Stoba. ITRI holds 9,863
patents and has 5,800 employees, including 1,112 with
doctorates. It has created 151 start-ups and spin-offs.
(Reporting by David Lawsky; Additional reporting by John
Crawley in Washington; Editing by Tim Dobbyn)

Playfish, along with Zynga and Playdom, are three start-up companies that have been generating buzz because they make free social games and earn money by selling virtual goods to players. The popularity of these games has taken off because of online networks like Facebook and MySpace.

EA, a traditional publisher of videogames like “Madden NFL,” will shell out $275 million in cash for Playfish, along with other consideration that may boost the company’s valuation to $400 million over time.

EA said on Monday that the deal valued Playfish at three to four times forecast fiscal 2011 revenue — a multiple that will probably set a benchmark for Zynga, Playdom and other social game makers, should they come to market.

“It’s like a domino effect — if one falls there’s a chance the others could fall soon,” said ThinkEquity LLC analyst Atul Bagga. “I think the company that might get acquired is Playdom, and there are a host of smaller companies that could be candidates for acquisition.”

Instead, later in the day a group of venture capital firms put $43 million of new investment into Playdom, valuing it at $260 million.

“It’s such a big space you don’t want to be constrained by your cash flow,” Jeremy Liew, managing director of venture capital firm Lightspeed Partners, said of the profitable firm. Lightspeed joined New Enterprise Associates, Norwest Venture Partners and one of the original investors, Rick Thompson, in making the new investment.

Playdom Chief Executive Officer John Pleasants said in a statement: “We’re not interested in acquisition at this point — we’re focused on growing Playdom into a world-class gaming company.”

Players of the company’s games range from 13 to 80 and come from more than 150 countries, Pleasants said, “so the opportunity for growth is tremendous.”

Meanwhile, Bagga said Zynga “has been a candidate for an IPO for some time, and there could be an IPO next year.”

Zynga, maker of Zynga Poker and the FarmVille farming game, is generating revenue at an annualized rate of more than $200 million, according to two sources with knowledge of the company.

Its venture capital backers include Kleiner Perkins Caulfield & Byers, Foundry Group, Union Square Ventures, Institutional Venture Partners and Avalon Ventures.

The speculation in the industry is that Zynga is too expensive for a strategic buyer, but could raise $1 billion to $1.2 billion in an initial public offering next year, should it choose to undertake one.

Zynga Chief Executive Officer Mark Pincus told Reuters the company had no plans to go public or change ownership.

“I want to build a long-term sustainable company, an Internet treasure,” he said. “I don’t see how selling the company or taking it public would accelerate that mission now.”

NO QUICK DEALS

Neither Zynga nor Playdom is under pressure to sell itself as their businesses are growing quickly, analysts say, so another social gaming deal could take time.

“A good new game can add $1 million or $2 million in monthly revenue within 30 to 60 days of launch,” said Liew.

Playdom, which until Wednesday had been backed by private investors, is currently generating revenue at an annualized rate of around $50 million, according to two sources familiar with the company. The company makes the Mobster series of gangster games, and it has a big presence on MySpace.

Analysts and venture capitalists cite a number of possible buyers for Playdom, but none that need to do a quick deal.

Maha Ibrahim, a general partner at Silicon Valley venture firm Canaan Partners, said Asian gaming companies Tencent Holdings Ltd <0700.HK> and Shanda Games Ltd <GAME.O> are the most likely to seek such acquisitions, but others say their expertise might not overlap.

Other potential buyers include game console makers like Nintendo Co Ltd <7974.OS> and Sony Corp <6758.T>, and traditional videogame publishers like Activision Blizzard Inc <ATVI.O> or THQ Inc <THQI.O>.

Investing in Web start-ups can be risky — the Internet is littered with social networks that have fallen as quickly as they have risen, due to fickle consumers.

In the last month, Zynga has been plagued by third-party advertisers that offered players special discounts on virtual goods, only to include hidden charges or subscriptions.

Zynga, which earns up to 20 percent of revenue from such advertisers, was criticized for not moving quickly enough to resolve the problem. Facebook eventually suspended a Zynga game called FishVille because of this.

“Stopping (the problem) was Priority One,” Pincus told Reuters, adding that Zynga has since suspended all such offers and is developing a system to screen them in advance.

Analysts said that if Zynga smooths over the problem, there would be no long-term effects.

“This ‘offer’ controversy is deserving of being a controversy,” said Pacific Crest analyst Evan Wilson.

The problem might hurt Zynga’s valuation if the company were to go public tomorrow, he added, but not over the long term.

(Reporting by David Lawsky, editing by Tiffany Wu and Lisa Von Ahn)

It may have to increase capital expenditure next year to beyond its stated expectation of $450 million, President Stephen Luczo told Reuters in an interview on Thursday.

Luczo also said that, within a year, the company will offer a hybrid drive combining cutting-edge solid state drive technology with a more traditional disk drive’s, speeding up computers, reducing boot times — and in some cases enabling “instant on” capability according to the company.

Luczo, speaking in an office overlooking giant redwood trees in the mountains above Santa Cruz, said chances were strong that enterprises will finally start replacing aging computers after a delay caused by the recession, also getting a spur from Microsoft Corp’s <MSFT.O> new Windows 7 operating system that went on sale Thursday.

There may even be a disc drive shortage in 2010 if conditions keep improving, he said.

“If you get a huge refresh, the (hard drive) industry will be chasing demand all through 2010. The industry will not be able to put enough (units) in place,” he said.

That could improve the company’s closely watched gross margin above its stated target range of 22 percent to 26 percent next year, but would also make it necessary to increase capital expenditures beyond the planned $450 million for the fiscal year ending in June, he said.

“We have to (add capital expenditures) prudently,” he said, without giving detail.

UNCONCERNED WITH MARKET SHARE

Seagate is running neck-and-neck for unit market share against its chief rival, Western Digital Corp’s <WDC.N>. Trend Focus says each has around 30 percent of the market.

Luczo said he was not concerned about unit market share so much as revenue market share.

“I’m not a believer that you have to be the unit volume leader,” he said. “We can give up some volume because we are selling the higher tech stuff.”

Luczo will know by December what the situation is and said that if industry sales are 155 to 160 million drives, inventories will be low everywhere.

Disc drive makers thus face potential shortages of parts, although Seagate relies more heavily than some others on making its own.

At the same time, the industry is changing with the advent of solid state drives (SSDs), which rely on memory chips as their media instead of spinning discs.

The company started shipping discs in small quantities this quarter, and Luczo predicted they will help change the industry by allowing new kinds of applications and that demand for SSDs will grow along with demand for hard drives.

To provide some of the advantages of solid state drives, which give quick access, and hard drives, which are far cheaper, Luczo said the company will offer within one year a combination drive that will in effect have a huge “cache,” or storage facility to augment the spinning disc.

(Editing by Anshuman Daga)

((E-mail david.lawsky@thomsonreuters.com; Phone +1 415 677 2505; Reuters Messaging david.lawsky.reuters.com@reuters.net)) Keywords: SEAGATE/

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