The country is now beginning the arduous job of cleaning up from the floods that killed upwards of 600 people and dealt a body blow to its industrial and manufacturing base.

One industry hit especially hard is the computer business. The world relies on factories in Thailand to turn out critical components used to build hard drives, and factories there are out of commission for now. This is not a trivial problem — the factories in question are not easy to replace, retool and restart once they dry out. Nor is the answer simply for the hard drive manufacturers to build new factories somewhere outside the flood zone.

This is the kind of supply chain disruption that the computer industry hasn’t seen in many years. I had a chance to talk with Steve Luczo, the CEO of Seagate Technology, for his view of the situation. Seagate has been relatively lucky in that its factories haven’t been directly impacted like those of Western Digital and Toshiba. But many companies that supply Seagate with necessary components have been hit, and it will be some time before they’re back on their feet.

Luczo told me that the computer industry as a whole — including companies who make PCs, servers, workstations and any other device that contains a hard drive, whether a set-top box or an enterprise storage device — can expect acute supply-chain disruptions to last well into 2012, and that it will take until the end of 2013 for the industry to return to its pre-flood operating posture. You read that right: It will be two years before the supply of hard drives is anywhere near “back to normal,” and there are simply no easy solutions for getting it fixed.

An estimate by the market research firm IHS iSuppli pegs the available supply at 125 million units, which is about 29 percent short of demand of 175 million units. By its reckoning, more than one-quarter of the world’s hard drive manufacturing capacity has been disrupted in one way or another, including 45 percent of the capacity devoted to making hard drives for personal computers. I spoke with Luczo by phone yesterday, and tossed in an extra eighth question because of the importance of the subject.

AllThingsD: Steve, at a high level, I think everyone understands the problem. There’s been a terrible flood in Thailand, and a lot of factories that make crucial parts for hard drives are out of commission. To that end, I think people expect this to be a temporary problem that works itself out in a couple of months. But you say it’s a much more complex problem than most people realize. You’re tracking this situation day to day, and probably hour by hour. So, how bad is it, really? And what’s likely to happen?

Luczo: What’s surprising to us is that even with all the data out there — we’re six weeks into it — there are a lot of fairly sophisticated companies that haven’t fully come to grips with the depth of the problem and the duration that is likely to occur. What is going to happen in the next couple of weeks is that the real shortage begins to show up right about now. There was already a lot of built inventory and a lot of finished goods moving through the system. And now all that is gone, and I think customers are starting to see shelves of parts go empty, and realizing that they’re not going to be filled for anywhere from one to two months. So the concern is heightened.

We heard Meg Whitman talk about this on HP’s earnings call Monday. She said HP stepped in and started doing some strategic buying. She says HP is going to see effects at least through the first half of next year. Apple talked about it on its earnings conference call, too. Are you hearing from them?

Tim Cook at Apple was way in front of this. I saw Tim the first week it happened, and took him through the situation, and in 15 minutes he understood the magnitude of it. Meg was on the second week of her job as CEO when I went to see her, and she got it right away. HP’s procurement VP, Tony Prophet, was also early to understand this. Companies like that reached out to us early on, because they understood that this is going to be an extended problem. They started asking for longer supply agreements. Deals that would typically last about a year, they’re now asking for two years.

How bad is it really going to be? What’s your outlier worst-case scenario, and then what do you think is a little more realistic?

If you think pre-flood, a mix [of products] that the customers need, the industry had the capacity to ship about 190 million units a quarter. Pre-flood, we expected the demand to be pretty consistent at about 180 million a quarter, with a bump in September 2012 for Windows 8. We now believe the March quarter is going to much more difficult than the December quarter, and December is going to be about 120 million or so. We think the March quarter will be about 120 million, in the best-case scenario. And that’s with customers mixing down pretty aggressively; and by that, I mean companies like Western Digital, who don’t have access to the sliders [a critical component in a drive], are shipping one- and two-headed devices so they can ship more units. So instead of shipping a drive that contains two disks and four heads, which is what the market needs right now, they’ll be shipping a one-disk, one-head or one-desk, two-head product. They’ll be maximizing the units they can sell, rather than shipping the product the customer actually needs. … So we see something like 130 million for March on the optimistic side, and then 150 million for June, 170 for September and then 190 million for December. And so by the end of 2012 you’re back to being close to industry demand. But even then, you’ve not included the impact of that missed 100 million units. And that will take another year to absorb, because it’s not like the industry is building new factories to chase that demand. We can’t over-invest to meet some bubble and then get stuck with excess capacity.

I think, intuitively, people expected companies like Seagate to just build more factories outside of the flood zone, but it’s not that simple, is it? Would this not be a moment to add capacity?

There are some in the investment community who think that’s what is going to happen, and that there will end up being a supply glut after all this is over, but it’s not the case. For us, it’s more a function of how to recover the supply chain and then work with the customer to get a good read on what their needs are for the next several quarters. If we see a multiquarter shortage that goes beyond what I described before, then we would think about maybe putting some capital in place. But we’re not going to do that to solve a temporary problem, because we end up being stuck with the excess capacity. Now if it turns out there is no recovery, and then the industry is more constrained than I first described — and that, by June, the industry is still 30-40 million units short and looks like it will be for the next six quarters — we might revisit. But then we’d want longer-term commitments to make sure we’re not overinvesting. But we’re not to that point yet.

What is this doing to prices? And what does that mean to the person who wants to buy a computer or server this year or next year?

If you look at a 10-year moving average trend, the industry has in general seen prices come down about 2 to 3 percent a quarter, and that is for a particular product. In 2009, there was a little price erosion, and that was because the storage industry recovered quickly from the recession. And there had been massive capital cutbacks, so there were big shortfalls through all of 2009 and into 2010. Then, when the Greece crisis happened, that put a big flatline on a lot of growth, and the industry had put in a lot of capital because everyone expected there would be growth. So, since spring of 2010, the price erosion has been higher than normal, which would show that supply is greater than demand. And what this flood has done is drive the supply curve down, while the demand curve has stayed constant. For OEMs [original equipment manufacturers, or the PC and server manufacturers like Apple, HP and Dell, who buy directly from Seagate], you’re seeing an average increase of about 20 percent, and in the channel [resellers who sell parts to smaller PC and server vendors], probably much higher. So all the sensational quotes you see about pricing are about those that occur in the channel, where we have no control whatsoever.

The markups in the channel are much higher? Are the channel guys taking advantage of this?

Yes, they’re higher, but I don’t think they’re taking advantage. I’ve heard stories about drives that we sell to OEMs for $60 that show up in the channel at $105. Normally the channel price is within about 10 percent of the OEM price. It’s just the law of supply and demand. They can’t get supply. The channel is getting about a third, at most, of the supply they would typically get. The OEMs are the ones with the supply agreements, so everyone in the channel is way short. In some market segments, supply is about 70 percent below what the demand is. And so those shortages are very acute. The channel is selling the few drives that are out there to whoever needs them the most and is willing to pay for them.

So what does all this mean for Seagate, specifically?

For us it’s a different story, because we’re going to be driving more volume than our competitors, because we’re not as directly affected, and we’re going to be making some  technology transitions. When we do that, it lets us take cost out of our product, so we can offer more capacity for the same or fewer parts. That helps us drive down pricing. Our goal is to recapture some of the more aggressive pricing of the last eight quarters, in order to sort of get our business back in balance. Our long-term business model calls for gross margins of 22 to 26 percent. And we use our manufacturing expertise to drive down our costs and then pass that on to our customers. This quarter, end users really won’t see it, because product has been built and has been on the shelves. As the shortages just started occurring, you’re starting to see prices increase in the channel. And then at the OEM there will be shortages in some high-value areas like enterprise storage or cloud computing. You’re going to have to see price increases, because there’s such big shortages.

One thing that occurred to me when I first wrote about this a month or so ago is that it represents an opportunity for the flash memory chip companies to make some inroads against hard-drive guys like you, mainly on notebooks. Is there a threat that flash could pick up some of the demand?

Some of it, but not very much. I think to the extent that there is a high value purchaser who can afford to pay $200 for 100 gigabytes, then that market will expand from 1-2 percent to 3-4 percent. Of the 35 to 40 percent shortage that exists, could you see a little of that get absorbed by silicon? The answer is yes. But there’s a cap. There’s just not enough of a raw supply of silicon to meet all the demand. Our industry will ship 400 exabytes this year. We would have shipped 450, were it not for the floods. Of that, 180 exabytes is notebooks. Reduce that by 30 percent, and you get about 55 or 60 exabytes. If you were to take all of the capacity from Samsung’s newest state-of-the-art flash factory, and dedicated it just to notebooks, it would only put out 7 exabytes a year. Plus, there are already other markets demanding flash, like  tablets and cellphones and other things. So it’s not like you can steal from those other markets. You’re not going to take a $32 product and replace it with a $350 product. Can you do it at the edges of the market? Sure. But the threat is capped by the amount of silicon available and the price point for flash storage, which is still an order of magnitude higher.

Of those leaving the company, 2,100 are taking a voluntary retirement buyout package that’s been made available to people whose age and years of service add up to a sum of 50 60. For example, an employee 40 50 years old with 10 years at Cisco would be eligible. An additional 4,400 will lose their jobs outright, but will no doubt receive severance packages. The remaining 5,000 or so are employees of a Cisco plant in Mexico that is being sold to Foxconn, the Taiwanese contract manufacturer. They will become Foxconn employees.

These reductions are the third significant step in what’s expected to be a four-step process, spearheaded by CEO John Chambers, to get Cisco on a leaner, more competitive and more profitable path. Analysts are, so far, fairly positive on the cuts.

Brian Marshall of Gleacher & Co. in San Francisco, who last week predicted that Cisco would cut 5,000, gave a tentative thumbs-up to the move. Cisco’s goal throughout the process has been to take out $1 billion in annual operating costs. Marshall says that it looks like Cisco could do better than that: He thinks the cuts could yield $1.7 billion in savings and add 25 cents in per-share earnings to the bottom line in 2012.

Breaking it down, he says the 6,500 jobs cut could result in $1.3 billion in savings from retirements and firings, assuming a cost of about $200,000 per head. The sale of the facility in Mexico will yield about $400 million in reduced cost of goods sold (COGS).

The next step, which Marshall expects in September, will be for Cisco to recalibrate its long-term financial expectations. Long accustomed to telling Wall Street to expect in the 12 to 17 percent range, the more realistic range for Cisco, Marshall says, is now closer to 10 percent, plus or minus a few points. Gross margin expectations will have to come down, too, to about 25 percent, down from a range of 28 to 31 percent.

Shaw Wu of Sterne Agee in San Francisco called the reductions “painful but necessary.” He notes that Silicon Valley hiring has been pretty strong of late and that those Cisco folks losing their jobs should have little trouble finding work at companies like Facebook, Apple or Google, though I’d suggest that Hewlett-Packard’s up-and-coming networking unit or Juniper will be eager to pick up some Cisco talent.

On the sale of the factory to Foxconn, Wu sees Cisco as winding up for a spin-off of the set-top box business. “We view the Foxconn transaction as effectively a restructuring of its lower margin set-top box business and think ironically, could make a potential future spin-off easier with the manufacturing detached.”

Update: A few of you have written to say my initial characterization of the retirement package terms was incorrect. The required sum of age plus years of service is 60, not 50. Sorry about that.

Some are starting to spill out interesting data to support their case.

One company, Simulmedia, says that set-top boxes that saw a targeted promotion tuned in two to three times more to the show being advertised than set-top boxes that didn’t receive a targeted promotion.

The New York company doesn’t target the ads to set-top boxes but buckets set-top boxes into groups based on what content they watch and recommends what programs advertisers should advertise on if they want to reach a certain types of viewer; then they can determine which set-top boxes saw an ad and whether those boxes tuned into the show.

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But its statement contained a new characterization from CEO John Chambers about the circumstances Cisco finds itself in. Gone was talk of temporary air pockets that emerged in November when Cisco’s outlook turned suddenly, and unexpectedly, sour. Now it’s in a “period of transition.”

One that’s far from over, apparently. Having reported the hard numbers, it saved the bad news, in particular its outlook, for the conference call. And it wasn’t pretty. It fell to CFO Frank Calderoni to deliver the bad news. While Cisco forecast revenue to grow at a rate of 4 to 6 percent in the third quarter over the same period in 2010, profits were forecast at 35 to 38 cents a share, well below the consensus of 39 cents. Gross margins for the full year will be in the 62 to 63 percent range, down from 64 percent in 2010.

Chambers noted weaknesses both in Cisco’s switching business, where sales declined by 7 percent, and in sales to government customers, saying he expected that segment to be problematic during the next several quarters. Sales of set-top boxes were also weak. Summing it up, Chambers said: “I think we will look back on this period of time and wish we could have avoided it and yet it will make us stronger in the long run.”

There was good news. Cisco will pay its first dividend this year, somewhere in the range of 1 to 2 percent.

And then there’s Cisco’s cash position, which stands at $40.2 billion, though only $3 billion or so of it is inside the U.S.

Chambers used the subject to once again complain about U.S. tax policy regarding cash held overseas. “We have a tax policy that is just broken,” he said.

The agency tweaked its so-called “CableCard” rules to make it easier for consumer electronics makers to make cable-ready TVs and other devices and for consumers to install them.

Cable-ready TVs and set-top boxes have been around for years, but consumers haven’t been able to use them to see some cable programming (like On-Demand movies) because of some technical protections cable companies installed to prevent piracy. The FCC changed its rules slightly to make it easier for consumer electronics makers to produce devices that access all cable channels.

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A few companies, including TiVo Inc. and Microsoft Corp. (MSFT), have released ad products tied to broadband-video services designed to be accessed on television sets, not computers. They include ads that can take a viewer to a movie trailer on YouTube when the viewer pauses a TiVo-recorded TV program, as well as ads that can be accessed by clicking a tile on the navigation menu of Xbox Live, the online gaming and video service for Microsoft’s Xbox game console.

Other efforts are also afoot. Google Inc. (GOOG) has been meeting with some of Madison Avenue’s biggest media-buying firms, exploring ways to sell ads through its Google TV software due out this fall. Sony Corp. (SNE) and other hardware makers are launching TVs and set-top boxes equipped with the software, which allows users to search and watch Internet programming.

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The service will allow people to watch and search cable, satellite and Web programming—as well as access regular Web pages—through TVs and set-top boxes that incorporate new Google software. The first devices, made by Sony Corp. and Logitech International SA, are due out this fall, marking another tug-of-war between tech companies eager for new content and media companies worried about giving it away.

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Over the past 20 years, 3-D-capable devices like set-top boxes as well as 3-D programming have become available at home. A lack of standard broadcasting formats, relatively little content and the need for 3-D glasses, however, have kept it from a broad audience.

Tech companies are betting that will all change, and when it does, you’ll be able to lose the glasses.

According to new data from Thomson Reuters, 3-D-related patents have risen sharply in recent years, led by companies such as Samsung, Panasonic and Toshiba. “It will only be a matter of time before 3-D televisions start showing up in the home,” the report says.

Patent activity in the 3-D television space grew 69 percent over a five-year period, with more than 1,000 unique invention patents filed last year alone. This year is on par, with 486 filed in the first half of 2009.

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Cisco is a company that tends to be associated with enterprise networking; at its heart it remains a manufacturer of big honking routers. But over the last few years, the company has made a concerted effort to get into the consumer business, largely through its acquisitions of Linksys, which makes home networking gear, and Scientific Atlanta, manufacturer of cable set-top boxes.

At the Consumer Electronics Show in Las Vegas today, Cisco made a set of announcements that extend its consumer ambitions considerably.

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Now, two more set-top boxes have been launched to try to marry the Internet and the TV. Both adapters, from Sony (SNE) and Roku, worked well in my tests, but each has limitations. The problem is that one of the boxes supplies content from a wide range of Internet video sources, but only works on selected models of one brand of TV set; the other works on a wide variety of TVs, but only provides a single source of content.

Sony’s adapter is the Bravia Internet Video Link. This is a $300 module that attaches to certain Sony HDTV models. It can either be set up beside the TV or snapped onto the back of the set. Once it’s connected to your TV and to your home network for Internet access, a new menu appears on the TV allowing you a choice of videos from numerous online sources, including YouTube, Yahoo (YHOO), Blip. TV, Sports Illustrated, AOL, Wired, and the Web sites of CBS (CBS), Showtime and more.

Setting up the Bravia Internet Video Link was straightforward, even though it involved a welter of cables. There is no built-in Wi-Fi — you need either a cable or an add-on wireless adapter to connect to the Internet. The primary hookup to the TV is via a modern type of cable called HDMI, for High Definition Multimedia Interface.

I tested the Sony Link using the company’s most unusual HDTV set — a tiny, very costly model that uses a very thin, very vivid new screen technology called OLED, for Organic Light-Emitting Diode. This TV provided a spectacular picture, but it isn’t required to use the Sony module. The Link works on many larger, more common Sony sets with more common screens. It just doesn’t work on non-Sony TV sets.

Sony’s Bravia Internet Video Link adapter

The Sony module doesn’t have its own remote control. It uses the one that came with the TV. This makes for an awkward experience, because there are no standard play and pause buttons, and various other buttons on the remote meant to do one thing on the TV may do another when watching Internet video via the Link module.

Also, I found some of the Internet content to be disappointing. Many of the items labeled “movies” on various Internet channels were really just trailers, and some content was stale. For instance, some baseball news videos on Yahoo were weeks old.

However, Sony plans to make one of its feature films, “Hancock,” available through the Link module before it’s released on DVD. More important, it will be adding access to Amazon’s (AMZN) forthcoming video-streaming service, which promises to contain a wealth of full-length content.

The Netflix Player by Roku is much simpler. In fact, it was the simplest set-top box I have ever tested. It costs just $100 and does just one thing: It allows Netflix (NFLX) subscribers to view its movies and TV shows via the Internet on a television set instead of on a computer. It can’t get you any other video content from the Internet.

The Netflix player is a small, plain black box that works with most TVs, not just digital or high-definition models. It connects using both old-fashioned cables, like the kind used by many VCRs and older DVD players, or an HDMI cable.

Unlike the Sony, the Roku box includes both wireless and wired Internet connectivity, and has its own remote. While the box is capable of displaying high-definition content, the Netflix service isn’t currently streaming movies and TV shows in high definition, so you get varying quality, depending on your TV and Internet speed, up to DVD-type levels.

There’s no added monthly fee required to use the Roku box, but you must be a Netflix subscriber. The box merely displays the movies or TV shows you have placed in your Instant Queue on Netflix. You have to do this on your computer before viewing the videos on the Roku box. You can choose from around 12,000 streaming movies and TV shows, far fewer than the 100,000 titles Netflix makes available via DVD, but a sizable collection.

In my tests, the Roku box set up quickly and easily, the interface and remote were simple and effective, and the movies and TV shows I tested streamed quickly and without hesitation over my fast home Internet connection.

Both products are meant to promote sales of other things — Sony TVs and the Netflix movie-rental service. They do these tasks well, but neither is the breakthrough solution that will connect most TVs to most Internet video content.

Find all of Walt Mossberg’s columns and videos online, free, at the All Things Digital Web site, walt.allthingsd.com. Email him at mossberg@wsj.com.

The Court of Appeals overturned a lower court ruling which concluded that network DVRs were a violation of content copyrights.

Bernstein Research analyst Craig Moffett notes this morning that the Court concurred with Cablevision’s view that by ceding control of what’s recorded to the customer, Cablevision’s network DVR model avoids direct liability for copyright infringement. “In Cablevision’s view, a network DVR is, in essence, simply a DVR with a very long cord,” he writes.

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The Journal says the three divisions will include one focused on cable set-top boxes and related gear for digital video, Internet-based video and modems; a second, which sells cellular networking gear; and a third focused on next-generation networks, including WiMax and LTE.

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