Bloomberg News

Apple’s Hot Cloud Offers Samsung Chance to Boost Chip Lead: Tech

December 15, 2011

Dec. 2 (Bloomberg) -- Apple Inc., Amazon.com Inc. and Google Inc. operate farms of always-on computer warehouses to sell music and books and run Internet searches. The servers also produce heat, an unwanted consequence that Samsung Electronics Co. sees as an opportunity.

Samsung aims to maintain its leadership in the $39 billion market for dynamic random-access memory, or DRAM, by tapping demand for low-power chips that can help servers save energy and companies reduce costs, Hong Wan Hoon, head of the company’s memory sales and marketing, said in an interview.

Electricity takes 12 percent of a data center’s operating expense. Total costs are poised to increase as the number of warehouses rises 8 percent to 3.7 million globally in the next four years, analysts said. Samsung’s ability to outspend rivals such as Japan’s Elpida Memory Inc. on the latest production techniques may mean it’s better placed to benefit from the increasing need for more efficient chips.

“You need high-performance machines that are highly efficient with a lot of storage to cover all your devices without a hitch,” Hong said. “The question is how you can cool down the heat resulting from power consumption, and that’s where low-power chips come in.”

Cloud Computing

The servers operate the cloud-computing technology that allows smartphones and tablet computers to access music, video and software on the Web. They also store e-mail and social- network accounts.

Data centers were responsible for about 1.5 percent of energy consumption in the U.S. in 2006, Hong said. That likely will double to about 3 percent this year, enough to keep four or five nuclear plants running, he said.

The data centers run by NHN Corp., owner of South Korea’s largest search engine, consume the equivalent of 10 percent of the power used by households on Jeju island, population 580,000, Kim Jung Hoon, an operations director, said at a Seoul forum in October.

Energy consumption by data centers is forecast to increase 19 percent next year, according to a September report by London- based researcher DatacenterDynamics.

“If you run servers, you have to consider ownership costs, and your biggest goal is to reduce electricity costs,” said Shin Hyun Joon, a Seoul-based analyst at Dongbu Securities Co. “Memory for servers will have to go energy-efficient.”

Lowest Prices

DRAM chips provide the main memory in computers, holding data while the processor makes calculations. Suwon, South Korea- based Samsung accounted for 45 percent of the market by revenue in the third quarter, while Ichon, South Korea-based Hynix Semiconductor Inc. followed with 21 percent, according to researcher Gartner Inc.

Samsung, the world’s second-largest semiconductor maker, is turning to servers and energy-efficient chips as growth in sales of PCs slows, damping memory demand. PC shipments climbed 3.2 percent last quarter, compared with an earlier projection for 5.1 percent growth, according to Stamford, Connecticut-based Gartner.

DRAM prices plunged to a record low last month, according to data compiled by Bloomberg, and global sales may drop 27 percent this year to $29 billion, according to IHS iSuppli. Elpida, Hynix and other makers of DRAM lost a combined $14 billion in the past three years, according to Bloomberg calculations.

DRAM chips for servers probably account for about a third of the overall market in revenue, Hong said. Samsung’s share for server DRAM in the third quarter was about 67 percent, he said.

Smaller Transistors

Samsung has avoided the slump in the DRAM industry by diversifying into specialty chips for smartphones, tablets and servers. The company will post 2.3 trillion won ($2.04 billion) profit from DRAM this year, according to Shinhan Investment Corp. in Seoul.

“Back in 2008, we decided we needed a definite differentiation for our products for the mobile era, and that can be done by reducing power consumption,” Hong said. “What we wanted was to reduce power consumption by half.”

The company developed 20-nanometer DDR3 DRAM chips that can slash consumption by 67 percent, compared with older generation 50-nanometer DRAM, Hong said. A nanometer is a billionth of a meter.

Chips made with 20-nanometer technology contain smaller transistors, which consume less power than bigger ones while performing the same computing functions. The newer technology is being tested by most server manufacturers, Hong said. He didn’t specify which companies are testing them, but Hewlett-Packard Co. and Dell Inc. both make servers.

Apple Warehouse

A center with 10,000 servers can process the same amount of data with a third as many machines and save $20 million a year by replacing conventional hard-disk drives with flash memory and using the newest low-power DRAM chips, Hong said.

“When you have got a huge room with literally thousands of servers, even a small change can lead to significant energy savings,” said Andrew Norwood, a U.K.-based DRAM analyst at Gartner.

Server DRAMs typically carry better profit margins than memory chips for PCs, he said.

Worldwide shipments of memory chips for servers may increase about 68 percent this year, according to SK Securities Co. in Seoul. Taoyuan, Taiwan-based Nanya Technology Corp. expects its share of revenue from server DRAM to climb to 20 percent within a few years from 12 percent currently, vice president Pai Pei-lin said in an Oct. 19 conference call.

Apple, based in Cupertino, California, built a $1 billion data center in North Carolina for its iCloud service to help mobile devices synchronize files and download songs, videos and apps from iTunes.

Google, Facebook

Mountain View, California-based Google, owner of the world’s most-popular search engine, said in September it will invest more than $200 million to build its first centers in Asia. The company has acquired land in Hong Kong, Singapore and Taiwan.

Amazon, the world’s largest online retailer, opened data centers in the U.S. in August focused on government clients.

Facebook Inc., owner of the world’s most popular social- networking service, said it will share its data-center and server designs to help the industry become more efficient. Warehouses can use 38 percent less energy and cost 24 percent less to build by better regulating computer workloads, power consumption and cooling, according to the Palo Alto, California- based company.

“Demand for server chips will remain solid as companies continue to build up infrastructure,” Shin said. “Chipmakers will flock to server chips because they are what make money.”

--With assistance from Mark Lee in Hong Kong, Tim Culpan in Taipei, Anand Krishnamoorthy in Singapore, Ketaki Gokhale in Mumbai. Editors: Michael Tighe, John Brecher.

To contact the reporter on this story: Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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