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November 21, 2005
Reverberations of the iPod Nano Rush
Apple today said it has locked in more long-term supply contracts for flash memory. I’ve watched the situation regarding the iPod nano and the supply for NAND-type flash memory for a few months now, and reported on the Apple-Samsung tie-up in August.
Apple says it will dip into its sizable cash reserve -- $3.5 billion in cash and another $4.7 billion in short-term investments – and pre-pay Intel, Micron, Hynix, Samsung and Toshiba $1.25 billion for flash memory supplies to cover the next three months.
A deal like this focused on just one product can’t help but take the most of the wind out of the sails of nearly all would-be iPod rivals. Remember if you will that the initial deal with Samsung called for the South Korean chipmaker to supply Apple with NAND chips for the nano at discount of roughly 40%. Since Samsung is the world’s largest supplier of NAND-type flash memory, then it stands to reason that these other suppliers might have been willing to give Apple a similar discount.
That’s going to put two kinds of pressure on companies like Creative Labs, Archos and iRiver to name only a few who make rival players: First they’re going to have to compete on price without the benefit of the kind of discount Apple has negotiated. Second they’re going to have wait in line for their turn to get NAND flash chips from the various suppliers. And supplies are already tight: Market researcher iSuppli estimates that between the iPod nano and iPod shuffle, Apple will have tied up between 20% and 25% of the world’s supply of NAND flash memory in calendar year 2006.
Also keep in mind that NAND flash is used not only in MP3 players, but in digital cameras, mobile phones, and scores of other electronic gadgets. By tying up such a huge corner of the market for NAND flash memory, Apple can’t help but indirectly affect the supplies of these other products.
But wait: There’s a new supplier coming in: Micron and Intel. The pair announced today the formation of a joint venture devoted to building NAND flash. They’ve agreed to contribute a total $2.4 billion for the first year and another $1.4 billion over three years to a joint venture they’re calling IM Flash Technologies, and it has already secured a $500 million order from Apple. Manufacturing will take place in Micron-owned fabs in Boise, Idaho, Manassas, Va. and in Lehi, Utah.
Intel is already the world’s biggest supplier of another type of flash known as NOR flash (Believe me, you really don’t want to get into to finer points of NAND and NOR stand for). While NAND is primarily used for storing data like music or digital images, NOR is used for storing and running code, like the software that runs your cell phone. But Intel’s got some technology called Multi-Level Cell or MLC that can be applied to NAND flash as well. MLC allows more data to be stored in parts of a flash chip called cells. As chip sizes shrink, so do these cells. The MLC technology allows more memory to be stored in each cell, essentially cramming more bits into a smaller area. You can read more about it in this Intel technical paper.
A new supplier is good news for other companies in the MP3 business having a hard time competing with Apple on price and in securing the supplies of flash chips they need. But it’s probably going to take IM Flash about a year to ramp up on manufacturing. It may be a rough Christmas for those companies this year but there’s light at the end of the tunnel if they hang tough until next Christmas. Meanwhile, Apple has ensured itself an extremely strong market position for this year.
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