By Arik Hasseldahl If five years ago you had said memory-chip companies would today be wooing Apple Computer (AAPL) as a marquee customer, you would have been laughed at. No more, thanks to the iPod.
Samsung, the world's largest supplier for flash-memory chips, is going to great lengths to turn the Cupertino (Calif.) computer maker into its biggest customer for its NAND-type flash memory. According to a report by market research firm iSuppli, Apple's success with the flash-based iPod Shuffle has prompted South Korea's Samsung to offer Apple a deep discount and be willing to dedicate 40% of its flash-memory manufacturing capacity to seal the deal.
NAND-type flash is used primarily to store data and is different from NOR-type flash, used mostly in wireless phones and dominated by companies like Intel (INTC) and Spansion, a unit of Advanced Micro Devices (AMD).
A FLASH MINI? The most likely reason that Apple would want to boost its buying of NAND flash is for a new version of the iPod. One of the biggest criticisms of the iPod Shuffle, successful as it has been, is that it doesn't have a display screen that lets users see what song is playing. A more expensive player using flash memory boasting capacities of 2 gigabytes to 4 gigabytes -- and which includes a display screen -- might make sense from a cost standpoint. The Shuffle now comes in two models, with 500 megabytes of memory for $99 and with 1 gigabyte for $129, and it's too early to tell how much more expensive it would be with the additional memory.
Or Apple might simply revise its iPod Mini line in favor of a flash-based model. Doing so has many technical advantages, says Nam Hyung Kim, analyst with iSuppli. Flash chips would allow the player to be smaller. And without the hard drive it uses now, the iPod Mini would be more resistant to damage from being dropped, as flash chips have no moving parts. Finally, its batteries would last a lot longer. "Hard drives consume power at a rate that's about 30 times that of flash," he says. "There's simply no comparison between them in terms of power efficiency."
Such a deal would also be great for Samsung. Kim reckons that for the first half of the year, the Korean company moved about $2.45 billion worth of flash chips, at an operating margin of about 40%. "That means they have room to drop the price a little for Apple if they want to," he says. Samsung may even have promised Apple to match prices on hard drives. Toshiba and Hitachi (HIT) have been Apple's main hard drive suppliers for iPods over the years.
PRESSURE ON RIVALS. In its most recent quarter, Apple sold 6.1 million iPods -- it hasn't yet broken out numbers for the iPod Shuffle -- for $1.1 billion in revenue, or a little more than 30% of total sales. Kim says if Apple introduced a flash-based iPod Mini it could sell between 3 million and 6 million units before yearend. And that could boost worldwide NAND flash demand by as much as 22%, he says.
Samsung has prepared the market for an overall decline in average selling prices in NAND chips, based at least in part on the expected impact from the Apple deal. That's going to put some pressure on Samsung's two main competitors -- Hynix, also of South Korea, and Toshiba.
But they don't have the manufacturing flexibility that Samsung has, Kim says. Samsung has dedicated an entire line to building NAND flash, while both Toshiba and Hynix, in order to boost their NAND capacity, would have to convert existing manufacturing lines away from DRAM memory chips -- the commodity chips used in personal computers.
SOMETHING SURPRISING? In fact, Kim believes Apple is currently trying to secure even more NAND flash from Hynix to supplement the supply from Samsung. In order to meet that demand, Hynix would have to convert some DRAM lines to flash. Since Hynix is the No. 2 supplier of DRAM chips, that would likely drive prices on DRAM chips upward and could turn out to be good news for DRAM suppliers like Micron Technology (MU) and Germany's Infineon (IFX).
Samsung's wooing of Apple has been an open secret in chip industry circles for some months, and rumors of their deal has always been keyed to the assumption that a change in the iPod lineup was the main reason. But others analysts, like Tim Bajarin of Creative Strategies in Campbell, Calif., aren't so sure.
Another surprise could be in the offing. "The Shuffle has been a pretty big hit," Bajarin says. "There's a perception that a 1-gigabyte player is a bit small, and so Apple has to be looking at a higher-density flash-based player. But it's really hard to anticipate Apple's actions. They may be using all this flash memory for something else." Something else that will make waves in the memory-chip business most likely.
Hesseldahl is a writer for BusinessWeek Online in New York