For years, Wall Street has urged Intel to change its approach to the computer-memory market. Investors pressed the chipmaking colossus to make a play for so-called NAND flash memory, used to store music and video in consumer electronics products such as Apple's (AAPL) iPod digital music players. Intel (INTC) balked, insisting NAND would go nowhere. Instead, the chipmaker clung to its plan to support an different data-storage format known as NOR. Since then, Intel, which developed NOR in the 1980s, has become the market leader in the technology.
Now, it looks like Intel finally has got the message. Demand for NOR, which stores data on cell phones, is dropping, while sales of NAND have been growing about 60% a year (see BW 10/17/05, "March of The Flash Chips"). On Nov. 21, Intel announced a joint venture with a top PC memory supplier, Micron (MU), to manufacture NAND. The companies will invest as much as $5.2 billion over three years. Intel's about-face didn't come a moment too soon -- and it could trigger a sea change in how NAND memory is used and the way Intel markets its products.
Called IM Flash Technologies, the joint venture has already signed up a heavy-hitting customer: none other than Apple (AAPL), which consumes about 20% of all NAND output today, according to chip consultancy iSuppli. Apple has already placed a $500 million order that will be divided equally between Intel and Micron, the companies said. That's likely to give Apple a whooping 25% of all NAND chips next year (its other suppliers include Samsung, Toshiba, and Hynix).
MARKET GRAB. The partners have already deployed two plants, and another may come online within a year. To get up to speed, each of the two companies has contributed $1.2 billion in cash, notes, and assets, and committed as much as another $1.4 billion over the next three years, subject to certain conditions. Intel will own 49% of IM Flash, while Micron holds the rest.
It's not hard to see the appeal for Intel and Micron. IM Flash could grab a sizable slice of the market in short order. Samsung, Toshiba, and Hynix together control 86% of the NAND market, according to iSuppli. "In three years, we think we'll be one of the top three suppliers in the world," says Micron CEO Steve Appleton.
Micron, which is known for simple PC memory called DRAM (dynamic random access memory), entered the NAND field several years ago, though it only commands 3.4% market share. Memory-cards maker SanDisk (SNDK), which uses NAND chips in its products, might consider buying them from the joint venture, says Eli Harari, SanDisk's founder.
RAKING CRUMBS? What's more, IM Flash could ease the NAND supply shortages that have plagued consumer-electronics manufacturers for months. NAND memory has been in such short supply that some of Asia's smaller MP3 player makers have gone out of business, says Nam Hyung Kim, an analyst at iSuppli. He reckons the parts shortages could be eliminated by the end of 2006. Toshiba, for example, has earmarked $600 million in additional flash capacity, says Toshiba CEO Atsutoshi Nishida.
But other reasons for Intel's change of tack are less apparent. The joint venture has the potential to add mere crumbs -- $200 million in revenue and 3 cents in earnings – to Intel's financial results each year, according to estimates by Prudential Equity Group. And with margins in the neighborhood of 60%, Intel probably isn't drawn to NAND flash margins, which are expected to narrow to 25% in the next few years from about 40% today.
What the move could do is serve as a springboard for a new brand, designed to replicate the success of Intel's Centrino package of chips, which allow laptops to access the Web wirelessly, says Eric Ross, an analyst at investment bank ThinkEquity Partners in New York.
NO-WAIT COMPUTING. NAND memory chips, in tandem with laptop processors, could allow the chipmaker to introduce what's known as instant-on computing. Indeed, Intel could well work with the inventive product designers at Apple to pioneer new ways to spice up today's garden variety PCs. Apple, after years of using chips from IBM and Freescale Semiconductor, will begin introducing Intel-based Macs in 2006.
An instant-on notebook boots up in a matter of seconds. "Consumers don't want to wait five minutes for it to start," says Ross. "A phone-like experience is what users expect of consumer devices. They want [these devices] to be instantly on and to offer virtually 100% reliability."
Such notebooks' batteries would also last days instead of hours. Ross believes that Intel could introduce a package of chips with those features as soon as late 2006. The aim would be to ramp up sales of Intel's high-margin, bread-and-butter processors.
If it's successful, IM Flash might greatly expand the market for NAND beyond consumer electronics and into PCs, where hard drives and DRAM rule the roost today. "Intel will generate new applications," says SAnDisk's Harari. "This PC application alone could be a major new market."
"ANOTHER NAIL." Intel, with its $12 billion in cash and short-term investments as of Oct. 1, could also help to push NAND to replace removable hard drives and other, lesser-used types of memory. "We're barely scratching the surface on applications today," says Darin Billerbeck, general manager of Intel Flash Products Group. That would mean greater sales for everyone from NAND powerhouse Samsung, which currently holds 50% of the market, to SanDisk. Intel wouldn't comment specifically on planned products.
The NAND business might also help Intel gain traction in cell phone chip sales. Although Intel already sells processors which allow cell phones to store music, photos, and video clips, it's still struggling to conquer that market. But NAND sales to cell-phone companies could open the door to Intel mobile-processor sales as well.
Something else the deal signals is the decline of NOR flash. "We see this as a confirmation that NAND has overtaken NOR," says Harari. "This is another nail in the coffin of NOR." Indeed, NOR sales have fallen 14% this year, to $7.9 billion, and they're expected to remain relatively flat, according to researcher IC Insights.
Meanwhile, NAND is expected to grow to $22.4 billion in 2008, from $10.2 billion this year. Intel says it remains committed to NOR. "We continue to focus on NOR," says Billerbeck. "We have a great NOR business." Still, most analysts believe the business is currently losing money.
UNDER PRESSURE. While Intel can certainly handle the losses, the chip giant's move from NOR may be particularly worrisome to its much-smaller processors rival, AMD (AMD), which is hurrying to take its money-losing Spansion NOR memory business public (see BW Online 11/16/05, "AMD: Less of an Underdog"). Analysts on Wall Street whisper that the IPO's pricing, currently listed at $16 to $18, could come under severe pressure, as investors might hesitate to pour money into a company whose business is contracting and in the red.
Whatever the fallout of the Intel-Micron deal, it's likely to be lasting.