Will SanDisk Sour Apple's Tune?

Competing against the iPod has been known to cause corporate injury. Take Creative Technology, the Singapore-based consumer-electronics company, for example. Creative (CREAF) for two years has tried to position its products against Apple Computer's megahit music player but has had a tough time of it, reporting a loss for fiscal 2005 and numbers in the red for the second quarter of this year. Rio, the brand name that effectively launched the MP3 player category in the late '90s, exited the business last year.

Apple (AAPL) certainly isn't making it easy for its competitors, especially after locking up exclusive supply contracts for flash-memory chips from vendors such as Samsung, Hynix Semiconductor, Toshiba (TOSBF), and a newly formed flash-memory joint venture owned by Micron Technology (MU) and Intel (INTC) (see BW Online, 8/26/05, "A Memorable Deal for Apple and Samsung?").


  So of all the things Eli Harari could be doing, why would he be leading his $2.3 billion company SanDisk (SNDK) into what appears to be a no-win attack against Apple's dominance of the digital-music player market?

Because in the market for those players that use flash memory -- such as Apple's iPod nano and shuffle -- Sunnyvale (Calif.)-based SanDisk has something that most other suppliers don't: Its own factory for making flash memory. That means SanDisk can supply itself with one of the most expensive and critical MP3 components at cost.

Of all SanDisk's flash-memory chips, 70% come from three Japanese chip factories it jointly owns with Toshiba. The remaining 30% come courtesy of its own supply contract with Samsung. When demand is high, Samsung's capacity fills in the gaps. When demand is low, the Samsung capacity is the first to be cut back.


  That's going to give SanDisk's newly released Sansa brand of players a competitive price on retail store shelves. Harari says the plan is not necessarily to compete directly with Apple, but to offer an alternative player with a wide range of features at a price where Apple only offers its stripped-down iPod shuffle, which has no screen.

The Sansa e250, for instance, strongly resembles the iPod nano, and is roughly the same size, but can play videos, has an FM radio, and works with several subscription music services, including RealNetworks' (RNWK) Rhapsody, Napster (NAPS), and Yahoo's (YHOO) Launch, among others. With two gigabytes of capacity, it stores about 500 songs -- at a price of $180, about $20 less than the 2GB nano.

At the high end of SanDisk's range is the e270, which stores six gigabytes at a price of $280, about $31 more than Apple 4GB iPod nano, which sells for $249. Other Sansa-branded players include the m200, which at $59 stores as much music at the iPod shuffle, but for around $10 less.


  "Apple has really done a phenomenal job with the nano, but it's really not interested in selling a player for $49.95," Harari says. "We're a firm believer in driving these products to the masses. There are a billion customers out there who would love to have a low-cost MP3 player that can also play video."

Does Apple have anything to worry about? With control of 80% of the market for portable music players, probably not, says Michael Gartenberg, analyst for Jupiter Research in New York. "SanDisk's e-series of players are very nicely designed, and in fact it's probably one of the nicest players on the market," he says. "Its problem is that it doesn't go by the name iPod. SanDisk is the no. 2 two manufacturer in the market, and it's going to take a lot of effort to get its message out to consumers."

But SanDisk is hoping a segment of the population will shun the iPod, no matter how cool it seems. How individualistic can the iPod really be if the President of the United States has one? "There are a lot of kids out there who won't want to have the same player as their grandmother," Harari says.


  Still, is being competitive on features and price enough? One little secret about iPod sales: retailers don't eke out much of a profit selling them; Apple sells them at a fixed, nonnegotiable price. Retailers, however, love selling all the accessories that have come to populate the iPod economy: leather cases, speaker systems, headphones, and what not. "The attach rate of accessories to iPods is really high, and the retailers love that business," Gartenberg says.

For Harari, this attack on the MP3 market isn't about short-term market-share gains. Harari takes a longer view. Ultimately, he says, the many gadgets populating pockets and purses for e-mail and music all will migrate to one universal device that does it all -- and that device will be a wireless phone. When that happens, SanDisk will be ready with its own flash-memory offerings targeting that market.

SanDisk is already the world's largest supplier of flash-memory products to retailers including Best Buy (BBY) and Circuit City (CC). It makes every format of CompactFlash, SD (Secure Digital) card, and Memory Stick under the sun, and that has given it a retail presence other manufacturers can't help but envy. Its cards are carried in 164,000 stores around the world.


  What's more, SanDisk's microSD cards -- about a third of the size of a postage stamp -- are aimed for wireless-phone use in capacities going up to a gigabyte. The company sold 13 million cards for handsets last quarter. Compare that with the 8.5 million Apple sold in its most recent quarter, and you get the idea why Harari is philosophical.

And by the way, the same card also fits in a slot on the Sansa music players. "Handsets are where it's all going," he says. "There's 900 million handsets out there, and more than half of them will have a slot for our card. Eventually, people will appreciate over time the music they play on their MP3 players will also move easily to their phone. We carry our phones everywhere. But we don't always carry our camera or MP3 player."

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