Micron's Megapixel Movement
Draw up a list of the top camera-selling companies in the world, and it will probably include household names: Kodak (EK), Canon (CAJ), Nikon, Fujifilm.
But depending on what defines a "camera," the list may need to be expanded to include a name that probably didn't make your cut: Micron Technology (MU).
Devices that can record an image are cropping up almost everywhere there's a computer chip these days: Wireless phones, PCs, cars, and medical equipment.
It's by that measure that Micron CEO Steve Appleton claims the chip company sells more cameras than any other. Known primarily for its main business of selling commodity computer memory chips, the $4.8 billion outfit in 2003 started building chips known as CMOS (pronounced SEA-moss) sensors that take pictures.
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The timing was perfect because the camera phone craze was just starting to catch on. In 2004, 241 million wireless handsets had cameras, and the number should reach 578 million this year, according to market research firm iSuppli. Micron will sell more sensors to phone makers like Motorola (MOT), Nokia (NOK) and Samsung than any other vendor.
Meanwhile CMOS sensors like Micron's have proven increasingly popular for low-end consumer digital still cameras, and for some use in cars and medical imaging. What's remained elusive is a CMOS sensor that's suitable for the four- to eight-megapixel cameras in the sweet spot of the consumer digital camera market -- where mainstream consumers buy their still and video cameras.
That segment has historically belonged to another type of chip known as a charge coupled device, or CCD. Sony (SNE), Sharp Electronics, and Matsushita Electric (MC) are some of the leading suppliers of CCD chips, which will go into some 83 million digital still cameras this year. That compares with only 11 million for CMOS sensors, according to iSuppli forecasts.
If Appleton has his way, the tide will begin to reverse starting May 18, when Micron releases a CMOS sensor that can capture images at a resolution of eight megapixels. Previously the best CMOS sensors were limited to image resolution around five megapixels. "Essentially this is a quantum leap for CMOS sensors, and will give us an entry into a business the CCD companies thought was all theirs," Appleton says.
Camera manufacturers also like CMOS sensors because they don't require all the same ancillary chips that CCDs do, says iSuppli analyst Chris Crotty. "You need fewer chips overall when you use CMOS sensors, and that can lower the cost."
Not only will the chip take higher resolution pictures than previous CMOS sensors, but it will do it with smaller pixels than ever before. Micron has shrunk the size of the individual pixels on the chip down to a size of 1.75 microns from 2.2 microns. The next step calls for shrinking them even further to 1.4 microns.
Why shrink the pixels? Digital camera manufacturers like their imaging chips to fit into a standard size -- a little less than a half-inch across measured diagonally. It's analogous to Moore's Law, which applies to conventional computer chips: computing power can be doubled at fairly regular intervals as ever smaller transistors are crammed in.
With imaging chips, more pixels crammed into the same space allows for better, higher-resolution pictures.
Building CMOS sensors is a good business for a company like Micron for many reasons, Appleton says. First, the gross margins on the chips are higher. In its most recent quarter, Micron's imaging unit reported gross margins of 44% versus 16% for the memory business.
But at $1.06 billion in sales, memory accounted for 87% of Micron's business, whereas imaging accounted for $159 million, or 13% of sales. But for the first six months of 2006, imaging sales grew by a mind-boggling 190% over the same period in 2005, and unit sales nearly quadrupled.
And the memory business is not for the timid. It's known for violent swings in its pricing environment and razor-thin profit margins. "There are times with memory when we'll see gross margins approach 40 to 50 percent, but there are other times when they're down around 10 or 20 percent," Appleton says. "The imaging business will get more competitive, and it's not going to be a cakewalk, but the gross margins in imaging, at least for us, will be 40 to 50 percent, and the good part of that is that it doesn't look like its going to change much."
Plus there's the added advantage of extending the life of old chip-manufacturing equipment. A factory used to build computer memory chips can, with a little retooling, extend the useful life of the equipment in that plant.
"The average life of that equipment is about three to four years," Appleton says. "Historically at that point we would pull it off the line and sell it for pennies on the dollar. That gear may be a generation or two behind for making memory but it's advanced for building CMOS sensors. And better yet, it's paid for. We can now extend that equipment's lifetime to about five years."
And strategically, sales of CMOS chips can spur sales of other chips, namely computer memory and flash memory. Last year, Micron and Intel (INTC) announced they would team up to sell flash memory chips in a joint venture called IM Flash technologies. Among their customers is Apple Computer (AAPL) which sells the popular iPod nano and iPod shuffle music players.
But photographers also need flash memory cards to store pictures. Micron is acquiring Lexar Media (LEXR), the $852 million vendor of flash memory cards for the consumer and professional photography market. "We think of it as one big ecosystem. We capture data, we move data, and we store data," Appleton says. "That describes what we do with imaging, computer memory and flash memory."