Late last year, Intel got blindsided by the herky-jerky flash memory market. Prices plunged so fast that the tech giant couldn’t make money. The unit’s losses hurt Intel’s (INTC) overall margins, prompting CEO Paul Otellini to promise investors he wouldn’t allow storage chips to continue dragging down the company’s profits. The implication: If this rollercoaster gets too scary, we’re getting out of the flash business.
Well, get your barf bags ready, Intel. It looks like things will get scary again.
At least, that’s the strong impression I got last week from Jon Kang, president of Samsung Semiconductor. And he would know. Samsung is the world’s top producer of flash storage, responsible for about 40 percent of all flash sales. That makes Kang more than a passive observer of the flash market’s ups and downs; if prices drop, it’s probably because Samsung (or its nearest rival Toshiba) cranked up production, pumping up the market’s supply of flash.
“I don’t think Intel will want to be in it too long, because they’re not used to this volatile type of business,” he told me during a chat at the Asian History Museum in San Francisco. “I think it definitely will stay volatile.”
There’s good reason for Samsung and its rivals to make a lot of flash chips – the tech industry is hungry for the stuff. From Apple’s (AAPL) iPods and iPhones to new laptops from Hewlett-Packard (HPQ) and Dell (DELL), the major players are increasingly using flash instead of hard drives to store digital information in hot new products. Why? Because unlike hard drives, flash chips are small and have no moving parts, making them an ideal fit for sleek, durable mobile devices.
The main factor keeping flash drives from replacing hard drives more quickly is price. Today you’ll pay several times more for a gigabyte of flash storage. That’s why Samsung, Toshiba and others are spending billions of dollars a year to build out more sophisticated manufacturing centers that pack more, cheaper storage onto the same sized chips. By churning out memory and lowering prices, they’re not only opening up new markets for flash, but also daring smaller players like Intel to take losses as they try to keep up.
Kang is politic about the economics here – it would be unseemly to suggest that his company has much influence over pricing. But at the same time, he looks very relaxed as he recalls how prices dropped by half at the end of 2007, and how they’ll probably drop again late this year. “You’ve got the Intel guys like deer in the headlights – ‘What happened?’ ” he says, smiling. “The reason we feel very good about it is, even though the market today is not very good, if it’s a supply-driven thing, the biggest guy with the largest capacity will eventually win.”
In other words, when prices drop, it hurts top flash producer Samsung less than its foes.
Intel knows this dynamic well. In the market for PC microprocessors, it’s a big player running over smaller rivals. The flash market is a different ride, though – so we’ll see how long Intel executives (and investors) are willing to stay on Samsung’s rollercoaster.