It is NOT new for Apple to splash out money on Flash memory chips, having once acquired what was thought to be some 40% of the world’s NAND Flash output in the early days of the iPod, back in 2005.
At that time Apple publicly snubbed Samsung which had hoped to grab all of the business for itself, and spread a prepayment $1.25 billion across Hynix, Intel, Micron, Samsung Electronics and Toshiba to secure its supply of NAND flash memory through 2010 with some $500 million at the time going to the Intel Micron new joint venture.
2010 is getting close, and while Apple might usually go to the trouble of negotiating such critical supply lines early in a cycle, the price of NAND flash has been low so there was no need. It has however gone up by 50% on the spot market this year and Apple has now reached into its $30 billion coffers to lay out $500 million in prepayments with Toshiba. There is every chance that similar deals will also be cut with other Flash suppliers by Apple over the coming months.
‘The NAND flash market has now begun to stabilize and we expect it to move to a slight demand imbalance,’ said Apple Chief Operating Officer Tim Cook in Apple’s Tuesday earnings conference call. “In terms of the Toshiba prebuy, we did a long-term supply agreement with Toshiba, as a part of that, as a part of the terms and conditions, we paid them $500 million,” Cook said. “We view flash as a very key component for us because we use it in so many of our products and also we’re a reasonable percentage of users of flash on a worldwide basis.’
Having that cash surplus has almost certainly meant that Apple can secure rock bottom pricing for the foreseeable future on flash, giving it a price (or profit) edge in both the MP3 and handset markets, which only Nokia and Samsung are likely to be able to match. Samsung is the world’s largest NAND Flash producer, and both Samsung and Nokia use a huge amount of flash as number 1 and 2 handset makers globally with around 60% market share between them. In flash Toshiba is the second largest and shares manufacturing capabilities with America’s SanDisk.
Back in 2005 it was the deal from Apple that stimulated Intel’s shift into NAND. It had been making NOR flash for some time, but in a deal with Micron to create IM Flash Technologies, it pooled resources while the latter acquired Lexar (a designer of Flash controller technology with a number of key patents). They each spent $1.2 billion kicking off the venture and were immediately rewarded by a contract from Apple. Intel subsequently merged its NOR flash business with that of ST Micro with the intention of pushing the combined business at ST’s partner Hynix.
NAND flash is cheaper to make than NOR flash and is best used on sequential file delivery like large video or music files.
Interestingly Apple is being sued by a Flash patent specialist (see separate story this issue) for using Samsung Flash memories which the company, BTG International, says use its patents. Perhaps that’s another reason for Apple to fill the pockets of arch rival Toshiba rather than Samsung.