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Sony Could Stoke Flash Fire

Alexei Oreskovic

Sony(SNE) could be the next growth engine for the red-hot market for flash memory. On Monday, South Korea's Samsung Electronics disclosed that it may sell flash chips to the consumer electronics giant, as well as other "major companies."

The announcement followed reports in the Korean press that Samsung, the world's No. 1 memory chip maker, was nearing a deal to supply Sony with flash chips for a new line of MP3 players in the first half of next year. According to the report, the deal would exceed the deal Samsung signed last month with Apple Computer(AAPL).

In November, Apple announced that it was preordering $1.25 billion worth of flash chips from a variety of suppliers, including Samsung, Toshiba and Hynix (it's unclear what portion of the deal Samsung has). At the same time, Intel(INTC) and Micron(MU) announced that they were forming a joint venture to produce flash memory chips, with a $500 million order from Apple already on the books.

With Apple's iPod in hot demand, the computer maker is moving to ensure that it has a reliable supply of the memory used in its portable music players. While earlier versions of the iPod stored an individual's music on miniature hard drives, newer versions such as the iPod nano rely on flash memory chips.

Sony, which invented the portable music category with its iconic Walkman, has been frustrated in its efforts to make money in the growing market for digital MP3 players. The company has a line of MP3 players graced with the Walkman brand, but the products have yet to capture consumers' attention the way Apple's iPods have. The news about the flash memory contract could signal that the company is planning a major push to take on Apple in the MP3 player business.

Samsung Electronics "is currently under consideration to pursue a contract to supply NAND flash memory chips to major companies, including Sony; however nothing concrete has been decided," read the statement by Samsung. The company said it would issue a statement when a detailed decision is made.

Representatives from Sony and Samsung were unavailable for comment.

In addition to MP3 players, flash chips are used to store data in digital cameras and cell phones. Executives at many chip companies expect flash to increasingly make its way into notebook PCs as well. According to recent report by the Semiconductor Industry Association, sales of NAND flash jumped 79% year over year in October. Sales of NOR, a less popular type of flash memory, were down 5% from last October.

A number of chipmakers are ramping up plans to increase their presence in the market for NAND flash memory, which commands higher margins than other types of computer memory, such as DRAM. Spansion(SPSN), the recently spun-off joint venture between Advanced Micro Devices(AMD) and Fujitsu, plans to roll out a new type of flash memory next year that will provide the operation an entree into the booming NAND business.

With so many semiconductor companies moving into the flash market, some analysts and investors have worried that a supply glut could lead to a decline in prices similar to that which has plagued the DRAM memory business. Last week, Micron noted that DRAM prices fell 15% in its most recently completed quarter.

But pre-orders by companies like Apple, and potentially Sony, suggest that even with the increasing output of flash chips slated to hit the market, consumer electronic companies expect supplies to remain tight for the foreseeable future -- a situation that could help keep flash prices stable.