Demand Concerns Threaten a Flash Fizzle

With Apple(AAPL Quote) iPod's white earphones such a common sight on city streets, there's no doubt that flash memory is hot.

Consumers can't seem to get enough, as they increasingly turn to digital gadgets such as MP3 players, cameras and cell phones.

But as strong as this demand is, it may not be enough to soak up all the flash memory chips coming to market. After the recent announcement by a few companies that they would aggressively cut prices, some investors are wondering whether the flash market's stellar growth is set to slow down.

The latest sales figures from the big flash-makers hardly suggest waning demand. Hynix Semiconductor reported that its fourth-quarter profit quadrupled thanks to flash chip sales, and SanDisk(SNDK Quote) saw a 37% year-over-year jump in its fourth-quarter sales.

In commodity markets, today's demand can quickly become tomorrow's supply glut. And flash memory, despite its attractive profit margins, is at heart a commodity business.

In fact, many of the big flash memory makers are also major producers of DRAM memory -- the textbook semiconductor commodity known for its wild price swings and volatility. DRAM prices are just now beginning to recover from a steep decline caused by overcapacity of the chips.

"You've got the same players in DRAM as in NAND [flash], and they're playing by the same set of rules," says Semico Research analyst Jim Handy.

In a conference call after the release of its earnings report Thursday, SanDisk CEO Eli Harari detailed the company's plan to sharply cut flash prices in the current quarter.

According to Harari, the idea is to stoke demand for higher-capacity flash chips that store gigabytes, rather than megabytes, of data. But he said that failure to stimulate demand for the higher-end products could cause problems.

"This move is to really stimulate new demand for all suppliers, so that the new capacity coming on board does not become excess capacity," said Harari.