Cornering the Flash Market

Electronic News, March 6, 2000 by Tom Murphy

With large flash suppliers making guaranteed supply deals with giant customers, concern has arisen over whether smaller buyers will be able to find enough of the nonvolatile memory to meet red-hot demand for such consumer goods as MP3 players, digital still cameras and CompactFlash cards.

The concern became more pressing last week as the flash memory supply was further constrained by Advanced Micro Devices Inc.'s (AMD) agreement to supply Cisco Systems Inc. with flash memory devices over the next three years. This pact follows a $400 million flash supply deal AMD made in January with cell phone manufacturer Samsung Electronics and is similar to a $1.5 billion agreement that Intel Corp. made with another cell phone manufacturer, Ericsson.

The supply situation wonat be improving for small companies in the coming months. An AMD spokeswoman said similar arrangements are pending with other OEMs as they vie for a guaranteed supply of flash in a capacity constrained market.

These agreements are putting the squeeze on smaller buyers, said Jesse Huffman, senior analyst for Cahners In-Stat Group, Scottsdale, Ariz.

aI donat know what buying power a company like S3 Inc. (with its Diamond division supplying Rio MP3 players) has compared to a Cisco,a? Huffman said. aAll the set-top boxes of the world need flash. All the cell phones need flash. All of these PDAs (personal digital assistants) need flash. There are some big markets there. You would think youad need some more of these alliances. What happens is the top-tier guys with the deep pockets in the big markets can wield a lot of power and then the second- and third-tier users are going to have a hard time getting product.a?

Those smaller manufacturers may only be able to ship as many products as their flash supply allows. However, the demand for products using flash memory will create a selleras market for the goods.

aUnder normal conditions, these guys might struggle,a? Huffman said. aBut the demand is so hot, I think each one of these guys is going to win. The only question is, how much are they going to win?a?

This year many flash manufacturers plan on expanding capacity up to 30 to 40 percent over 1999 levels, Huffman said. But collectively, it may not be enough. aItall be good news for a while for the flash vendors,a? he said.

Recognizing the severity of the flash shortage, small start-up companiesaincluding digital film card maker Lexar Mediaaalso are entering into guaranteed flash supply deals.

aWe inked a strategic agreement with one of the largest flash manufacturers that gives us access to 100 percent of their flash manufacturing capacity,a? a Lexar Media spokesman said. aWe have enough flash for our needs.a?

S3 last Thursday said it has an agreement with SanDisk Corp. to develop storage solutions for next-generation products. SanDisk is a CompactFlash manufacturer.

An AMD spokeswoman said the size of a company is not important when it comes to securing flash capacity. The agreements are aimed at providing all of its customers with enough flash while it expands capacity to meet growing demand, she said. The agreements also give the company enough cash up front to increase its fab capacity. Huffman said the flash shortage will last into 2001.

Cisco plans to use flash to store sophisticated code and data for its networking systems, according to AMD.

aWe are privileged and pleased to have been chosen by the worldwide leader in the networking industry to provide the flash memory devices for products that enable the Internet information highway,a? said Walid Maghribi, vice president of AMDas Memory Group.