Apple cuts $500 million flash memory deal

Apple said Tuesday that it has made a $500 million prepayment to Toshiba for flash memory chips and indicated the market is stabilizing.

Apple COO Tim Cook says the flash memory market is stabilizing.

(Credit: Apple)

"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. (The call is available as an audio Webcast on Apple's Web site.) The news was reported earlier by Reuters.

"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."

NAND flash is used for data storage in a variety of consumer products including digital media players and smartphones, such as the iPod and iPhone, respectively. For the last two years, flash chipmakers such as Japan-based Toshiba and U.S.-based Micron Technology have been reeling from severely depressed flash memory pricing.

Intel, which makes flash chips jointly with Micron, is also seeing a recovery in pricing. "For the year, it's up over 50 percent," said Troy Winslow, marketing manager for the NAND Products Group at Intel, in a phone interview earlier this week. He was speaking about the recovery in flash memory chip prices in the spot market. "That's been very positive for the industry and obviously we have benefited from that. And our business is going very well," he said.

Even with the better spot market pricing for flash memory--which is a boon for manufacturers--this won't necessarily translate into a jump in prices for consumers, according to Avi Cohen, managing partner at Avian Securities. "If the question is--will components (flash chips) cost 50 percent more than they did three months ago? Absolutely not," he said.

[ÆL]

When I went to CES in January, Sandisk was showing off their flash memory, it's nice to see other Technology players coming on board with this technology.

[sting7k]

That's a whole buttload of memory...

[cvaldes1831]

Indeed. iSuppli, with their BOM breakout of the iPhone 3GS, estimates the cost of 16GB of flash memory (NAND, MLC) to be $24, so we're talking enough chips for roughly 20 million units.<br /><br />This is probably a competitive advantage for Apple as they lock in availability with their prepayment; their competitors might end up paying higher prices (especially on the spot market) due to constrained supply.

[cvaldes1831]

Apple doesn't break out sales number of individual iPod models, but in practical terms, this amount of memory might actually cover 100-120 million (or even more?) iPhones and iPods since the shuffles and nanos have much less memory and the lower capacity chips are less expensive per gigabyte anyhow.

[marcusmaedl]

yup, that is a good direction to take. When I compared tow Apple MacBook Airs side by side, one with a hard drive and one with flash, the flash unit performed noticeably faster in opening applications and the like. <br />Volume will bring down prices as always. Thanks Apple for the prepayment. Hope many chip giants smell the opportunity and bring down cost....

[cvaldes1831]

Actually you have it the other way around.<br /><br />Over the past year, NAND pricing has tumbled and this is probably Apple taking advantage of the situation, thinking that the prices has bottomed out for now.

[cvaldes1831]

Also, this appears to be a deal for NAND flash memory, such as the chips they use in iPhones and iPods.<br /><br />This does not appear to be a deal for solid state drives. While SSDs do contain NAND memory chips, SSDs are usually purchased as finished units, not as raw components.

[marcusmaedl]

bottom line is that the $500MM can and likely will be spend on (risk free) capacity increases. Capacity increases in production always yield economy of scale effects. The rest of hte game is simple supply and demand mechanisms. To reach those economy of scale advantages, any manufacturer needs to balance the risk of his investment with the upside of higher revenues and profits. Apple is reducing this risk in exchange for lower prices or guaranteed quantities or fixed prices or whatever their strategic goal might be....

[cvaldes1831]

Don't forget that Toshiba burnt a $20B hole in their pocket trying to topple the NAND champion Samsung. (This ill-timed attempt also put Toshiba's stock in the toilet.)<br /><br />Half a billion is a nice chunk of cash, but Toshiba has a lot farther to go to wipe out that debt.<br /><br />Whatever Apple's strategy is, they took advantage of Toshiba's situation and leveraged it into what I assume to be a killer deal.