Intel, Micron Partner to Provide, Apple, Others With Flash Chips

In a move that underscores the growing importance of flash memory chips as consumer electronics devices continue to shrink in size, Intel and Micron Technology announced a joint venture that will create flash chips for the likes of Apple and others.

The two chip makers will contribute up to US$5.2 billion over time to the venture, with each contributing $1.2 billion to start the venture and possible additional investments of $1.4 billion each as needed to grow the operation, which will be 51 percent owned by Micron and 49 percent by Intel.

Manufacturing of the NAND Flash chips will take place at Micron-owned plants in Boise, Idaho; Manassas, Va.; and Lehi, Utah, with the first chips rolling out in early 2006 and manufacturing moving as soon as possible to Intel’s 50 nanometer (nm) technology.

As part of a long-term supply deal, Apple will pay each company $250 million. In return, it will receive a “significant portion” of the joint venture’s flash memory output.

“This strategic relationship positions both Intel and Micron to build on each other’s strengths to become leaders in the fast-growing NAND market,” said Steve Appleton, CEO and president of Micron.

Intel President and CEO Paul Otellini said the partnership puts Intel in the middle of a “fast-growing portion of the flash market segment” and expands its relationship with Apple.

Shrinking and Growing

Flash memory is seen by analysts as becoming more essential for electronics makers as devices shrink in size.

Apple’s new iPod nano and other versions of the iPod use flash technology instead of a small internal hard drive to store and recall digital music. Flash chips are also found in mobile phone handsets, other hand-held devices such as game players, and many consumer electronics items. Flash is also fast becoming the method of choice for fast, removable data backup and storage.

The importance of flash was underscored today when Apple said it would pre-pay as much as $1.25 billion in the next three months in order to ensure a steady stream of flash components, striking deals with Hynix, Samsung Electronics and Toshiba.

“We want to be able to produce as many of our wildly popular iPods as the market demands,”Apple CEO Steve Jobs said in a statement.

While Apple gains a steady, predictable supply of flash chips with its investment in the Micron-Intel tie-up — likely at a predictable price as well, analysts note — Micron was seen by many analysts as a main beneficiary of the partnership by virtue of being given access to the new and growing Intel-Apple relationship.

One clear loser in the deal appeared to be rival flash maker SanDisk, which saw its stock plummet more than 16 percent in early afternoon trading today.

Oppenheimer & Co. analyst Vijay Rakesh said the deal threatens SanDisk because unlike many other flash makers, neither Micron nor Intel pays royalties to SanDisk. Over time, the two competitors will also “increase memory supply and put pricing pressure on SanDisk,” the analyst wrote in a brief.

Partnerships Galore

Intel recognized some time ago that flash would gain in importance and took steps to lock in its place in the market. More than two years ago, Intel invested $450 million in Micron, a move seen at the time as helping to ensure that Intel — which had earlier left the flash memory business to focus on its core business — had constant access to memory chips. The two companies had worked together prior to that investment.

Meanwhile, some analysts saw the move as a vote of confidence in the still-young relationship between Apple and Intel. Apple announced in June that it would drop IBM as its main chip supplier for its Mac brand of desktop, notebook and enterprise computers in favor of market-leading Intel.

Illuminata analyst Gordon Haff said Apple signaled the seismic shift to more flash memory when it announced it would stop making hard-drive-based iPod minis and expand its use of flash memory.

“When you hear that, you can understand how flash is growing in importance for the entire consumer device segment,” he said. “Apple has signaled that this is the path to follow to make devices work and make them small at the same time.”

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