Demand for Flash Memory to Soar as Phone Makers Play Catch Up with the iPhone

by: Shlomi Cohen

Analysts at Bank of America have examined the telephone market, and came to the conclusion that the moment is near when the term "smart phone" will disappear, because by next year more smart phones will be sold than regular phones. According to Nokia (NYSE:NOK), in 2011 about 65% of the industry's sales will be of telephones up to now called "smart" because they were rare items. Bank of America estimates that the veteran telephone producers, Nokia, Palm (PALM), and RIM (RIMM), will struggle to cope with the competition from the rising stars, Apple and Google (NASDAQ:GOOG).

It's exactly three years since Apple (NASDAQ:AAPL) founder and CEO Steve Jobs pulled the first iPhone from his jeans pocket, six months before the actual launch. He was greeted by considerable cynicism, chiefly from market leader Nokia. Now, the industry is falling into line with him, copying all his innovations --- from design, to the screen, to the applications. For Nokia, it may already be too late, because sometimes one mistake by a gorilla causes irreparable damage. Nokia can look at what happened to Microsoft (NASDAQ:MSFT) in the web search field , which derided newcomer Google, to gain an idea of what is liable to happen within a few years.

The established telephone makers lost two precious years, since the first iPhone was announced in January 2007, before they started seriously designing devices of their own that could challenge the dizzying success of the iPhone. It also took them time to understand that users do almost everything with their iPhones, but talk on them less.

Another company suffering from the revolution is AT&T (NYSE:T), which won exclusivity in the US, but whose wireless network is failing to keep up with the video traffic generated by iPhone users. It is having to invest mightily in reinforcing the network.

Among the Israeli companies that are befitting from the huge investment in networks resulting from the iPhone revoloution is Ceragon Networks Ltd. (Nasdaq: CRNT).

As far as the iPhone's components are concerned, I must give an honorable mention to SanDisk (SNDK) founder and CEO Dr. Eli Harari, who told me two years ago, "Pay attention to the iPhone revolution, because it's tremendous, and, among other things, it will contribute hugely to the flash industry."

In retrospect, I think that SanDisk almost collapsed in the crisis because Harari pinned so much on the revolution he correctly foresaw, and therefore invested heavily in new product lines, without realizing that Apple's competitors, chiefly Nokia, still did not see the iPhone as a strategic threat. As far as they were concerned, it was another prestigious, uneconomical gadget from the house of Steve Jobs that would go out of style.

At the time, Jobs thought exactly like Harari about the great future for flash components in telephones, and he rushed around with checks of hundreds of millions of dollars to all the manufacturers so that they would invest in production lines. The first iPhone came out in the summer of 2007 with built-in flash storage capacity of 4 gigabytes. In the latest model, this has risen to 32 gigabytes. Rumor has it that Apple's first surfing computer, the Tablet, will be launched next Spring with built-in storage capacity of 64 gigabytes, and perhaps with a special slot for expanding the memory with flash cards. This is a huge market for SanDisk. So far, Apple has insisted on not equipping iPhones with such slots, because it makes a great deal on the built-in flash.

If smart phones will cross the 50% line next year, while investment in flash production lines has dropped almost to nothing in the crisis, I reckon that Steve Jobs must be worried about a shortage and the end of flash components at cost price, or even at loss-making prices for the manufacturer. On the other hand, Harari is smiling, because in a shortage prices take off, or at least stabilize, as has happened in the fourth quarter for the first time in many years, so that SanDisk's profit margins will soar, among other things from royalties. The last stain left on SanDisk's stock from the crisis period was removed on Friday, when Nasdaq announced that SanDisk would be restored to the Nasdaq 100 list, a year after it was thrown off it.

Published by Globes [online], Israel business news - - on November 17, 2009; Reprinted on Seeking Alpha with permission

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009