In football, often it's not the team that prepares the best, or the team that has the best athletes that wins the game. Instead, it's the team that can most effectively adjust to the other team's strategy that is ahead when time expires.
Likewise, leadership of large companies must adapt to their markets and what their competition throws at them. Micron (MU) is in the middle of one of these adaptations. The bankruptcy of competitor Elpida was greeted with enthusiasm by analysts and investors. Elpida's bankruptcy would most likely mean that one of its major semiconductor competitors, like Samsung, Hynix or Micron would purchase the all-important fabrication centers, and the consolidation would help producers of DRAM push prices up.
Indeed, further consolidation in DRAM producers seems a likely bet. Micron is still playing from the same playbook that late CEO Steve Appleton engineered - bank money and secure cheap financing when times are good, and buy up production capacity when times are bad. In a commodity market where economies of scale are the key to more profitability in good times and less losses in bad times, this strategy makes sense.
However, here the lack of leadership of Steve Appleton is keenly felt. On Mark Durcan's first quarterly earnings call, two things were clear: first, that he was still playing from Appleton's playbook. And second, that he was still learning the ropes of his new role. Perhaps Tim Cook from Apple (AAPL) might have some advice for Durcan on taking over for a brilliant, dynamic, and tenured leader. Or perhaps Steve Balmer from Microsoft (MSFT), several years past the transition from Bill Gates, might have a few suggestions. Regardless from who, Durcan need some help growing into the leader Micron needs.
Leading Micron is akin to sailing through troubled waters - certainly there are times of calm waters and great profits. But more frequently, there is choppy water, sometimes devolving into storms, like last quarter's $282 million loss. And missing that experienced hand at the helm is especially difficult.
The time is coming for Micron to take a hard look at its industry. As more and more people start substituting smartphones and tablets for desktops and notebooks, demand is shrinking for Microns products. Consider this - an Apple iPhone 4S only had 512 megabytes of RAM. A quick perusal of Best Buy's (BBY) website shows the cheapest models of desktop computers have 2 gigabytes of RAM, and more expensive models have between 6 and 8 gigabytes of RAM. That means a typical smartphone has between one-fourth and one-sixteenth as much RAM as the desktops they're replacing. Similarly, notebooks and laptops typical have 4 gigabytes of RAM.
Tablets won't be DRAM's savior either, despite some predictions. An iPad 3 only has 1 gigabyte of RAM, and Amazon's (AMZN) Kindle Fire also only has 512 gigabytes of RAM. Sure, it would not be hard to see the next generation of tablets might have a little more RAM - but ask yourself, when was the last time your major frustration was that your tablet was not fast or powerful enough?
The answer for most people is that tablets and smart phones are plenty powerful enough. And so, conscious of price, smart phone makers will continue to only reluctantly and slowly increase RAM. And demand for DRAM will fail to rebound, and over capacity will destroy profitability for all of the major DRAM producers.
The sad truth for Micron is that computers are, for most of us, more than powerful enough. They have much more processing power and space than most of us will use. Who's the last person you know who actually filled one of the 300-700 gigabyte hard drives standard on laptops, much less 1 terabyte drives available on some machines? Except for your college-age son, downloading all of the episodes of CBS's (CBS) Big Bang Theory, most people just don't need that much memory.
And just as people are moving from high-powered desktops to low-power smartphones and tablets, they're also moving their storage from their computer to the cloud. And there are several companies vying for that space, like Google (GOOG), Amazon and Microsoft, not to mention dozens of niche players like Carbonite (CARB). All of these players are singing, at least partially, the same song - let us store your data, run your applications, and do everything for you. You don't need a high-powered computer!
The shift from installed programs to cloud-based computing and software as a service also means that, just like DRAM, demand for Micron's NAND memory will also be decreasing. In the short term, the volatility of the market might disguise the trends. But in the long term, the simple truth is that computers have more power and memory than consumers need. And this means Micron's market will slowly, but surely contract.
If Micron continues to follow its current strategy of buying up capacity and purchases Elpida's fabrication plants, it might soon find itself the biggest (or at least second biggest) maker of chips that no one really cares about. Who wants to pay top dollar for the latest and greatest chip, when the last generation (or even three generation ago) chips works just?
The one silver lining is that Hynix, now SK Hynix, might be the next weakest link. Elpida offers the classic trap for a struggling company - a large, flashy, complicated acquisition that will definitely be a game changer. But beneath the glossy exterior, massive complexities regarding integrating Japanese and South Korean personnel, technologies and supply chains lurk. If Hynix pursues Elpida, it would require a miracle to avoid being back in default two years later.
Now is Micron's half-time. Now is the time for Micron to adjust the strategy, to make the mid-course adjustments that will determine whether it manages to dominate its section of the semiconductor space, or whether it simply falls victim to being the most recent victim of consolidation. For me, it's just a matter of time until Micron has to face the music of a market gradually fading away.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.