Apple plans to buy 40% of Samsung

If five years ago you had said memory-chip companies would today be wooing Apple Computer as a marquee customer, you would have been laughed at. No more, thanks to the iPod.

Apple is planning to buy as much as 40 per cent of Samsung's entire flash memory output in the second half of 2005, according to research firm iSuppli.

Apple's success with the flash-based iPod Shuffle has prompted South Korea's Samsung to offer Apple a deep discount and be willing to dedicate 40% of its flash-memory manufacturing capacity to seal the deal. NAND-type flash is used primarily to store data and is different from NOR-type flash, used mostly in wireless phones and dominated by companies like Intel and Spansion, a unit of Advanced Micro Devices(AMD).

The most likely reason that Apple would want to boost its buying of NAND flash is for a new version of the iPod. One of the biggest criticisms of the iPod Shuffle, successful as it has been, is that it doesn't have a display screen that lets users see what song is playing.

A more expensive player using flash memory boasting capacities of 2 gigabytes to 4 gigabytes -- and which includes a display screen -- might make sense from a cost standpoint. The Shuffle now comes in two models, with 500 megabytes of memory for $99 and with 1 gigabyte for $129, and it's too early to tell how much more expensive it would be with the additional memory.

Or Apple might simply revise its iPod Mini line in favor of a flash-based model. Doing so has many technical advantages, says Nam Hyung Kim, analyst with iSuppli. Flash chips would allow the player to be smaller. And without the hard drive it uses now, the iPod Mini would be more resistant to damage from being dropped, as flash chips have no moving parts. Finally, its batteries would last a lot longer. "Hard drives consume power at a rate that's about 30 times that of flash," he says. "There's simply no comparison between them in terms of power efficiency."

Such a deal would also be great for Samsung. Kim reckons that for the first half of the year, the Korean company moved about $2.45 billion worth of flash chips, at an operating margin of about 40%. "That means they have room to drop the price a little for Apple if they want to," he says. Samsung may even have promised Apple to match prices on hard drives. Toshiba and Hitachi have been Apple's main hard drive suppliers for iPods over the years.

Another surprise could be in the offing. "The Shuffle has been a pretty big hit," Bajarin says. "There's a perception that a 1-gigabyte player is a bit small, and so Apple has to be looking at a higher-density flash-based player. But it's really hard to anticipate Apple's actions. They may be using all this flash memory for something else." Something else that will make waves in the memory-chip business most likely.