iPhone’s Impact

My working plan for this blog entry had been to take a comprehensive look at the iPhone’s impact on Sandisk. It was to have started with NAND supply, transition to potential competing products, and end with speculation about the iPhone’s impact on Sandisk product strategy.

Have decided to just skim over the first two topics and concentrate on product strategy, particularly Sandisk’s Sansa View video player, which was recently delayed. The Sansa View would have been competing directly against Apple’s video iPod, which I expect to be reinvigorated with iPhone technology later this year.

Much has been written recently about the iPhone’s impact on NAND supply dynamics. No need to rehash. Basically, the iPhone has turned out to be a very hot product and at 4GB and 8GB, per iPhone, it is soaking up enough NAND to single-handedly tighten up the NAND market.

This is, of course, good news for Sandisk, even though Sandisk doesn’t supply NAND chips for the iPhone. Tight NAND supply means higher prices in the flash market. Higher prices there, in turn, mean higher gross margins for Sandisk on the products it sells and increased royalties from its licensees.

Rather than selling NAND chips, Sandisk only sells higher margin products, which incorporate NAND. Sandisk could sell chips, since the demand is there, especially at times like these, but it apparently prefers not to.

In fact, Apple approached Sandisk for NAND supply. According to Sandisk CEO Eli Harari, when Apple asked for chips, Sandisk answered: “No, we’d rather sell MP3 players. Why would we want to sell components?”

Later Eli was asked if Sandisk would enter the handset business itself since the MP3 market appears to be going into the handset business. His response:

“First of all, I do believe that the handset will become the convergent device for MP3s, for camera, for video, for TV and so on. We are going to enable a lot of that through the storage. We are going to be the Tivo in the handsets or the MP3 in the handsets. ….We are a very trusted supplier to Nokia, to Sony-Ericsson, to Motorola.

So it is a question, then, of do we need to be there [produce a converged device]? Apple needs to be there, because they see that it [device convergence] is going to go in the handsets. We don’t need to be there. I will be very happy selling all day long to every one of these MP3 slots in the handsets.

But eventually, handsets, 5 years from now, will be very different than they are today. They could be totally driven by WiFi networks and not what we see today. In that case, we may just be in it [have a converged device] without even realizing it.” [from the Q&A in Eli’s Stanford University talk October 26, 2006]

So, in a nutshell: Eli believes in the convergent device; won’t enter the market with his own handset any time soon; plans on selling a ton of flash products enabling competing devices; and sees the market evolving towards Sandisk’s strengths (where Sandisk’s product evolution is headed.)

All of this has seemed a bit hypothetical until the iPhone arrived. Seems the future arrived earlier than expected.

This week I made a field trip an Apple Store to see what all the fuss was about. The iPhone is a remarkable device. Many have called it revolutionary. Wouldn’t disagree. This may be the first converged device to get it right.

Walked in and picked up a demo unit. The iPhone is remarkably intuitive. Surfed around the internet. Checked out the address book and the calendar, zooming in and out as needed and typing as required. Felt right at home on my first try. All around me, others playing with iPhones were smiling.

Apple’s competition must be as stunned as its customers are thrilled. The iPhone is great.

Sandisk doesn’t make phones at this point, so what’s the issue?

The challenge is to Sandisk’s Sansa line, especially the Sansa View.

Sandisk has recently been trumpeting its strengths as an up and coming consumer electronics powerhouse. For a while, it looked as if the Sansa View, Sandisk’s flash-based media player, would be one of this year’s flagship products. With a 4 inch wide screen, removable battery, storage expandable up to 16 GB, and support for a wide array of video formats, it out-featured Apple’s video iPod.

It was announced at the 2007 CES in January with great fanfare and a projected release date in March. Time passed & its release was pushed to late May. In June it was put on ice. Current release date is sometime in 2008. What happened?

Don’t think it just coincidence that the Sansa was sent off for major redesign the same month that the iPhone was launched. Suspect that once Sandisk realized the impact that the iPhone would have, they beat a hasty retreat. The problem for the Sansa View is more than buggy software or battery performance. It is going to have to compete with the next-generation video iPod.

Sometime this fall, Apple will likely refresh its iPod line with iPhone technology. Probably starting with its video iPod. Goodbye scroll wheel; hello multi-touch screen. The video iPod will morph from a souped-up iPod into a stripped down iPhone. Another game entirely.

What makes the iPhone special is its user interface and operating system. Apple has put its Mac OS in a mobile device. In essence, the iPhone is the smallest Apple computer ever built. Most importantly, Apple has figured out how to apply its decades of experience in intuitive user interface technology by using a multi-touch screen with orientation, light and proximity sensors. And– the device is gorgeous.

Luckily, Sandisk isn’t under any pressure. While it is counting its profits from the iPhone-induced tight NAND market, it can tinker at its leisure with the Sansa View.

I believe Sandisk could eventually deliver a successful personal video player, but it is going to be a challenge. Sandisk has the same access as Apple to components and original design manufacturers, but it doesn’t have a time-tested intuitive user interface, or a sophisticated efficient general-purpose operating system.

Although Apple looks wonderfully positioned right now with its iPhone/ iPod product line, it has its own set of strategic issues that may give Sandisk an opening.

Apple has built its business selling premium consumer products. Technological innovations are introduced at the top of product lines and only over time do they work their way down. Typically, Apple maximizes its profits from higher priced full featured products. See no reason why it would be different with the iPhone.

Speculation has already begun as to whether the likely upcoming Apple video iPod with iPhone technology will include Wi-Fi just like the iPhone. Many would love that, including yours truly, but am inclined to think Apple will be more interested in differentiating the iPhone from the video iPod and ensuring that its iPhone customers are locked into service plans with its telecom partners.

Sandisk on the other hand, is under no such pressure. It doesn’t sell phones or service plans. And Sandisk knows its way around Wi-Fi. The Sansa Connect already includes the technology. My hope is that Sandisk makes the effort to include Wi-Fi, web browsing and email in the Sansa View redesign.

If executed well, the Sansa View, if reborn as a Wi-Fi enabled, web-browsing, personal video player, might yet be heralded as a cutting-edge device designed by a innovative company willing to venture where Apple is reluctant to go.

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5 Responses to iPhone’s Impact

  1. iPhone’s Impact

    Great post. Thanks! I’ll add a link to your post.

  2. bob77977 says:

    hi savo,
    what do you think happened with MegaSIM. .
    moran’s big hope and another mystery case.
    faded, or a big surprise to come ?

  3. savolainen says:

    Hey bob77977

    Will try to post more at length in MegaSIM in a few weeks. Believe we are in a wait and see mode right now. Rollout seems to have been delayed over standards issues. Much of which were Sandisk’s making.

    It appears that Sandisk shot itself in the foot or maybe both feet. Probably no lasting damage, but sheesh.

    There were two competing standards for the phone interface for high capacity SIMS: USB and MMC. MegaSIM was designed so that it could work with whichever won out. FLSH and some others were pushing MMC because it could rollout sooner.

    Orange trials for example were based on MMC. Various phones were designed with the technology. Looked like trials would transition smoothly into rollouts with MMC.

    Then Sandisk got involved. This was before the FLSH acquisition. Sandisk didn’t have a high capacity SIM product, so it decided to try to derail the process by claiming at the 11th hour that its patents would be required for folks to use MMC for the high capacity SIMs.

    This PO’d many. The net result of SNDK’s ploy was that support swung to USB which indeed has delayed potential MegaSIM rollouts.

    Then SNDK acquired FLSH and MegaSIM. And now has what might be the best front-running product, but has no where to go, while the competition catches up.

    USB crowned as high speed SIM standard
    http://www.theregister.co.uk/2006/11/22/megasims_to_be_usb/

    Savo

  4. sambatyon says:

    Hi Savo,
    Did you anticipate the IBM anouncement on SSD for blade servers?
    I thought the adoption rate will ramp more slowly first with laptops than desktops
    but now I think SSD will be a big part of their revenue come 2010
    Your thoughts please.

    Sambatyon

  5. savolainen says:

    Hi Sambatyon,

    SSDs for IBM blade servers is an old FLSH story, which goes back at least to 2004 when SSDs were called FFDs. As I recall there was a projection late 2004 that FLSH would sell something like $20M worth to IBM in 2005.

    Both Dell and HP were also blade server players and seemed like prime candidates for design wins. Don’t know if FLSH ever closed any of those deals, but wouldn’t be surprised if they did.

    In the bigger picture, while blade servers are nice, the consumer market for SSDs promises to be a much much much larger market by 2010. The last crazy price drops in NAND accelerated the SSD story. It is a highly elastic market.

    Agree with those saying that within a few years, SSD will be a multi-billion $ market driven by elasticity and MLC. Wouldn’t be particularly surprised if SNDK sold $1B worth of SSDs by 2010. Gartner is thinking that by then SSDs will be a $3B market. Say $1B to Samsung, $1B to Sandisk, $1B to everyone else.

    Savo

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