Solid State Storage Solutions LLC

Buried on page 27 of SanDisk’s Q2 2007 10Q SEC filing is a short and intriguing paragraph:

“Solid State Storage Solutions LLC . During the second quarter of fiscal 2007, the Company formed a venture with third parties that will license intellectual property. This venture qualifies as a variable interest entity under FIN 46R. The Company is considered the primary beneficiary of this venture, and in accordance with FIN 46R, the Company consolidates this venture in its financial statements. The venture was financed with $10.2 million of initial aggregate capital contributions from the partners. In July 2007, Solid State Storage Solutions LLC invested $42.5 million for the acquisition of intellectual property, with an initial payment of $10.0 million and a liability of $32.5 million which is secured by the intellectual property.” [SanDisk 10Q 08.07.07]

So SanDisk just orchestrated a stealth venture with multiple partners, is licensing IP to this venture for $42.5M and is considered the primary beneficiary. While it would be nice to have more info, don’t think we should hold our breath. Doubt we’ll hear anything more for a while.

msystems had a similar venture by the name of TwinSys. SEC documents revealed that the partner was Toshiba and the business was USB drives, but that was it. No PR was ever forthcoming. TwinSys revenues were mixed into msystems revenues in such a way as to be impossible to track. When asked about TwinSys on conference calls, msystems management either stonewalled, or gave convoluted, less than informative answers.

Suspect Solid State Storage Solutions LLC is a similar stealth venture. At least for now.

So let the Solid-State-Storage-Solutions-LLC guessing games begin

Based on the name and the timing, I’d say the venture revolves around Solid State Disks (SSDs.) Now that SSDs are poised to go mainstream, the time is right to cement alliances and implement strategic planning. Makes a lot of sense to set the dominos up before the market starts the chain of events which will play out over the next several years. SanDisk has a very strong position and means to cash in.

IDC predicts a 71% compound annual growth rate for the SSD market from 2006 through 2010. In 2006 SSD revenues were $373M. IDC predicts $5.4B for 2010.

My guess is that the IP SanDisk licensed to Solid State Storage Solutions is high performance SSD controller technology including IP for multi-bit chips, MLC and up.

Performance is the name of the game for SSDs and controllers are key. Data loss on a PC or blade server can be far more serious than data loss from media content such as photos, audio or video.

MLC NAND is challenging and will require high performance system solutions. x3 and x4 will be even tougher. SanDisk might be years ahead of the competition on the controller front. SanDisk’s Solid State Storage Solutions’ partners might be in line for very very valuable IP for relatively small money. What’s in it for SanDisk?

In the past, SanDisk’s CEO Eli Harari has explained that partnerships and licensees are very important for royalties, but that this is really secondary. The bigger issue is to grow the market and control standards. Eli is committed to open standards, particularly standards which SanDisk drives and controls. SanDisk has executed this stategy for Compact Flash cards, SD cards, MMC cards, and U3, first with msystems and now with Microsoft.

If the pattern holds, SanDisk has a plan to drive and control standards for SSDs, at least for some market segments. For such a strategy, partners are critical. Am not sure what SanDisk has in mind, but suspect the opportunity lies with SSDs as removable cards.

Standards for SSDs as Removable Cards

In January of this year, at CES Eli hinted at the SNDK vision for one branch of SSD evolution– from HDD look alike into something else entirely:

“Also our plan is to take this today from an OEM business bundled in the unit, mostly to corporate America, into a consumer product where you can buy it in a store. It may not look like today’s device. It may look a little bit different, but it will be 64 GB, 128 GB, 256 GB for a very attractive price point for consumers.” [01.08.07 Eli Harari CES. Am posting a full transcript of Eli’s 2007 CES comments in transcripts]

Suspect SNDK is intent on driving a big chunk of the consumer SSD market away from just an OEM model and towards its strengths in consumer retail. Believe SanDisk is thinking consumer device/card along the lines of an ExpressCard.

If this is how things play out, laptops will move to a storage model like today’s digital cameras. A new game entirely. Such upheavals always bring opportunities for new players. Am thinking SanDisk sees this coming and is intent on being a big winner.

Suspect Solid State Storage Solutions is one piece in SanDisk’s SSD master plan. So who are SanDisk’s chosen partners for Solid State Storage Solutions?

SanDisk takes its partnerships seriously. Partners need to have common strategic objectives and be trustworthy. The formula seems to be one part cooperation, one part competition. Quite Japanese in many respects.

Likely candidates would seem to be selected NAND players such as Toshiba and/or Hynix and/or Intel, consumer electronics companies such as Dell and/or Sony, or, as some are speculating, a hard disk drive player like Seagate which has a lot of history with SanDisk.

Personally, think Seagate the least likely.

Al and the Snakes

The key guy in the SanDisk/Seagate relationship was legendary Seagate founder Al Shugart, Silicon Valley icon and all round good guy. From what I can tell he made it to the top without mortgaging his soul. He seems to have maintained his sense of humor through most trying times. The acid test, if there is one.

Al was the kind of guy who ran his dog for Congress to make the point that government can be rather ineffective. He was also a visionary when it came to tech trends. Way back in 1993, Al had the good sense to invest $30M of Seagate funds in a struggling flash memory company– SanDisk (SunDisk at the time.)

1993 was a tough time for SanDisk. Starved for capital, and burning cash, SanDisk had the products and the vision, but the market hadn’t caught up yet. Seagate’s $30M gave SanDisk the three years of breathing room it needed. Without Al’s help, am not sure SanDisk would have survived.

Al was a smart guy and could read the writing on the wall. Am sure he considered the $30M a kind of insurance policy. Disk drives were king, but he foresaw that the day would come when solid state memory would have its day. For $30M he had his company covered, by teaming up early with the leaders in solid state storage. In 1993 Seagate CEO Al Shugart joined SanDisk’s board.

Today with flash memory threatening segments of the the hard drive market, Seagate should be sitting pretty. As it is, they are on the outside looking in. What happened between then and now?

In July 1998, Seagate tossed Al Shugart and his SanDisk insurance policy overboard.

Current Seagate management appears to have convinced the Seagate Board that Shugart had to go. Once that was done, the coast was clear to take Seagate private and put lots of money in certain people’s pockets. Which is what happened in March 2000.

As part of this plan, Seagate sold off all of its 12M+ SanDisk shares in a series of open-market transactions and one private transaction.

To my knowledge, SanDisk has never publicly commented on these goings-on, but we can guess how they felt about it. Actions speak volumes. SanDisk stood by their guy.

Al was sitting on SanDisk’s board before he was dumped by Seagate. Al was sitting on SanDisk’s board after he was dumped. SanDisk simply changed his title to independent board member. Al remained on the SanDisk board until shortly before he died this last December at age 76.

Handicapping the Potential Partners

Am inclined to think that the most likely SanDisk partners in the Solid State Storage Solutions venture are NAND manufacturers. If the IP licensed is SSD controller technology, the companies with the most to gain are NAND manufacturers. With the right controllers optimized for their own NAND, they are wonderfully positioned for SSDs.

If SanDisk wants to grow the SSD market, drive its chosen standard, and collect significant royalties, best to team up with those trustworthy companies who can push a lot of product, in other words, selected NAND manufacturers.

Of the NAND players we can probably eliminate Samsung and Micron since they wear the black hats, which leaves Toshiba, Hynix and maybe Intel. Toshiba’s the most likely. Then probably Hynix and Intel, probably in that order.

SanDisk’s most important partnership is already with Toshiba. The two companies have built an excellent relationship since 1997 developing and manufacturing NAND chips. They have already successfully worked together establishing the SD card standard, along with Matsushita (Panasonic.)

Toshiba is also a laptop manufacturer and thus in position to pull for a new SSD standard and include card slots as required from that angle. In addition since Toshiba and SanDisk share the same NAND, jointly produced, SanDisk’s controller expertise is a perfect Toshiba fit, for MLC and beyond.

Back in March Hynix and SanDisk signed a memorandum of understanding that outlines a joint venture contemplated between the two companies which will manufacture memory components and sell NAND memory system solutions. If this JV moves forward and I suspect it will, SanDisk’s controller expertise is once again a perfect fit, for MLC and beyond.

If one of those NAND memory system solutions is SSDs, we’ve got a match. On the other hand, am not sure how interested Hynix is in retail which is the direction SanDisk may want to go. Intel on the other hand is both interested in SSDs and retail.

Also Intel would be a good partner for pushing a new standard. The outstanding question to my mind is whether Intel and Micron are too entangled. If so, SanDisk might be inclined to pass.

The other candidates are consumer electronics companies: Sony and Dell. Probably in that order. Sony and SanDisk have worked together on Sony’s memory stick. Sony understands the importance of standards. Sony also has expertise in semiconductors and has established itself as a player in the card market albeit without its own fab. Sony would make a good partner.

Dell and SanDisk/msystems have been working together for years. If SSDs go consumer in a big way, Dell might have aspirations to leverage its PC market share in new and interesting directions.

Regardless of who SanDisk’s specific partners are for Solid State Storage Solutions LLC, don’t see any reason why other interested parties wouldn’t jump on the bandwagon further down the line. This SSD story is only in its first chapter. Should be a fascinating run through 2010 whatever Solid State Storage Solutions LLC is all about.

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6 Responses to Solid State Storage Solutions LLC

  1. Poofypuppy says:

    Hi Savo,

    Excellent article, thanks for all the homework you must have done on both the LLC and Al Shugart. One would think that Eli identified himself pretty closely with Al (they both were founders, CEOs and Chairmen of their respective industry-leading storage companies). It’s amazing to think that Seagate’s $30 million investment (for a 40% stake in SanDisk) would be worth billions of dollars today if Seagate had held onto those shares… can someone say a loud “oops”?

    Not sure if it’s just me, but I find some of the latest comments by Seagate CEO Bill Watkins and its other execs to be heavily flavored with “Don’t forget us, remember we’re still the king of the storage market and we’re the ones who will set the pace as to when and how important flash memory will be.” Given recent comments from Josh Tinker of Seagate (http://www.betanews.com/article/Seagate_SolidState_Disks_Will_Never_Replace_Magnetic_Storage/1187977915), it appears their position is that spinning HDD will always be the main thing but that flash memory will play a role in hybrid drives. Seagate sound like an aging lion king that keeps roaring loudly to prove it should still rule (or at least co-rule) the pride. This is almost validation that a changing of the guard is on the horizon.

    Regards,
    poofy

  2. savolainen says:

    Hi Poofy,

    I found the Seagate saga with Al Shugart very interesting and very relevant. On many levels.

    Had been digging around for a while and then the pieces fell into place when I realized that Seagate had it all and then just chucked it along with the vision guy for the quick and big $$$. Am somewhat surprised that this Seagate history hasn’t been mentioned anywhere now that Seagate is getting ready to “leap into the flash-drive arena” as the Wall Street Journal put in on 23 August.

    The Seagate SNDK opportunity seems to be a screw-up on the order of Kodak.

    Check out this PR from 1992 for what might have been:

    “Seagate & Sundisk in storage dev’t alliance – Seagate Technology Inc and Sundisk Corp. to develop solid state mass storage products
    Newsbytes News Network, Nov 16, 1992 by Ian Stokell
    Seagate & Sundisk In Storage Dev’t Alliance 11/16/92 LAS VEGAS, NEVADA, U.S.A., 1992 NOV 16 (NB) — Hoping to increase their respective shares in the storage devices market for mobile and portable computing, Seagate Technology and Sundisk Corp., have signed a letter of intent to form a “product and technology development alliance focusing on the design, manufacture, marketing and sale of solid-state mass storage products.”
    http://findarticles.com/p/articles/mi_m0NEW/is_1992_Nov_16/ai_13070079

    It will be interesting to see what Seagate has in mind now. Suspect they are thinking Micron. Would fit. Either as a partnership or something more. In the whole lot more department, one not entirely implausible scenario: If MU were to be taken private per some recent rumors (say by Seagate buddies Silver Lake Partners & shark-like friends), MU’s NAND business could be carved off and delivered to Seagate. Seagate would get lots of congratulatory headlines and a short term boost. And lots of $$ would go into a few pockets. Deja Vu.

    Long term Seagate/MU NAND would still have to execute. There-in would lie the problem.

    This week, am thinking of more on TSEM and more on the GooglePhone (not related). We shall see.

    Best,
    Savo

  3. flashwave2000 says:

    hi savo,
    i stumbled accross this podcast (link below) with an Intel “Fellow” regarding NAND Flash and Intel’s work in that area. perhaps you can explain what he means about the standardization.
    thanks
    gal2k
    http://www.podtech.net/home/4532/advances-in-nonvolatile-memory-intel-chip-chat-episode-17

  4. Chvoja says:

    Hi Savo,
    on one message board I saw mentioning new SNDK patent concerning controlers for MLC SSD. Do you think the MCL SSD could be here really soon?
    http://appft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=3&f=G&l=50&co1=AND&d=PG01&s1=sandisk&OS=sandisk&RS=sandisk
    Thanks
    Chvoja

  5. medda says:

    can you email me your phone number – thanks

  6. DAVID Harris says:

    Savo, Like I said in May, I believe Eli has a great hand this qtr. I am not quite as technical as you guys are, but I do watch the body language. I think we have a bright future. Thank you for all you do. David

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