Everyman’s Apple

In January of this year at CES, Eli Harari declared that the most important development for SanDisk in 2006 was SanDisk’s mobile business and how it was taking off. Couldn’t agree more. See “Mother of All Markets.”

Then, surprisingly, Eli noted that the second most important development in 2006 was the emergence of SanDisk’s Sansa audio player. Must admit that I really haven’t taken the Sansas all that seriously.

I recently (finally) noticed/saw the Sansa revenue graphic below [cropped for legibility] from this year’s analyst day, and decided it was time to take a more in-depth look at SanDisk’s audio/ video business. Hence this post.

digital-audio.jpg

The first thing that caught my eye was the $275M± total digital audio revenues for 2006. $275M is real $$$. The 75% 2005/06 YoY Sansa revenue growth is also rather remarkable, especially considering this product was only introduced in October 2004.

Below is another graphic from SanDisk’s 2007 analyst day showing 2006 Flash-MP3 units, US market share. Between late 2004 and the end of 2006 SanDisk came from nowhere to jump over Creative Labs, Samsung and Sony to secure the #2 position.

usmarketshare.jpg

Its worth noting that the ratio of the difference between the SanDisk Sansa and the Apple iPod is roughly equivalent to the ratio of difference between SanDisk and the next player. SanDisk has secured the number two position, as the iPod alternative.

So how did SanDisk take its 14% market share in such a short time?

The answer is vertical integration and channel strength. Best costs and channel strength go a long way in the consumer electronics business. This is not lost on SanDisk which sees opportunity knocking.

SanDisk’s Consumer Electronics Strategy

SanDisk sees itself gradually over time, transforming from a semiconductor-based company, with a specialization in flash storage, into a broad-based global consumer electronics company, with a specialization in flash storage.

The key, or cornerstone, of this strategy is best-cost captive memory supply. As more consumer devices depend on more and lower cost solid state storage, SanDisk has more opportunities to leverage its competitive NAND advantage.

Hence SanDisk needs to continue to focus on its flash memory business, which in turn will create new end markets and product opportunities that will consume ever-larger quantities of SanDisk NAND flash memory in SanDisk products.

SanDisk is trying to take advantage of opportunities offered. With over 200,000 storefronts worldwide, lowest cost flash memory supply, and an ever-strengthening brand, SanDisk is in position to capitalize on the solid state memory revolution in consumer electronics. SanDisk would be a fool not to try.

As Eli put it in this year’s Analyst Day:

Let me say, we sold last year if you added up the numbers on the chart, Sanjay’s chart, about 150M cards last year. Most of those had the SanDisk brand on them. And most of those, people took [the card] out of the, whatever it is, and saw “SanDisk.”

We didn’t have to say “SanDisk Inside.” There really is no semiconductor company today that has the ability to sell their product with their brand in 200,000 stores worldwide and sells 150M of them last year, and that was double what we did before. And we are pretty bullish about our ability to grow that number. Frankly, I have been saying 5 years from now, we could well be selling 1B cards per year. If it is 700M, I will take that as well.

But with that kind of number with your brand, if you don’t take advantage of that and transition the company to really take advantage a unique force then you deserve to be catagorized as maybe a just DRAM-commodity- supplier-lite. OK?…

The Apple model is not a bad model, as far as to where over time what we can strive to. Apple I would argue has a severe disadvantage that they are not as vertically integrated as we are. Long term at least on sub $100 player market, or sub $30 player market which eventually will be a huge market, that they may play at a significant disadvantage compared to us.

Right before our eyes, Apple has transformed itself from a computer company into a consumer electronics company. SanDisk hopes to do the same thing, albeit from a different angle, leveraging its semiconductor strengths.

Apple’s iPod & SanDisk’s Sansa

Apple’s iPod was introduced in 2001. It has gone on to revolutionize the music business. The first iPods were all hard disk-based. Then in 2005 the flash-based shuffle and the flash-based nano were introduced. The flash-based iPod Nano has gone on to become the iPod of choice.

Today if folks want an alternative to the iPod nano where are they to turn?

SanDisk has positioned the Sansa perfectly as the iPod nano alternative. Time will tell how far SanDisk can ride this. Could be quite a ways. The success of the Sansa product line shows how effective SanDisk’s consumer electronics strategy can be when the stars are aligned.

Price/cost is critical in consumer electronics, and SanDisk has the competitive edge with the Sansa.

iSuppli did an iPod Nano teardown analysis on September 19. For the 8GB iPod Nano NAND the direct material cost for the flash memory accounted for $48 out of a total material cost of $82.85. In other words, the flash memory purportedly accounted for 58% of the direct material iPod cost.

Although Apple squeezes its NAND suppliers, it will never get down to SanDisk’s NAND costs. All things being equal (which they never are), that $82.85 would probably translate to something like $68 or less for SanDisk thanks to in-house NAND supply.

SanDisk has taken advantage of its lower costs to either undercut Apple on retail price, or add more features and storage capacity at the same price.

Bumps in the Road

At CES this year, SanDisk made lots of noise about switching from a “fast follower to a more proactive stance in product offerings.” Rough translation: Instead of copying Apple ASAP, SanDisk wanted to one up Apple. Beat them to market with better stuff.

Can’t fault SanDisk for trying, but to date the results are nothing to boast about. Early this year, SanDisk was on the verge of rolling out a personal digital video player before Apple.

The Sansa View, was slated to have been one of this year’s flagship products. It was announced at the 2007 CES with great fanfare and a projected release date in March. Time passed and its release was pushed to late May. In June it was put on ice.

As discussed, the Sansa View 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, it beat a hasty retreat.

The problem, now realized, was that Apple changed the game by rolling out a personal digital video player, the iPod touch, based on iPhone technology. The digital video player morphed from a souped-up iPod into a stripped down iPhone, or handheld computer. Another game entirely.

It will be interesting to see how SanDisk deals with this strategically. My guess is that sometime in 2008, we’ll see a somewhat comparable WiFi-enabled SanDisk video product based on the Linux OS. My hope is that SanDisk will adopt at least some of the Google mobile platform, but that might not work out. We shall see.

At the same time the iPod touch was released, Apple refreshed its flash-based nano line adding video functionality.

SanDisk has kept pace by giving its comparable Sansas video functionality and renaming them Sansa Views. See photos below. Note that the photos are approximately 85% of actual size.

viewipodtouch.jpg
viewnano.jpg

The Sansa Connect WiFi MP3 player is another SanDisk consumer electronics product announced at this year’s CES which has failed to live up to its promise. Although it won first place in the “MP3 and portable video” and was also voted “top portable audio player” by LAPTOP Magazine, the product is looking more and more like a non-starter, at least for SanDisk.

What made the Connect potentially special was its tight integration of streaming audio technology with online subscription services allowing for PC-free downloads and software updates. The Connect was tied to Yahoo! Music Unlimited for subscription downloads. SanDisk licensed the Connect’s critical software Zing.

Today, Yahoo’s music service appears to be struggling, Dell has acquired Zing, and the iPhone and iPod Touch have delivered full-featured web access via WiFi far beyond the the Connect’s limited offering. Figure that about does it for the Connect, at least in its current incarnation, but you never know.

There are a couple of other very interesting angles to SanDisk’s Audio/Video strategy which I am going to leave until later. The msystems-developed USB-TV is due to be released later this year, suspect under the name of TakeTV. Also TrustedFlash seems to have interesting potential and synergies.

While it is entertaining and informative to compare SanDisk’s Sansas with Apple’s iPods. In the bigger picture its probably much more relevant to just concede the iPod theirs, and then look at what’s left as a potential market.

95% of the world’s population doesn’t live in USA. Over the next decade about a billion new consumers will likely join the world’s middle class from countries like China, India, Russia, South America and such, the new rapidly emerging economies.

These consumers are going to want digital audio and video, but at the right price. This isn’t going to be about elegant stores or pretty packaging. Price and functionality are going to be the critical factors. Here SanDisk has a tremendous edge and knows it.

The real money, the mega billions of $$$, is likely going to be made in the sub $100 audio/video player player market and/or even the sub $30 market. If this is how things play out, calling SanDisk, Everyman’s Apple, might be considered the highest of compliments.

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