Flash memory shortage, MP3 player market consolidation due to iPod maker, chip supplier deal, says rival MP3 maker.

October 27, 2005

Creative Technology is pointing a finger at Apple Computer for the worldwide shortage of flash memory for MP3 players and recent market consolidation, attributing the shortage to a deal between the iPod maker and a flash chip supplier.

Chip research firm iSuppli has estimated that Samsung will supply up to 40 percent of its flash memory chips to Apple for the iPod nano and iPod Shuffle models in the second half of the year. The two had planned another $3.8-billion deal to jointly produce NAND chips, although Samsung backed out (see $3.8B Apple-Samsung Deal Dies).

While Singapore-based Creative did not name the chip supplier, it nevertheless still seemed to suggest that the deal between Seoul, South Korea-based Samsung and Cupertino, California-based Apple has been constraining supplies of 1-gigabyte (GB) flash chips.

“The MP3 market is now consolidating,” said Creative CEO Sim Wong Hoo in a conference call on Wednesday, as quoted in the Financial Times. “Many Chinese manufacturers at the low end went out of business over the past six months, and other Asian suppliers are getting out because it’s very hard to face this kind of pressure.”

Japanese MP3 player maker Rio, which pioneered the business with Creative, went out of business in September.

Shares of Creative were down $0.12 to $7.25 in recent trading, while shares of Apple were down $0.67 to $56.36, and shares of Samsung were down 1,100 KRW ($1.05) to 16,700 KRW ($16.06).

“Apple is guilty only of smart purchasing and the clever use of technology,” said Jonathan Spira, chief analyst of Basex, an IT research firm specializing in knowledge sharing and collaboration.

“Samsung would not have agreed to supply Apple if the deal were one-sided,” he added. “Creative shouldn’t blame their weakening position in the marketplace on anything but their own ability to deliver a product consumers want.”

Key Challenge

“One of the key challenges we face in our MP3 business is an industry-wide shortage of 1GB flash memory,” Craig McHugh, president of Creative’s U.S. subsidiary based in Milpitas, California, told IDG News Service.

“Industry demand for high-capacity flash memory currently outstrips supply and this will impact availability of our 1GB flash MP3 players for the holiday quarter,” he added. “The shortage of flash memory, according to industry analyst speculation, is primarily a result of a special deal that Apple has secured from a key supplier for the holiday season.”

Samsung has been selling its flash memory to Apple at a discount, according to iSuppli, which estimates that Apple has been buying the two separate 1GB NAND flash memory parts together that make up the chips together for $54.