NAND and demand: How the chips fall at Apple, Inc.
News out of overseas chip factories this week cuts both ways for Apple (AAPL), the world’s No. 3 buyer of NAND flash memory.
The report getting the most attention — and stirring the most controversy — is the one published Wednesday by iSuppli Corp. Based on what chip makers are telling it, iSuppli is cutting its outlook for revenue growth in NAND flash memory (the chips used in MP3 players and USB drives) from the 27% it had expected for 2008 to “single digits.”
“NAND suppliers are likely to go into the red in the first quarter,” warns Nam Hyung Kim, iSuppli’s chief memory analyst, “and are not likely to recover in the second.”
Grim tidings for the chip makers, no doubt.
The controversy comes from what the iSuppli report had to say about Apple’s role in the shortfall:
In an early warning sign of consumer weakness, Apple Inc. has slashed its 2008 NAND order forecast significantly and has informed suppliers that its demand growth will slow in 2008 compared to 2007, according to iSuppli sources. … Before word of Apple’s warning, iSuppli had predicted the company’s NAND flash purchases would rise by 32.2 percent this year, helping drive significant market growth. (link)
Sounds pretty ominous, and the paragraph may have played a role in shaving a couple points off Apple’s share price on Thursday.
But several commentators have taken issue with the use of the word “slash” to describe Apple’s order forecast. As Tom Krazit at CNET points out, Apple’s demand for flash is still growing rapidly, despite the broader slowdown in consumer spending. In fact, by his calculation, Apple is still planning to purchase 27 percent more flash memory this year than last year — just not the 32 percent iSuppli had expected.(link)
[UPDATE: Krazit now says that his calculations were wrong. "This was an error on my part," he writes in a corrected blog. "The 27 percent increase in flash memory spending in 2008 was iSuppli's previous expectation for the global market, not the revised expectation for Apple's spending. Right now, iSuppli doesn't have an estimate of how much Apple plans to spend on flash memory this year, and won't until more data becomes available."]
Moreover, what’s bad for memory makers may actually be good for Apple. Chip prices were already plummeting (4GB flash memory fell more than 73 percent since last August, according to IDG), and a memory glut could drive them even lower. As Richard Hyde writes in Seeking Alpha:
Here is where the story gets interesting for Apple. Not only do they reap the benefit of huge decreased pricing, the difference between the 8GB and 16GB modules is only $11, even though the iPhone models differ by $100. Similar savings are seen in the 16GB and 32GB iPod touch. (link)
No wonder Apple can afford to cut the price of the iPod shuffle from $79 to $49. If it wanted to drive up demand, it could probably afford to cut prices all across the iPod and iPhone product lines.
Below the fold, iSuppli’s breakdown of the chip makers’ NAND revenue market shares for 2007.
Sadly, Jonathan Cassell, presumably from iSuppli, has denied their own report, by posting this at the MacDailyNews website:
“Jonathan Cassell:
There’s been some misinterpretation of the iSuppli press release regarding its revised NAND flash memory forecast.
iSuppli did not write in the release that Apple had reduced its expected NAND orders from 32 to 27 percent.
Nor at any time did iSuppli state that Apple was reducing the level of its orders from existing levels—but rater stated that Apple’s demand growth will slow in 2008 compared to 2007.
This is a major event for the NAND flash market considering Apple’s large-scale NAND flash purchasing.
This was only one of the factors mentioned in the iSuppli release that are impacting the NAND flash market.
iSuppli affirms the accuracy of the release and would be pleased to answer inquiries on the topic.
Please see the text of the release below for your reference.”
And, while it’s clear from the above Fortune blog that it wasn’t iSuppli that mentioned the drop from 32 to 27 percent, it was iSuppli that used the words, “slash…drastically”. And, that’s what is causing the furor. How does iSuppli characterize a drop in predicted growth as “slash… drastically”. This, Jonathan Cassell does not address.
Some overlooked items:
iSuppli cited a revenue “slash” from Apple, not a unit slash. If Apple agreed to order as much memory capacity as last year - if not more - but they’re getting it for a 55% discount, is the “slash” a bad thing? It’s bad for the memory supplier, not Apple.
If gasoline dropped to $1.50 per gallon, we’d all “slash” our gasoline expenditures, but we’d drive the same if not more amount of miles.
iSuppli and others are inferring the “subprime crisis” is creating a problem for Apple. Apple does a ton of business overseas. The rest of the world does not have a subprime crisis. If anything, overseas economies are running too hot.
Apple’s North American business, like that of HP and IBM, is becoming less influential to its overall revenue.
iSupply is not a reliable source. They are the same ones that broke the story that Apple Cut production of the 8GB iPhone 3 weeks ago. Turned out that Yes, Apple did cut the 8GB production, BECAUSE they were introducing the 16GB iPhone. So as history shows with iSupply, one data point shows nothing other than change is in the wind.
Fortune needs to find a better source, or do some primary research.
Thank You Elmer Fud for your balanced article
Since I criticize you when you’re wrong or fail to do adequate research, let me congratulate you on writing a balanced article.
Now, can you find out where Apple stands relative to their $1.25B investment in the five NAND-producing companies a few years ago? Did they recoup their investment in discounted pricing, or do they still own a piece of those factories or whatever?
Just curious…Who are the No. 1 and No.2 buyers of NAND memory in the world…and why did iSuppli NOT mention them in their “report”?
Now, truth be told, this is the first decent report you have come out with in… a long time.
Save the last paragraph.
But I can help: Apple is not the typical manufacturer that wants volume in detriment of margins. Somehow, with their case-study supply management, they have been succeeding in achieving volume with margins that are unheard of in almost any industry. Some times, over 50% gross. And, with these memory price drops, I’m sure that is going to grow.
And that’s the really good news for Apple - in a time of recession and consumer spending retraction, they are effectively managing their supply market and making for even higher profits thus securing buffering it better when it comes to hardships on the other end - sales.
More over, expect Apple to also manage its way out of the so-called recession / crisis by moving its products upwards to higher memory and sales prices. That’s what they’ve just done with the iPod Touch and iPhone, even though keeping the prices. Yes, with this, they don’t even need to increase pricing! In every way, the market is always crying for bigger memory and Apple is going to provide.
Expect the same very intelligent move with products that use SSD - MacBook Air, all future MacBooks and handheld Touch products. Although not exactly the same product/market, the SSD will eventually become as ‘manageable’ [by Apple] as NAND has been for the most recent years.
And that’s how you can tell a successful company that will withstand no matter what crisis shows up ahead.
Believe you me, AAPL is the next GOOG!
you get it! Apple wins all around. Go teach your friend Eric over at Barrons how to write a story.
Inveterate LiarsLike Eric Savitz (Barrons) and Eli (’the moldy yarmulke’) Hoffman (seeking Alpha)are painting a picture of doom for Apple based on incorrect, half-assed interpretations of chip demand based on some clueless analyst’s prognostications.
Apparently, they are making a little money shorting on the side and the SEC should raid their shoebox-sized offices…Glad you see the light…
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Silicon Valley veterans like to joke that Steve Jobs must be surrounded by a reality distortion field; if you get too close to him, you start to believe what he's saying. Thanks to the success of the iPod, the launch of the iPhone and the renewed interest in the Mac, Apple has made believers out of millions of customers - and made a lot of investors rich. But Philip Elmer-DeWitt believes that an ounce of skepticism never hurts when writing about the company. He should know. He's been covering Apple - and watching Steve Jobs operate - since 1982, first for Time Magazine, then for Business 2.0, and now for Fortune.
Forgive me for quoting iSuppli’s report as “slash…drastically”, as I meant they wrote, “slash…significantly”.