CES Trend #8: Cheaper flash memory leads to new CE possibilities

Our countdown to next week's Consumer Electronics Show in Las Vegas continues now with how impossibly cheap flash memory, coupled with lesser than expected demand for it, could lead to newer classes of flash-based devices.

The dream of embedded device designers and consumer device manufacturers is to be able to embed new, higher levels of functionality into more everyday items. Still on the drawing boards of futurist designers are the wallet or purse that can report itself stolen, the doorknob that remembers what time it was last opened, the authentication device capable of passing or failing employees' smart cards in low- or no-power situations, and the credit card that helps its bearer make his payment on time.

And everyone involved in the design of something called the ultra-mobile PC, including Intel, still sees the possibility of a third tier of personal computer: the sub-notebook, or "flashtop." With Linux capable of attaining a very low profile, and Microsoft giving the low-profile idea one last try with Windows XP, the dream of embedding a complete, multi-purpose OS in a handheld PC that millions will want under their trees next Christmas, is alive and well.

Embedded development is planning a resurgence, and it's counting on flash memory to be its launch vehicle.

But for non-volatile memory to reach that vaulted position of ubiquitousness in every vacant slot and empty pocket in our lives, it must clear a very serious hurdle: There currently aren't enough manufacturers producing novel and innovative designs for flash-embedded devices that consumers appear to actually desire. The market today continues to depend on Apple to supply the innovation and lead the charge in small devices, but Apple's success alone isn't enough to sustain what should become a new and relevant product category: functional, multimedia, portable, memory-based devices.

With the cost of NAND flash memory continuing to plummet far, far below what its manufacturers hoped would be the floor, what are the impediments to flash being able to open a huge new market in non-PC functional devices? The remaining problems are perhaps threefold:

1. Traditional hard disk drive technology continues to evolve, and at a faster pace. Last August, Toshiba gained ground in that department with a 320 GB HDD in the 2.5-inch form factor, impressive not because it spins faster like Seagate's 2.5-inch 7200 rpm and 10000 rpm models, but actually slower -- 4200 rpm -- presumably without sacrificing much throughput speed and while reducing power consumption. Flash would possibly have an opportunity to make a real stand in the portable multimedia device department, were it not for the fact that HDD is such a fast-moving target.
2. Cell phones are completing their metamorphosis into multi-purpose devices, and in so doing are annexing many of the leftover viable applications that could conceivably justify a stand-alone flash-based product line. The PDA is actually dying, and consumers now expect to find more new functionality in their unified handsets. Unfortunately, that trend is slowing down the rate of inclusion of NAND flash in those devices that would appear to need them most, because the rate of innovation there is being dictated either by the telecommunications carriers or by certain software companies that would spoil their plans, such as Google. By delivering respectable applications to mobile devices for next to nothing -- especially location services -- Google is forcing competitive location devices such as GPS to evolve to the premium side rather than the value side, justifying their existence by going for the "value-add" rather than the discount.
3. The market expects Apple to innovate first. Apple is a good customer for flash producers, at one time giving Samsung an exclusive contract for both flash memory for iPod nano and digital signal processors for iPod across the board. Now, its iPod Touch includes flash from Samsung, Toshiba, Hynix, and Micron. With Apple working at its own pace, it could be up to someone else to open up a new market in embedded CE devices this year, if anyone's going to do it at all. But consumers are skeptical of any new competitors, as evidenced by Palm's debacle last year with the Foleo. It's up to the flash memory manufacturers themselves to create the incentive for a new company to go up against Apple, and to avoid the fate of Palm. With no more room for discounts, their value proposition may have to become a bit more intellectual. While a new, big market would open up a world of good for them, they can't afford to upset the single customer that could comprise the largest single share of their NAND sales.

Innovating up through the bargain basement

The wholesale price for flash memory continues to descend beneath levels anyone ever anticipated would be viable. But the reason for that descent is not high consumer demand coupled with standardization and mass production, as is the case with hard drives and most other electronics components. In fact, the market conditions for NAND flash are surprisingly the opposite: Analysts including market research firm iSuppli point out that throughout 2007, producers' demand for flash memory declined, perhaps due to a shakeout in flash-enabled consumer devices in key markets such as MP3 players, where Apple dominates.

Last November, iSuppli projected that wholesale memory prices for 512 megabits of DRAM could have plummeted below an average of $1.00 by the end of 2007, and 512 Mb of NAND flash could have fallen to as low as $0.46. That means a typical CE device producer may be paying about $59 to equip a device with 8 GB of flash RAM (128 x 512 Mb @ $0.46).

The more devices a CE manufacturer produces, the lower that figure goes. iSuppli's recent teardown analysis of Apple's newest iPod Touch revealed that it uses two 32 gigabit NAND flash ships for its 8 GB model, typically from Toshiba, Hynix, Micron, or Samsung. Each of those chips probably costs Apple only $20, meaning Apple is likely paying one-third less for the NAND flash it uses for its iPod Touch, nano, and Shuffle than the market average.

On the opposite end of the market, iSuppli's analysis continually reveals that Apple is willing to purchase whatever small form-factor hard drives for its iPods that it can obtain for no more than $80. Two years ago, that was a 30 GB drive; last year, it was 80 GB. During the same period, the company's $50 of expenditure on NAND flash for iPod nanos produced 2 GB of memory in 2005, then 8 GB in 2007. Some business analysts concluded this means, on a linear scale, flash capacities are accelerating faster. The problem is, over the last four years, HDD capacity availability appears to be increasing exponentially, not linearly, driven -- according to manufacturers -- by consumer demand for very high capacity for multimedia.

Next: Why isn't demand for storage driving demand for memory?