Apple Computer Inc. on Monday said it would prepay $1.25 billion to secure its supply of flash memory used in its market-dominating iPod music players amid an expected surge in demand for the chips.
Apple said it would make the payment over the next three months in a series of agreements to lock up NAND flash memory supply through 2010 with five leading manufacturers: Hynix Semiconductor Inc. (000660.KS), Intel Corp. Micron Technology Inc., Samsung Electronics Co. Ltd. (005930.KS) and Toshiba Corp. (6502.T).
"It's critical that (Apple) tie up capacity," said Jefferies & Co. analyst John Lau. "They need to secure a reliable source to fund their continued expansion into this area."
Apple, which uses the NAND chips in its portable iPod shuffle and recently introduced iPod nano music players, has sought in recent weeks to ensure a greater supply going forward. The company had held ill-fated talks with No. 1 manufacturer Samsung to invest in flash chip production earlier this year.
NAND memory chips are also widely used in digital cameras and photo-snapping cellular phones because they can retain data even when power to them is shut off. Industrywide growth in flash memory sales topped 30 percent in the latest quarter.
In another sign of growing demand, Intel and Micron on Monday announced the formation of a new company to manufacture NAND chips, with an initial investment of $1.2 billion each.
Apple uses about one-quarter of total NAND supply now under production and is expected to be the largest customer for the venture between Intel and Micron, according to ThinkEquity Partners analyst Eric Ross.
In the Intel Micron announcement, Apple said it will pay Intel and Micron $250 million each for a "significant portion" of the venture's NAND flash memory output.
"We want to be able to produce as many of our wildly popular iPods as the market demands," Apple Chief Executive Steve Jobs said in a statement. The company has sold more than 30 million iPods since their introduction in October 2001.
Micron Chief Executive Steve Appleton said at a Reuters Summit earlier this month that the industry would move in coming years to using flash memory instead of hard disk drives for primary storage devices in notebook computers.
Such a move would bring dramatic increases in battery life and would allow for notebook PCs to boot up nearly instantly, compared with the wait now required with hard disk drives because of the time required for disks to spin up and for the operating system to be loaded into DRAM chips.
"Samsung made the same statement earlier this year," said Ashok Kumar, an analyst at Raymond James & Associates, noting that 1 gigabyte of flash memory storage now costs about $60 at electronics retailers and the price of a gigabyte of hard disk drive storage is about $1.
"If you can bring that price to parity, the marketplace will make that decision," Kumar said.
Apple would also likely use flash memory in an iPod mobile phone that it is widely speculated to be developing, analysts said.
An Apple spokesman declined to comment on future products.
In late Nasdaq trade, Apple shares were up 52 cents, or less than 1 percent, to $65.08. So far this year, shares of Apple have more than doubled, after tripling in 2004.