SanDisk Becomes No. 2 Seller of MP3 Players. Flash Memory Chip Makes Device Cheaper Than IPOD.

By John Boudreau,

Mercury NewsOne does not usually think of flash-memory card maker SanDisk as a leader in fashion technology. But the Sunnyvale-based company has quietly become the No. 2 seller in the United States of the hottest tech trend -- digital music players.
They are creators of the un-iPods.

SanDisk won't be rolling out big TV campaigns featuring silhouetted dancers. And the company's digital music players, while sleek, have yet to inspire breathless prose from reviewers. ``We want to be a strong No. 2 in the MP3 space,'' said Eric Bone, SanDisk's director of consumer product marketing.

The SanDisk devices are aimed at people looking for an alternative to the Apple Computer models and who want to load their devices up with songs sold through services other than iTunes. But SanDisk, a leader in the market of USB flash drives -- those little storage devices small enough to hook onto your key chain -- and flash memory cards, has a strong presence in retailers across the country.

The company reported a record $2.3 billion in revenues for 2005, and sold a million digital music players during the recent holiday quarter. Apple, on the other hand, registered a whopping 14 million iPod sales during the holiday period. Still, SanDisk's sales were an impressive showing for the company, which entered the digital music player market in November 2004.

``We already have the channels. We have the brand,'' SanDisk Chief Executive Eli Harari said. ``We are not Apple. We are not an iPod. But we have a highly respected brand.''

A key to its success has been the sudden embrace of flash memory chips, which are replacing small disk drives in the devices. Flash memory chips are used in small handheld devices, such as cell phones, digital music players and digital cameras, because they can store large amounts of data even when the power is turned off. Technology, Harari said, has reduced the price of producing flash memory, which is more durable and enables manufacturers to create thinner products than devices with hard disk drives. Apple unveiled its flash-based devices, the wafer-like iPod nano that weighs 1.5 ounces, last September.

Though not nano-thin, SanDisk's new Sansa line of digital music players, which will hit stores next month, resembles the iPod. ``If you had asked anyone in the industry just a year ago where would the MP3 market be today, no one could have predicted this,'' the SanDisk chief and co-founder said. ``It has really come on like a tornado. It has definitely been accelerated by the iPod nano.''

SanDisk was an early innovator in the use of NAND flash memory chips as hard disk drive replacements -- NAND and NOR are two types of flash memory. Because of that, the company has key patents and draws royalties from other flash memory manufacturers, such as Samsung.

Now, it's also manufacturing flash memory as a result of a joint venture with Toshiba. That means it can get its own source of flash chips at wholesale prices, giving it a cost advantage over competitors who must buy their chips from either SanDisk or one of its licensees. SanDisk can always undercut the makers of the MP3 flash players on price. That, in part, explains its quick rise in the market: The most expensive component of a digital music player is the memory.

``MP3 players really aren't complicated to make, and it's a higher-margin way to sell flash memory,'' said ThinkEquity Partners analyst Eric Ross.

SanDisk's strategy is to offer digital music devices to those ``beyond the middle class,'' Harari said. ``Our passion is to bring the cost of these devices down. It's basically about creating new markets in which people can afford a product.''
SanDisk has also used its strong U.S. retail presence, built on the popularity of its USB flash memory drives and memory disks, to gain market share in digital music players, said Stephen Baker, director of industry analysis for the researcher NPD Group.

``They use their flash and USB products to help get good distribution for the MP3 players,'' he said. That includes grouping various product promotions, holiday sales promotions and campaigns that also benefit retailers. And SanDisk established a niche that is just outside Apple's powerful marketing reach.

``When people are looking for something that is functional and relatively low cost, they have a great solution,'' Baker said. ``They have a price advantage. They own the memory.''

SanDisk's current Sansa music players range in price from $79 to $149 with a disk capacity from 256 megabytes to 2 gigabytes, though promotions can cut the price of its most basic model to as low as $40. Apple announced Tuesday a new 1 GB iPod nano that will cost $149, and said it is lowering the price of its iPod shuffle to $69 for the 512-megabyte model and $99 for the 1 GB version.
Next month, SanDisk is launching a higher-end line that will come with iPod-like prices, from $120 to $300.

The SanDisk devices come equipped with FM tuners, voice recording and software that allows people to play purchased digital songs and music downloads from services such as Rhapsody, Napster and Yahoo Music. The new Sansa devices have color screens and allow users to view photos. The Sansa e200 series comes with video viewing capabilities.

But Shaw Wu, an analyst with American Technology Research, thinks being a solid No. 2 in the digital music player business will be hard to sustain. ``Apple walloped everybody last quarter,'' Wu said. And the new, lower-priced iPods ``will make life harder for non-Apple vendors. If I were the competitors, I would be worried.''

SanDisk is realistic: It knows that, at least for now, the digital music world sways to Apple's beat. ``There are people who, no matter what, will buy an iPod,'' Bone said. ``All I want is for people to think there is an alternative.''

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