Memory chip pushes Intel, AMD to backseat

Daniel Sorid

SAN FRANCISCO: Intel Corp. is waging a memory chip price war against AMD Inc., bruising both chip makers in the third quarter, analysts said.

Both companies have now warned that lower-than-expected sales of flash memory chips -- which are used in cellular phones and other electronics -- would push total sales below Wall Street expectations in the period.

Analysts blame renewed price competition from Intel, the world's largest chipmaker, which recently reentered the non-cellular phone segment for flash memory. Also, analysts say cellular phone inventories are being worked down in Asia, dampening demand for flash memory chips.

Both of the big US chipmakers are better known for making computer microprocessors. But flash memory chips -- in particular, a type of flash memory called NOR -- brought the companies more than $1 billion in sales in the first half of the year, according to research firm iSuppli.

Both companies have now disappointed investors with their flash memory results.

"The NOR flash industry is about to collapse due to Intel's price war in an effort to regain flash market share," J.P. Morgan analyst Christopher Danely wrote in a note to clients.

According to a recent iSuppli report, average prices of NOR flash memory will decline in the next four quarters as suppliers -- which also include STMicroelectronics -- increase production, and the effects spread from Intel's re-entry into the non-cellular phone segment of flash memory.

About 65 percent of the NOR flash market is tied to mobile phones, with the remaining 35 percent divided between automotive, industrial and other applications.

Prices of NOR flash memory have fallen for 13 straight weeks as Intel "has made a concerted effort to regain share through price," noted Smith Barney analyst Glen Yeung.

Lehman Bros. analyst Tim Luke wrote to clients that average selling price "pressure and competition from Intel" was among the key reasons for AMD's revenue miss.

Betsy Van Hees, iSuppli's flash memory analyst, said she did not view the latest price drops as an all-out war. But she pointed to an additional cause for concern in Intel and AMD's flash memory business: growing competition from new entrants.

NOR flash to date has been the dominant type of non-volatile memory used in cellular phones, but now makers of "NAND" flash -- including Samsung Electronics and Toshiba Corp. -- are designing their products for use in cellular handsets. Non-volatile memories like flash do not lose their data when electricity is cut off, making them useful for cellular phones and other consumer electronics.

"The handset market is very competitive because of the fact that we now have NAND as an alternative solution," Van Hees said.

Unlike in PC chips, where AMD lags far behind, AMD and its joint venture partner Fujitsu Ltd. edged out Intel in NOR flash memory market share during the first half of the year, iSuppli reported.

AMD warned that weaker flash memory sales would lead it to miss its quarterly revenue target -- echoing Intel's own bombshell financial warning. AMD is scheduled to report earnings on Thursday. Intel plans to report earnings next Tuesday.