New Deal with Samsung Bolsters Flash Maker SanDisk

SanDisk, the company that holds more patents than anybody else in the NAND flash sector but which also has been struggling financially, celebrated a victory May 27 when it renewed its longstanding memory chip license with its biggest customer, Korean device maker Samsung, for another seven-year period.

Samsung renewed its license with SanDisk at a lower royalty rate, but it will now also guarantee a portion of its NAND output back to SanDisk, which also makes branded flash memory cards for cameras and other handheld devices.

Samsung, the world's No. 1 manufacturer of NAND flash chips, said it currently pays about $350 million per year in royalties to SanDisk for the patented technology, which is used globally in digital cameras, MP3 players and other electronic devices.

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"Although some information cannot be disclosed due to an agreement between the two parties, the royalty rate will be about half the rate applied in the existing contract," Samsung said in a legal affidavit filed at the Korea Exchange.

"We are very pleased with the agreements announced today. Furthermore, continued access to Samsung's flash capacity under competitive terms gives us greater flexibility in managing our future capital expenditures," SanDisk CEO Eli Harari said.

Despite the rate cutback, the deal solidifies SanDisk's overall equity position. The San Jose, Calif.-based flash maker was hurting badly after reporting a $1.9 billion loss in the fourth quarter of 2008, but it now apparently is back on the road to recovery.

Only last week, Harari told attendees of the Reuters Global Technology Summit in New York that 2009 could well be "significantly better" for SanDisk than anticipated only five months ago, thanks mainly to cutbacks in NAND flash memory production.

The bulk price for 1GB of NAND flash memory had dropped for the first time to about $1 in January, and manufacturers were swimming in excess stock. In the last four months, however, flash makers have trimmed back production to bring balance back into the industry, and the price has now more than doubled to more than $2 per gigabyte.

Demand for NAND flash remains steady

Despite the price increases, demand remains steady, industry analysts have reported.

"There's been a lot of thinking that SanDisk would see their royalty stream decrease, but the people who projected this outcome seemed to have a really distorted notion that SanDisk wasn't collecting royalties from anyone except Samsung, so their projections are questionable," NAND flash industry analyst and consultant Jim Handy of Objective Analysis told eWEEK.

"Even so, since Samsung is the biggest NAND maker, with some 30-odd percent market share, their payments would be big. As for the industry, this validates SanDisk's patent portfolio to a degree, so the other companies are likely to fall into line.  It also clears the way for all suppliers to migrate to 3-bit and 4-bit MLC [multi-level cell flash], allowing the industry to continue to reduce costs faster than would be possible simply using process shrinks -- à la Moore's Law."

The new agreements would become effective when the current cross license and supply agreements expired on Aug. 14, 2009, and would run for seven years from that date, the statement said.