SanDisk 1999 Annual Report Download - page 27

24 Annual Report 1999
MANAGEMENT’S DISCUSSION AND ANALYSIS
In October 1999, we entered into a nonbinding memorandum of
understanding with Toshiba providing for the joint development and
manufacture of 512 megabit and 1 gigabit flash memory chips and
Secure Digital Memory Card controllers. We and Toshiba will each
separately market and sell any products developed and manufactured
under this relationship. Accordingly, we will compete directly with
Toshiba for sales of these advanced chips and controllers.
We have entered into patent cross-license agreements with several
of our leading competitors including, Hitachi, Samsung, Toshiba,
Intel and Sharp. Under these agreements, each party may manu-
facture and sell products that incorporate technology covered by the
other party’s patents related to flash memory devices. As we con-
tinue to license our patents to certain of our competitors,
competition will increase and may harm our business, financial con-
dition and results of operations. Currently, we are engaged in
licensing discussions with several of our competitors. There can be
no assurance that we will be successful in concluding licensing
agreements under terms which are favorable to us.
ALTERNATIVE STORAGE MEDIA
Competing products have been introduced that promote industry
standards that are different from our CompactFlash and
MultiMediaCard products, including Toshiba’s SmartMedia, Sony
Corporation’s Memory Stick, Sony’s standard floppy disk used for
digital storage in its Mavica digital cameras, Panasonic’s Mega
Storage cards, Iomega’s Clik drive, a miniaturized, mechanical,
removable disk drive, M-Systems’ Diskonchip for embedded storage
applications and the Secure MultiMediaCard from Hitachi and
Infineon. Each competing standard is mechanically and
electronically incompatible with CompactFlash and
MultiMediaCard. If a manufacturer of digital cameras or other con-
sumer electronic devices designs in one of these alternative
competing standards, CompactFlash or MultiMediaCard will be
eliminated from use in that product.
In September 1998, IBM introduced the microdrive, a rotating disk
drive in a Type II CompactFlash format. This product competes
directly with our Type II CompactFlash memory cards for use in
high-end professional digital cameras. In October 1998, M-Systems
introduced their Diskonchip 2000 Millennium product which com-
petes against our Flash ChipSet products in embedded storage
applications such as set top boxes and networking appliances.
According to independent industry analysts, Sony’s Mavica digital
camera captured a considerable portion of the United States market
for digital cameras in 1998 and 1999. The Mavica uses a standard
floppy disk to store digital images and therefore uses no
CompactFlash, or any other flash cards. Our sales prospects for
CompactFlash cards have been adversely impacted by the success
of the Mavica. Recently, Sony has shifted its focus to the use of its
flash Memory Stick in its latest digital camera models.
Our MultiMediaCard products also have faced significant competition
from Toshiba’s SmartMedia flash cards and we expect to face simi-
larly significant competition from Sony’s Memory Stick. Sony has
licensed its proprietary Memory Stick to other companies. If it is
adopted and achieves widespread use in future products, sales of
our MultiMediaCard and CompactFlash products may decline.
Recently, Hitachi, Infineon, Sanyo and Fujitsu have proposed their
Secure MultiMediaCard which provides the copy protection function
that is included in our Secure Digital Memory Card. Should this ini-
tiative gain industry wide acceptance, it may reduce the widespread
adoption of the Secure Digital Memory Card.
ALTERNATIVE FLASH TECHNOLOGIES
We also face competition from products based on multilevel cell
flash technology such as Intel’s 64 megabit and 128 megabit
StrataFlash chips and Hitachi’s 256 megabit multilevel cell flash
chip. These products compete with our D2 multilevel cell flash
technology. Multilevel cell flash is a technological innovation that
allows each flash memory cell to store two bits of information
instead of the traditional single bit stored by the industry standard
flash technology. In the second quarter of 1999, Intel announced
their new 128 megabit multilevel cell chip and Hitachi began ship-
ping customer samples of CompactFlash cards employing their new
multilevel cell flash chip. In addition, Toshiba has begun customer
shipments of 32 megabyte SmartMedia cards employing their new
256 megabit flash chip. Although Toshiba has not incorporated mul-
tilevel cell flash technology in their 256 megabit flash chip, their
use of more advanced lithographic design rules may allow them to
achieve a more competitive cost structure than that of our 256
megabit D2 flash chip.
Furthermore, we expect to face competition from existing competitors
and from other companies that may enter our existing or future mar-
kets that have similar or alternative data storage solutions which
may be less costly or provide additional features. Price is an impor-
tant competitive factor in the market for consumer products.
Increased price competition could lower gross margins if our average
selling prices decrease faster than our costs and could also result in
lost sales.