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Chip shortage could hit MP3 player availability

Father Christmas seeks alternative supplier

An industry-wide shortage of key flash memory chips will hit the availability of some models of MP3 player during the upcoming Christmas shopping period, the head of Creative Technology's US unit said on Wednesday.

"One of the key challenges we face in our MP3 business is an industry-wide shortage of 1GB flash memory," said Craig McHugh, president of Creative Labs, in a conference call with financial analysts.

"Industry demand for high-capacity flash memory currently outstrips supply, and this will affect availability of our 1GB flash MP3 players for the holiday quarter. The shortage of flash memory, according to industry analyst speculation, is primarily a result of a special deal that Apple has secured from a key supplier for the Christmas season."

Apple is widely reported to have signed a deal with Samsung to secure a supply of flash memory for its music players, particularly the recently launched iPod nano.

This deal is putting pressure on the entire MP3 player industry, according to Sim Wong Hoo, chairman and CEO of Singapore-based Creative. He did not refer to Samsung by name.

"The MP3 market is now consolidating, but there is a shortage [of flash memory] because of the special deal we talked about," said Sim.

The consolidation has been at the low end, he said, with several Chinese MP3 player makers leaving the market because of the pressure Apple is putting on the industry.

"The low-end [manufacturers] went out of business in the past few months because it's very hard to face this pressure. If Creative is losing money then it's very difficult for other companies to really fight in this battle," Sim said.

He predicted that Apple's deal will not last long because it is not favourable to the memory chip maker involved.

"I don't think the vendor is benefiting from it, so it's really a one-sided deal," Sim said. "I don't think anybody else out there can get [similar terms]. That's not the way the industry works."

He wouldn't be drawn into estimating how much Apple is paying for the memory chips.

The deal has already been criticised by Korean MP3 player makers, some of whom have said they suspect that Samsung is selling the chips at below market value. According to local media reports, the chairman of South Korea's Fair Trade Commission said earlier this month that an investigation into the deal could take place.

Creative, which also makes speakers and PC sound cards, held Wednesday's conference call to announce its financial results for its fiscal first quarter.

Net sales during the period from July to September were $280.2m (about £190.8m), up by a third from the same period last year, and net income was $691,000 (£468,766) down from $4.8m (£3.25m) a year ago. Creative would have recorded a net loss of $9.3m (£6.31m) were it not for a one-off gain from investments, the company said.

Sales of MP3 players in the quarter jumped 123 percent from a year ago, McHugh said. That led revenue at Creative's personal digital entertainment division to account for two-thirds of total sales, up from less than half a year ago.

Creative cited progress it has made in moving its business back into profitability. Its efforts include reducing inventories by eight percent and buying back one million shares.

"Our key goal for this quarter is to return to profitability by the end of the calendar year," said McHugh.

He named four key focus areas for the company: its Xtreme Fidelity and X5 sound cards, maintaining momentum in the MP3 player business, expanding in the MP3 speaker category and continuing to reduce inventories.


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