Chip shortage will hit MP3 players, says Creative

An industry-wide shortage of 1G-byte flash memory chips will hit availability of some MP3 players, Creatve Technology said Wednesday.

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

"One of the key challenges we face in our MP3 business is an industry-wide shortage of 1G-byte 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 impact availability of our 1G-byte 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 holiday season."

Apple Computer is widely reported to have signed a deal with Samsung Electronics to secure a supply of flash memory for its music players, particularly the recently-launched iPod nano, which replaced the hard-disk drive-based iPod mini in the company's music player line-up.

The deal struck by Apple is putting pressure on the entire MP3 player industry, said 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 Hoo.

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, according to Hoo.

"The low-end [manufacturers] went out of business in the last 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," he said.

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

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

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

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

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 US$280.2 million, up by a third from the same period last year, and net income was US$691,000, down from US$4.8 million a year ago. Creative would have recorded a net loss of US$9.3 million 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 8 percent and buying back 1 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 continued reduction of inventories.

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