It's hard to be in the business of selling gigabytes, as evidenced by the frequent rough patches in the memory market. But the reason that things are so tough can be a bit counterintuitive because of the way that supply and demand interact with technological progress in this market. Counterintuitive or not, the gigabytes business is especially hard in the face of a recession, as the latest round of earnings reports and projections from two flash memory makers makes clear. Is there any hope on the horizon for the long-battered NAND flash sector, the part of the semiconductor market that provides storage for everything from iPods to digital cameras? Let's look at brief look at both the market itself, and some recent developments in it.

Last week, Samsung's earnings report revealed that the company's net income was down 44 percent this past quarter, the steepest drop since 2003. This decline, which was in line with analysts' gloomy expectations, came on the back of falling prices in both the NAND flash memory and LCD display markets.

Rival memory maker SanDisk also had a bad quarter. Earnings fell 21 percent year-over-year due to the memory market supply glut, and the company's stock tumbled after its earnings release because the losses were almost double what analysts were expecting. What with the layoffs at the company and its plans to sell of 30 percent of its fab capacity to Toshiba—another major flash player—things are not looking good for SanDisk as it heads into a very challenging 2009.

SanDisk's losses led Samsung to give up on its long-standing attempt to acquire the company and, with it, the SanDisk-owned patents for X4 technology, which could dramatically improve flash memory densities. The fact that this merger was scotched is huge news for the flash business, as there had been hope in some corners that the combined entity, which would control almost half of the global NAND market, could use its size to prop up prices (undoubtedly raising antitrust concerns in the process). But with the merger now out of the picture, the NAND market is left to rely on good old supply and demand to set prices, and the results won't be pretty.

NAND flash prices have already plunged 55 percent this year because of oversupply issues (see below) and, with 2009 looking increasingly grim for consumer spending, it's unlikely that demand will reach the levels that were assumed during the massive flash memory production capacity build-out a few years back. In short, Moore's Law has been a double-edged sword for flash memory makers, as technological advances have left flash makers with an oversupply of gigabytes.

Selling gigabytes

You might think that Samsung and SanDisk make NAND flash memory modules (among other things), and that the solution to a supply glut that drives prices down would be to for these two companies to make fewer modules. But you'd be mostly wrong on both counts.

Samsung sells gigabytes of semiconductor memory; the memory modules that deliver those gigabytes are best thought of as units of cost (on the production side) or units of price (on the consumption side). So, when Moore's Law increases the amount of memory (i.e. product) that a flash maker can ship in a single module (i.e., a unit of cost) then it has done two things that are very wonderful, but also very dangerous and impossible to reverse: it has cut in half the cost of a gigabyte, and it has also doubled the supply of gigabytes.

This drastic cost reduction is wonderful in that consumers love cheaper storage, but the law of supply and demand operating in the gigabyte market makes this potentially dangerous for memory makers. There is an aggregate global demand for gigabytes across all segments of the consumer and business markets where flash is used, and that demand may not increase at the same rate that the industry's engineers are able to increase the company's gigabyte output per unit cost. So, if the world's gigabyte demand—from consumer electronics to PCs to datacenters—doesn't increase quickly enough, then technological advances in storage will lead to an oversupply of gigabytes from storage vendors.

When there's an oversupply of gigabytes, the price of gigabytes plunges dramatically in response. That is exactly what has happened in the past year and, in the face of the coming global downturn, that trend looks set to continue.

Because of their success in increasing the storage density of semiconductor memory, storage makers are currently left holding too many gigabytes to a market in which demand is slowing and may well contract. In this respect, you might say that the storage makers are victims of their own success: they invented ways to make way too much of something (gigabytes) way too cheaply, and now they're finding that there isn't enough demand to support sale prices that would let them maintain their profit margins.

And if you're thinking that memory makers could just cut back production of DIMM modules, that doesn't work either. Semiconductor fabs are huge investments, and they lose money if they aren't operating at full capacity. Typically, it's better to let the market batter margins and keep selling product at reduced prices than to cut back on production in an attempt to boost margins. This dynamic is precisely why Intel, Micron, and Hynix have all opted to close NAND flash fabs this year rather than see them operate at a loss. Even before the hair-raising developments of the past two months, low consumer demand and low prices haven't been able to support the industry's planned levels of flash production.