What do you do if your company has committed to investing billions of dollars in the production of semiconductor chips, only to watch the prices at which you can sell those chips collapse because of excess supply? If you happen to be a NAND flash memory manufacturer, you design gadgets that will consume some of these extra chips. Both SanDisk (NASDAQ:SNDK) and Samsung took this approach. Now chip behemoth Intel (NASDAQ:INTC), partnered with Micron (NYSE:MU) in NAND flash manufacturing, intends to follow suit.
Intel recently announced its intent to sell a line of solid-state drives (SSDs) with up to eight gigabytes of storage capacity. An SSD behaves like a hard drive, but instead of a spinning magnetic platter on which the data is stored, the solid-state drive stores its bits in NAND flash memory. The physical size and capacity of Intel's SSD closely resembles the one-inch offerings from hard-drive makers like Seagate (NYSE:STX) that are used in mobile devices, although Intel's release states that its product is targeted at servers, routers, cheap PCs, gaming, and industrial applications.
Solid-state drives do have some advantages over their whirling counterparts. They consume less power, have very fast read/write speeds, and have longer lifetimes -- if you've ever experienced a hard drive failure, you can appreciate this last one.
Despite the utility of SSDs, I have to wonder whether this is a great move for Intel. Its gross margins last year were under pressure from AMD (NYSE:AMD), but were still higher than 51%. Its competitors in the SSD arena for which I have access to the relevant financials are SanDisk and STEC (NASDAQ:STEC). Both of these companies have much lower gross margins -- 38% for SanDisk and 25% for STEC. The problem for Intel is that the competition may drive prices down, resulting in margins that are acceptable to them, but not to Intel and its investors. I'm left wondering whether investors should hope that Intel's SSD is a big hit or not.
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Fool contributor Dan Bloom owns shares in Intel and Seagate, although he is rethinking his commitment to his Intel shares. The Fool has a disclosure policy.
