Less Is More, Micron

I was gambling in Havana
And I took a little risk
Send laywers, guns, and money
To get me out of this!
-- From "Lawyers, Guns, and Money" by Warren Zevon

Poor Micron (NYSE:MU). The memory manufacturer keeps pushing down the costs of doing business at an amazing rate -- but not fast enough to keep up with plummeting memory prices. It'll take more than that to survive the downturn.

It sounds like tough cookies, but it's even worse than that. Micron and rivals could do something about the problem. Instead, they keep making it worse.

CEO Steve Appleton proudly reports that his next-generation 34-nanometer technology is "ramping rapidly." This will again lower the cost of making a gigabyte of flash memory, but it will also let Micron keep pumping inventory into a market that already has more than enough of it.

As a result, the average selling price of a NAND flash chip (the kind of memory that Apple (NASDAQ:AAPL) puts in its iPods and iPhones) dropped by 13%. Not year over year, but from one quarter to the next. And this has been going on for a couple of years now. While this benefits the end producers of consumer electronics, it's been a death spiral for flash memory manufacturers.

Under those conditions, I'm not surprised to see Micron lose $751 million this quarter, or $0.97 per diluted share, on $993 million in net sales. We're looking at a negative 27% gross margin. That's better than the 32% underwater gross margin of last quarter, but clearly not a great way to run a business.

There are some encouraging signs of discipline around the memory industry right now. A cadre of Taiwanese powerhouses are banding together to gain economies of scale and the power to exercise some restraint. Micron is playing an instrumental part in that effort and could end up running the show in Taiwan. But it could be too little, too late.

Intel (NASDAQ:INTC) and AMD (NYSE:AMD) both entered the memory market back when it was hot, but both have spun out and shrugged off their memory-making units. I'd do the same myself, but that's not really an option for Micron, which makes its primary living in this market. It will take courage, discipline, and luck to snap out of this death spiral.

Send lawyers, guns, and money. Please?

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