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In an earlier post, we tried to establish questions you could ask when trying to determine if a technology has an architecture:

1. Does this technology represent discontinuous innovation?

2. Can this technology become an important component (heart, mind, or spine) of a larger system?

3. Can software be used to link other components into a complete architecture?

4. Does the developing company have the vision, ability, and position to control the architecture?

This weekend, I tried to apply this line of thinking to Sandisk (NASDAQ: SNDK) which may be creating a Flash Memory open proprietary architecture and in the process creating a Gorilla Game. Caveat – I am not a Flash Memory or SNDK expert. However, some earlier DD led me to invest and I'm trying to determine whether I think an architecture exists to merit further investment.

* * * *

Flash Memory is a unique memory technology which (unlike DRAM) retains information when powered off and (unlike mechanical hard disks) is semiconductor based making it small, rugged, and a beneficiary of Moore's Law enabling capacity to increase while costs drop.

Flash Memory is based on open standards developed by SNDK and endorsed by all the major global electronic manufacturers. Over the last 12 years, SNDK has obtained more than 100 patents in many areas of Flash Memory development including technology, manufacturing, and application. In addition to developing its own Flash Memory products, SNDK has licensed its technology to other companies (Toshiba, Hitachi, Samsung, Matsushita, and Intel), extended its value chain through JVs with companies like Toshiba and Siemens, and continued to invest significant resources in advanced R&D.

Flash Memory found its first bowling alley applications in the rugged mobility markets where specialized computer systems (military computers, weather measurement, heart monitors, etc.) needed data storage devices with both small size and the ability to withstand physical vibration and temperature extremes. Flash Memory crossed the chasm into the tornado by becoming the standard data storage device used in MP3 players, digital cameras, and smart cell phones. Flash Memory will soon be found in very high bandwidth applications like video recorders and convergent media devices like combination cell phone/MP3 players and PDA/GPS devices.

One risk of investing in SNDK is the potential for Flash Memory products to become low margin (albeit very high volume) commodities like other forms of memory. However, through their R&D and patent activity, SNDK has begun to create a broader Flash Memory applications framework which may give it greater control of the architecture at some point in the future and thus create the opportunity for higher profit opportunities. For example, SNDK owns the patent on “disk emulation” which is the concept of using software to integrate Flash Memory with computer devices so manufacturers can treat Flash Memory as the equivalent of hard disk, CD-ROM, DVD, and ZIP drives without taking on the integration effort. This also provides SNDK with the opportunity to create a flexible “plug and play” architecture around its memory products providing end users with an easy upgrade path for adding additional storage capacity to accommodate new applications such as when MP3 or GPS functionality is “field upgraded” to a cell phone or PDA.

Furthermore, SNDK is working to create security capabilities allowing content owners to securely distribute their electronic content (music, movies, etc.) to devices with secure Flash Memory under predetermined licensing arrangements (e.g., free for 30 days, view for a week, unlimited viewing, etc.) in a manner that enables widespread electronic content distribution without fear of unauthorized use or distribution. At minimum, SNDK stands to benefit from the high storage requirements created by this type of application. At best, SNDK becomes a critical component of a secured content delivery and payment architecture.

So back to the questions…

1. Does this technology represent discontinuous innovation?

Absolutely.

2. Can this technology become an important component (heart, mind, or spine) of a larger system?

Yes. Flash Memory is a vital component of digital cameras and MP3 devices and is becoming increasingly vital (though not quite the brain) of cell phones. A secure Flash Memory system could become the heart of an electronic content delivery/payment architecture.

3. Can software be used to link other components into a complete architecture?

Yes. The patents, IP, and current R&D of SNDK are oriented toward making this happen.

4. Does the developing company have the vision, ability, and position to control the architecture?

SNDK seems to be making the right moves (licensing agreements to create a tornado, formation of a strong value chain, continued development of leading applications) that could lead to creation and control of an open proprietary architecture.

All comments and feedback are welcome.


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