Posted 3/12/2006 9:00 PM     Updated 3/12/2006 9:09 PM

Picture of success SanDisk goes beyond photography
SanDisk (SNDK) CEO Eli Harari profited from his physics education by inventing the use of memory chips to store digital photos on tiny, removable cards.

The company now sells more than 100 million memory cards a year. It recently topped $2 billion in sales, including royalties from rivals licensed to make cards.

No company is profiting more from the success of digital photography, says Chris Chute, an analyst at researcher IDC. "They're the big winner," he says.

SanDisk shares have doubled from a year ago, although the stock is down more than 33% from a January peak of $79.80 because of investor worries about an oversupply of flash memory, says Satya Chillara, an analyst with American Technology Research. It closed Friday at $53.06.

SanDisk is now expanding beyond photography, with USB flash drives, cards for cellphones, digital music devices and video game systems.

Harari held management jobs at Hughes Aircraft, Intel and Honeywell before founding SanDisk (originally named SunDisk) in 1988. He spoke to USA TODAY's Jefferson Graham at SanDisk headquarters in Silicon Valley's Sunnyvale, Calif.

Q: A year ago, SanDisk wasn't even in the digital music business. Now, with your SanDisk Sansa digital music player, you're No. 2 in market share behind Apple Computer and its red-hot iPod. How did you come so far, so fast?

  About Eli Harari

A: We saw an opening when the price of memory went down to the point where large capacities were truly affordable. We had a significant advantage over competitors, because we could get flash memory at lower costs than (Apple CEO) Steve Jobs could. We felt if we could leverage our 150,000 retail locations that sell our memory cards to sell our MP3 players, too, we could really have something. And we were proven correct. We came out of nowhere, and zoomed past Sony, iRiver, Creative and all the rest.

Q: Apple has 78% of the digital music player market; SanDisk has 10% of the "other" category. Apple has sold more than 42 million iPods. You've sold 1 million Sansas. How do you catch up?

A: This month, we're introducing a new player, the Sansa e200, and it's superb. We feel it's far better designed than Apple's Nano, which also uses flash memory instead of a hard drive to store the music. Our new Sansa is priced attractively and has many more features than the Nano. You can view pictures and videos on our unit. We have FM radio, voice recording, a slot to add extra memory from a card, and a removable battery. The Nano doesn't have those. You have to ship the unit back to Apple if you have a problem with the battery. (The Nano sells for $149 and $199. The Sansa ranges from $179 to $279; and retailers discount aggressively.)

Q: Many analysts have said that Apple has ruled in digital music because of the seamlessness of the iPod and iTunes Music Store, where Apple fans buy digital music. SanDisk doesn't have a music store. You work with multiple partners, such as Rhapsody, Napster and Microsoft, which provide the software. Are you hurt by not having a store?

A: Apple deserves a lot of credit and has done a superb job. But they have a closed, proprietary system. We work with, as you say, Rhapsody, Napster, Yahoo and many alternatives. That's a plus. Apple hasn't had a competing alternative that's just as good. But that's going to change. We are not going to be a 10% player. We will improve our position.

Q: How did you develop the concept of storing images on removable media?

A: The idea was to use flash memory to emulate a disk drive and make it very small, portable and removable. The first products were ahead of their time, and not successful. So we turned our attentions to digital photography. In 1988, digital cameras had everything but one missing piece: the film. We developed it, with the Compact Flash card.

Q: How did you do it?

A: Flash memory is imperfect memory; you have bits that can fail. The way it was done then, the entire drive would be erased and recorded over; that wouldn't work with photography. We needed a new system where part of the chip could store information and correct any failed bits. We came up with the card and the internal controller.

When we showed it to venture capitalists, they didn't get it. They thought we should just buy chips from Intel and resell them. We knew that couldn't work. We found one investor who agreed with us, Sanjay Mehrotra. He put in $2.5 million, and is our chief operating officer today.

Q: Your first memory card was the Compact Flash. Now, there are many other formats. Why?

A: When we developed the CF card, we thought it would be the 35mm equivalent. And we were backed by Kodak and Canon, which used them in their early cameras. But then Sony decided it had to have its own standard, and came up with Memory Stick. We developed the Memory Stick Pro — higher-capacity cards — for Sony.

Matsushita came to us and said, "Help us develop a better card than the Memory Stick." And we helped develop SD, which was our smallest card.

But for cellphones, SD is too large, so we came up with MiniSD and an even smaller version, TransFlash. Now, SD cards are pretty much standard in compact cameras, and we feel MicroSD will be standard for cellphones.

Q: How does your revenue break down?

A: Fifty percent came from photography last year, and that's down from 75% two years ago. Every year, our photography business keeps growing. But so does the rest of the market.

The fastest-growing area for us is cards for cellphones, which was 15% last year, but eventually it will be our biggest business. The rest is USB drives at 12%, MP3 at 6%, and cards for gaming portables at 3%.

Q: What does the memory market look like for 2006?

A: We're at the point where it's cheaper for us to get 1-gigabyte chips instead of smaller capacities, and we're passing the savings on. The pricing will be such that people will see the benefits of having a higher-capacity card. Within the next two years, we think the price will fall to $10 per GB (cards now average $40-$50 for a 1 GB), and when that happens, we don't think people will bother to erase the pictures off their cards anymore.

Q: Your highest-capacity card right now is 8 GB, which is many more times the capacity of computers 10 years ago. How much further can you go?

A: We believe that in 20 years time, we will be able to fit 10 terabytes of information into a card that's as small as a quarter. Ten terabytes is the amount of memory we have in the human brain. Ten terabytes could fit 5,000 movies. When you have that kind of memory, you could store a human lifetime's worth of memory into one of these cards. You could implant a device like this in your head to restore memory.

Q: You're in the memory business. What can't you find?

A: My glasses.

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