All Things Digital

Overall CD sales are plummeting after eight years of unflagging erosion. Digital music sales now account for 15 percent of recording industry’s revenues worldwide and 30 percent in the United States, according to recent data from the International Federation of the Phonographic Industry. And those numbers are climbing faster than ever. Consider: This past June, Apple (AAPL) said it has sold some five billion songs on its iTunes Store. Clearly, physical media are giving way to the Internet as a means of music distribution. What better time, then, to reinvent the music industry’s business model for physical media as SanDisk (SNDK) hopes to do with its new microSD memory card album format?

This morning the company announced slotMusic, a compact memory card-based music format that can be played on cellphones, PCs and some MP3 players. It relies on MP3s without digital rights management schemes and is backed by Universal Music Group, Sony BMG Music Entertainment, Warner Music Group and EMI Group, all of which apparently believe that more physical media is the best way to reinvent their business model in the era of digital distribution. Though as SanDisk VP Daniel Schreiber notes, they do have their reasons. “There’s a billion phones out there and a lot of them can play music and a lot of them have a microSD slot,” he explained. “We think there’s still a need for a tangible, physical product. People will appreciate walking out of the store playing music on their phones.”

Perhaps. But will they appreciate carrying that music around on a 0.6″ x 0.4″ medium that’s about the size of a fingernail? Seems easy to lose, doesn’t it (maybe Case Logic is planning a slotMusic binder)? And wouldn’t they rather carry around hundreds of songs, instead of the dozen or so stored on each slotMusic card? And what if the memory card in their phone is already in use, filled up with contacts, applications and other data? What then? And beyond this, haven’t iTunes and Amazon MP3 made consumers more accustomed to purchasing music à la carte? Why purchase a full album at $15, when all you really want are the only two good songs on it?

Is SanDisk out of its mind?

On Tuesday the company rejected a $5.9 billion acquisition bid by Samsung Electronics. Apparently, it feels the $26-a-share cash offer–an 80 percent premium over its Monday close–undervalues the company. Which may have been true once upon a time. But now that a supply glut has depressed prices for the memory cards on which its business is built and its shares have lost half their value, well … really, you have to wonder what the company is thinking.

Anyway, Samsung isn’t taking no for answer. In a letter to SanDisk CEO Eli Harari Wednesday, Samsung CEO Yoon-Woo Lee argued that a merger is a financial win for both companies.

Our many meetings and conversations over the last several months have served to confirm for us that a combined Samsung-SanDisk would have a superior global brand, an unparalleled technology platform and the scale and resources to drive convergence in the marketplace. With SanDisk’s innovative culture and technology leadership and Samsung’s scale, leadership in manufacturing and execution, and strong systems and consumer electronics segment knowledge, the combined company would be well positioned to accelerate the adoption of flash memory technology in new markets. We can also establish the platforms and capabilities necessary to position flash as the preferred vehicle for delivery and storage of a wide variety of content, such as film, in a way that would not be possible for either of our companies alone.

As we have seen in recent months, markets have become more turbulent and global economic trends are negative. At the same time the competitive environment remains challenging. To survive and compete in these times we will each need to leverage our resources and rely upon a strong balance sheet to fund critical investment and development through good times and bad. Separately investing in necessary state of the art facilities will be a significant tax on your business in the near term. In addition, reliance on IP and enforcing it is a costly and uncertain business for both our companies. Faced with these challenges, now is the time to merge.

A persuasive argument. But not in the eyes of SanDisk (SNDK), which seems determined to play Yahoo (YHOO) to Samsung’s Microsoft (MSFT) and, in Lee’s words, “continues to cling to unrealistic expectations on both its standalone market value and an appropriate merger price.”

Apparently, NBC Universal doesn’t know that jumping into rebound relationships after a particularly painful breakup is rarely a good idea. After Apple tossed its fall TV lineup off iTunes in August, saying the two companies couldn’t agree on pricing, the broadcast network has been spitefully seeking out distribution deals wherever it can find them: Hulu. Then Amazon Unbox. The hilariously ill-conceived NBC Direct. And Netflix.

Now SanDisk. Today, NBC U said it would make its shows available on SanDisk’s recently launched Fanfare PC-to-TV video player service. Come January, consumers will be able to download episodes of NBC series they can no longer purchase on iTunes, and transfer them to their TVs via SanDisk’s TakeTV product.

“Fanfare is going to be an iTunes-like store for us,” NBC U’s president of digital distribution, Jean-Briac Perrette, told Silicon Alley Insider. But with one noteworthy difference: NBC U controls pricing. “The business model is one we like,” said Perrette. “It’s normal for content owners to control the wholesale price of their content. This is no different than any other wholesale relationship; it’s not different in the sense that Wal-Mart decides to price DVDs at a loss. Ultimately we still set the wholesale price.”

Flash memory maker SanDisk has apparently devised a means of offsetting the legal bills that might arise from the price-fixing suit filed against it (and 23 other companies) earlier this year: suing the better part of the removable flash storage industry for patent infringement.

SanDisk filed three patent-infringement lawsuits against 25 companies that make, sell or import USB flash drives and other removable flash storage products yesterday, seeking damages and a permanent exclusion order from the U.S. International Trade Commission banning importation of infringing products into the United States.

SanDisk hasn’t yet disclosed publicly the patent(s) at issue here–and there are certainly a number of possibilities– but No. 5,602,987, Flash EEprom system may be one of them. After all, the company has used it for these purposes before.

Anyway … Among those on the receiving end of SanDisk’s suit: LG Electronics, Buffalo, Corsair, Kingston, Verbatim Transcend and Imation/Memorex. “These actions demonstrate SanDisk’s long-term commitment to enforcing its patents, both to protect our investment in research and development by obtaining a fair return on that investment, and out of fairness to third parties that participate in our patent-licensing program,” E. Earle Thompson, chief intellectual property counsel at SanDisk, said in a statement, noting that defendants named in SanDisk’s suits would be offered the chance to participate in its patent-licensing program. “Otherwise, we will aggressively pursue these actions, seeking a prompt judicial resolution awarding damages, obtaining injunctive relief and banning importation of infringing product.”