AI demand gives flash suppliers leverage over Apple

Flash prices have jumped 550%, squeezing Apple’s storage margins

During a ride in a Southern California desert, Scott Nelson stopped his dirt bike, pulled out a rifle and shot his old iPod. Nelson sold flash storage to Apple — the chips in iPhones that store photos, music and apps — and hated feeling like he always got the worst end of the deal. His Japan-based employer, Kioxia, had little leverage: Apple, the world’s biggest buyer of flash, used its position to squeeze every cent from suppliers and bullied flash makers into opening their books so it could monitor sales, making sure no one else got a better deal. Kioxia and other flash makers stewed as Apple paid them pennies for storage the iPhone maker resold to customers for dollars; Nelson used Android phones in protest. He kept the broken pieces of the iPod, the first Apple device to use flash, on his desk, where they gained new significance after AI hyperscaler demand quintupled flash prices over the past year, according to research firm TechInsights.

The shift has changed the balance of purchasing power. Two years ago, Apple bought nearly twice the flash storage of Microsoft, Amazon, Meta and Google combined, according to TechInsights estimates; hyperscalers now buy double Apple’s share. Meta, Microsoft and Amazon signed contracts with Kioxia this year that commit them to higher prices in exchange for long-term supply — contracts that protect Kioxia’s profits if the market turns. Kioxia declined to comment. Flash suppliers and their sales teams privately expressed their satisfaction during chitchat at the industry’s largest conference this summer in Santa Clara, Calif., and AI deals have given Kioxia sales executives and other flash suppliers new leverage to charge Apple higher prices.

Hyperscalers can afford to pay more because flash storage is a smaller part of building a data center than making an iPhone, and accounting rules let companies spread the cost over years. Apple, by contrast, was caught off guard, having ignored analysts’ warnings, according to people familiar with its procurement practices; executives believed they knew the market better than anyone else, those people said. Tim Cook, Apple’s executive chairman, compared escalating memory-chip prices to a “100-year flood.” Apple is expected to spend $25 billion on flash storage this year for about the same amount it bought for $6 billion in 2025, according to TechInsights estimates.

Flash memory that cost $68 a gigabyte in 2005 had fallen to 5 cents by 2023. AI demand has since lifted the price to more than 30 cents a gigabyte — a 550% jump that threatens Apple’s profit margins from selling extra storage. Buyers of the iPhone 17 Pro paid Apple $200 last year for double the storage of its 256-gigabyte base model; the extra storage cost Apple $15 at the time and has since risen to $66, according to an analysis by The Wall Street Journal.

Roughly 100 million iPhone buyers paid for storage upgrades last year, according to IDC estimates, seeking a cushion for high-resolution videos, content downloads, text attachments and data-hungry apps. Many paid $200 for an extra 256 gigabytes and as much as $800 for an extra 1.75 terabytes. At an 85% margin, those upgrades translated into more than $10 billion in gross profit, according to the Journal’s analysis, which used the equal-weighted average price of every iPhone storage upgrade step and estimated Apple’s cost as gigabytes added multiplied by the flash market price times 0.85 to reflect an estimate of Apple’s discount. Mac and iPad buyers added billions more, and when devices run out of space, Apple charges for monthly iCloud storage.

The Journal found that Apple averaged more than 80 cents of gross profit for every dollar it charged iPhone and iPad buyers for extra storage from the devices’ first releases through 2025; for Macs sold since 2010, the average was nearly 80 cents. In recent months, Apple raised prices for nearly all of its products, with iPhone prices up an average of 13% — an increase that included older models which typically get a price cut.

The question for Apple is whether consumers react to the higher prices by keeping their iPhones longer or continue buying at their usual pace; for flash suppliers, the question is when — or if — Apple regains its flash-market leverage. “It’s been a love-hate relationship between Apple and the flash industry,” said Mark Newman, an analyst with Bernstein Research. Apple sustained the manufacturers for years, Newman said, but its power to cap prices, while beneficial to shareholders, left suppliers feeling “screwed.”

“Apple has historically driven a very hard bargain with memory suppliers,” said Walt Coon, an analyst at TechInsights. “And there’s no shortage of satisfaction among suppliers now that the balance of power is shifting.” Apple said in a statement, “We’ve worked with many of our suppliers for decades, and we deeply value their partnership over the years.” The company added, “We look forward to continuing our important work together.”

The relationship stretches back to 2001, when engineers at Kioxia — then called Toshiba — showed two Apple executives a 1.8-inch-diameter, 5-gigabyte hard drive they had developed but did not yet know what to do with. The executives recognized right away that it would be perfect for their stealth project, according to a person familiar with the meeting, and Apple bought exclusive rights to the drive, which became the heart of the iPod, the company’s breakout hit.

Flash proved even better suited to consumer devices than hard drives: a chip with no moving parts, it was smaller, held more data and required less power than spinning disks that can break. Apple used flash to launch the iPod Nano in 2005, a music player thinner than a pencil, and prepaid $1.25 billion for flash supply through 2010 from five companies; suppliers, seeing an opportunity, built more factories. In June 2007, Apple released the iPhone, a flash-based smartphone. As the device took off, Apple staked a claim on more than a fifth of the world’s flash supply, spending $3 billion to $4 billion a year, according to TechInsights, and became the world’s largest buyer.

Apple’s appetite for flash swelled its leverage, and suppliers acquiesced to its demands for the lowest prices in the industry. Flash makers benefited from Apple’s massive orders because the high fixed costs of chip manufacturing required factories to operate at capacity to make money. Apple also avoided commitments: after ordering flash at rock-bottom prices, it sometimes refused delivery when prices were falling, leaving suppliers holding piles of unsold chips, including inventory custom-made for Apple. Kioxia executives joked they felt like Charlie Brown trying to kick the football, with Lucy always pulling it away. The standoff often ended with suppliers cutting Apple’s prices further.

The executive behind that strategy was Tony Blevins, Apple’s head of procurement, who left the company in 2022. Suppliers knew him as the “Blevinator” for negotiating tactics they described as clever — or ruthless. He sometimes scheduled back-to-back supplier meetings so rival sales teams might run into each other, stoking competitive tension. Sales representatives packed nutrition bars for sessions that Apple executives sometimes pushed past midnight without a dinner break, and Blevins’s bad-cop reputation gave his staff leverage: they threatened to call him in when contract terms were not to their liking.

Apple’s contracts typically required suppliers to designate it a “most favored customer,” guaranteeing that no other buyer got a lower price, according to people familiar with the agreements, and audits let Apple verify that no one paid less. Apple caught Micron selling flash at cheaper prices to another customer and won an arbitration settlement worth tens of millions of dollars more than a decade ago, according to people familiar with the dispute. The audits also gave Apple firsthand knowledge of suppliers’ business operations, including the output of machines on the factory floor, which let Apple’s negotiators determine how badly each supplier needed a big order, according to people familiar with the company’s procurement practices. Apple audited its suppliers so often that Blevins negotiated a volume discount with the auditor, Deloitte.

Suppliers have tried to gain the upper hand over the years. Around the end of 2015, Sandisk refused Apple’s requests to send additional supply because it already had customers willing to pay more, according to a person familiar with the call. Blevins threatened a Sandisk salesman with retaliation, saying he would have Sandisk’s chief executive, Sanjay Mehrotra, “crawl on his knees” back to Apple, the person said. When flash supplies tightened around 2017, Western Digital — Sandisk’s new owner — required Apple to pay a fee to reserve flash chips without committing to sell it any, according to people familiar with the strategy.

Blevins wrote the date on his office whiteboard and circled it, texting a photo to Western Digital executive Mike Cordano and promising payback, according to people familiar with the exchange. He got his chance when flash prices fell a year later: Cordano and colleague Jerry Kagele went to Blevins’s office with a refund check as a peace offering. Blevins demanded they never ask for a reservation fee again, which the men agreed to in a handshake deal. As a punishment, he told them that if Western Digital wanted Apple to buy its flash chips, it would have to pay Apple to test them — and even then, Apple was not obligated to buy any. Apple security then escorted the men out, according to people familiar with the meeting.

The industry’s low point came in 2023, when the Covid-era, work-from-home device boom cooled and flash prices bottomed out at 5 cents a gigabyte. Bernstein Research estimated the flash industry generated operating losses of $19 billion that year, while Apple earned $14 billion in gross profit selling extra flash storage. “I hope we don’t ever see again,” Nelson, the Kioxia sales executive, said of those times. Since then, AI demand has reversed the imbalance: hyperscalers now buy double Apple’s share, Apple is paying more for flash, and consumers face the choice of keeping iPhones longer or buying at their usual pace.