Flash storage vendor SanDisk's recently announced cost-cutting measures may please investors, but at least one customer says there may be more driving the expense reductions than the vendor is revealing.

The company said on Friday it would be laying off about 250 people, reducing executive salaries, freezing employee salaries and instituting a hiring freeze in all but "strategic areas". The moves are expected to save SanDisk $30 million to $35 million annually.

SanDisk blamed a dramatic drop in flash component pricing — a deterioration of 50 per cent in the past two months — as well as the need to tighten its supply chain organisation in the wake of its acquisition of M-Systems Flash Disk Pioneers for the reductions.

Bill Blackthorn, company spokesman for CompAmerica, a SanDisk customer that sells PCs, servers and mobile devices to government and corporate buyers, said the flash vendors should have seen this coming. "The market is so confused, nobody knows what they want. They can't distinguish between a USB thumb drive, a flash memory card, the need for a flash reader, a 7-in-1 [card reader], a 9-in-1 [card reader], a 25-in-1 [card reader]. It's an insanely confusing marketplace."

The company was likely not surprised by the plunge in pricing. According to company spokesman Bob Goligoski, SanDisk regularly sees its prices drop by 40 per cent to 50 per cent a year. "So we base our projections on pricing knowing that that is the case." Yet a company press release quotes CEO Eli Harari as suggesting that overall market conditions for NAND components coupled with a weak demand in the first quarter is affecting pricing "for our retail and OEM products at a steeper rate than we had been anticipating."

The layoffs announced by SanDisk will hit across all functional areas, but they will affect certain areas more, "such as the private-label USB drive business, which we are de-emphasising, given current industry trends," Goligoski said. An 8K filed this week said the labor force cuts will "impact functions related to operations, engineering, sales and marketing, and administration within SanDisk, and will primarily be based in the United States and Israel and, to a lesser degree, other international locations."

At the time that the M-Systems acquisition was finalised, in late 2006, SanDisk had 2,362 people, which means it could lose just under 11 per cent of its workforce.

Goligoski said employees would learn of their status in early March. Some people will be moved to other parts of the company, he said. Everybody will receive severance packages based on "salary and time at the company."

Harari will see his base pay drop by 20 per cent. The last time that was publicly reported — in 2005 — he earned $2.46 million. Other executives will have salaries reduced by 10-15 per cent.

The cost-reduction activities come on the cusp of a slew of new product releases announced at CES in January. During that announcement, Harari had said the release of the products was "very honestly stretching our internal bandwidths".

Goligoski said the staff reductions won't delay those releases, which include the Sansa Express, a sub-$60 1GB MP3 player; the Sansa View, a $300 portable video player that can hold up to 16 movies; and the Sansa Connect, a WiFi-enabled music player. All are expected to be released in March.

CompAmerica's Blackthorn suggested SanDisk should generate new markets by promoting its flash devices in the PC and laptop industry.

"How come SanDisk isn't knocking down Microsoft's door to distribute Vista on them?" he said. "They're expensive. But so what? They last longer than a DVD and they can be write-protected. So you create a permanently protected model and give it to Microsoft [customers] and say, 'Here. Your master copy of Vista — all [six] editions — and Office 2003 Professional Enterprise on one memory card.' You just go to each machine, plug it in, load it or go to your server and plug it in, and it's an extra $35. Big deal."