The report getting the most attention — and stirring the most controversy — is the one published Wednesday by iSuppli Corp. Based on what chip makers are telling it, iSuppli is cutting its outlook for revenue growth in NAND flash memory (the chips used in MP3 players and USB drives) from the 27% it had expected for 2008 to “single digits.”

“NAND suppliers are likely to go into the red in the first quarter,” warns Nam Hyung Kim, iSuppli’s chief memory analyst, “and are not likely to recover in the second.”

Grim tidings for the chip makers, no doubt.

The controversy comes from what the iSuppli report had to say about Apple’s role in the shortfall:

In an early warning sign of consumer weakness, Apple Inc. has slashed its 2008 NAND order forecast significantly and has informed suppliers that its demand growth will slow in 2008 compared to 2007, according to iSuppli sources. … Before word of Apple’s warning, iSuppli had predicted the company’s NAND flash purchases would rise by 32.2 percent this year, helping drive significant market growth. (link)

Sounds pretty ominous, and the paragraph may have played a role in shaving a couple points off Apple’s share price on Thursday.

But several commentators have taken issue with the use of the word “slash” to describe Apple’s order forecast. As Tom Krazit at CNET points out, Apple’s demand for flash is still growing rapidly, despite the broader slowdown in consumer spending. In fact, by his calculation, Apple is still planning to purchase 27 percent more flash memory this year than last year — just not the 32 percent iSuppli had expected.(link)

[UPDATE: Krazit now says that his calculations were wrong. “This was an error on my part,” he writes in a corrected blog. “The 27 percent increase in flash memory spending in 2008 was iSuppli’s previous expectation for the global market, not the revised expectation for Apple’s spending. Right now, iSuppli doesn’t have an estimate of how much Apple plans to spend on flash memory this year, and won’t until more data becomes available.”]

Moreover, what’s bad for memory makers may actually be good for Apple. Chip prices were already plummeting (4GB flash memory fell more than 73 percent since last August, according to IDG), and a memory glut could drive them even lower. As Richard Hyde writes in Seeking Alpha:

Here is where the story gets interesting for Apple. Not only do they reap the benefit of huge decreased pricing, the difference between the 8GB and 16GB modules is only $11, even though the iPhone models differ by $100. Similar savings are seen in the 16GB and 32GB iPod touch. (link)

No wonder Apple can afford to cut the price of the iPod shuffle from $79 to $49. If it wanted to drive up demand, it could probably afford to cut prices all across the iPod and iPhone product lines.

Below the fold, iSuppli’s breakdown of the chip makers’ NAND revenue market shares for 2007.