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Enterprise Fuels DRAM Price Spike

Prices for computer memory jumped as much as 10 percent on the spot market this week, thanks in part to a surge in corporate customers, analysts said.

The price spike for dynamic random-access memory (DRAM) chips seems to be a combination of an enterprise pull and a capacity bottleneck. Prices averaged just above $5 for suppliers like Rambus, Micron Technology, Infineon Technologies, with some vendors reporting as much as $6 per chip in 1,000 unit quantities.

The situation is being discussed with customers, but the costs may get worse before they get better. On average, analysts predict DRAM contract prices will probably increase to $5.50 in second half of this month.

"Eight to twelve weeks ago prices were rock bottom. They've now gone up a ton," Rick Whittington, managing director of research at Caris & Company, told internetnews.com. "This is purely 'excess demand' driven, namely the computer customers are witnessing greater demand than anticipated. As such, OEMs are finding the multiple year capital spending reductions at DRAM makers now results in inadequate supply, hence the piling into the thin spot channel and price spike. One can only imagine where contract prices, now at $5 for 333Mhz 32x8 DDR, will build this season."

The other contributing factor to the high DRAM prices rests on the shoulders of fabrication plants. Whittington said critical capital equipment lead-times are now a year or longer, meaning significant new capacity can't come on stream for 18 to 24 months, if not longer. But fears that higher DRAM prices will spark a "buyer's revolt" are misplaced.

"This is because enterprise customers are now calling the shots, with consumer-oriented computers taking a relative breather," he said.

In the past month, PC makers like HP, Dell and Apple Computer have all offered extra DRAM as an incentive to get enterprise customers to buy off their excess holiday inventories.

No one segment more clearly demonstrates the cyclical nature of the global semiconductor market than the DRAM sector. While the memory chips were once used almost entirely in computers, they are now found in a broad number of consumer and communication applications. But it's not like the DRAM companies were caught completely unawares.

Just before the 2003 holiday season various analyst firms predicted positive growth in the worldwide DRAM market for the next two years. IDC, for example said the market would blossom from its $16.5 billion in revenue in 2003 to a rosy $24.7 billion in 2007.

In the company's latest U.S. Quarterly PC Tracker report, the analyst firm says notebooks and other portable PCs remain the primary driver, but so do aggressive pricing for entry-level desktops and media centers.

"Although pockets of weakness remain, improving economic conditions and an aging installed base are also contributing to growth and should help support double-digit growth for 2004 and 2005," said David Daoud, IDC senior analyst.

Whittington said "overall box loading" or packing PCs with as much memory as possible should rise throughout the year ahead.

In response, he said companies like Micron are now on allocation on all product types and are expected to do so through the end of the November 2004.