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 32×8 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.