Setting the Price of Memory
When you buy memory, the price you pay is primarily dependent upon the going rate in the spot market, where memory chips are bought and sold on a daily basis.As with any commodity, DRAM trading can vary wildly. Manufacturers and brokers keep a close eye on this activity to determine the average daily spot price, or what the market is willing to pay for memory chips on that day. As spot price changes, so does the amount that memory suppliers charge you, the consumer, for a memory upgrade.
Contract Pricing
While spot is the starting point for price, most major original equipment manufacturers (OEMs) don't actually buy the majority of their memory on the spot market. Instead, they purchase through contracts with major memory manufacturers. These contracts provide some stability to buyers who need large amounts of memory on a regular basis.
Securing Inventory
Contracts also help OEMs secure inventory when supply is tight. This is often considered more important than price. Why? Without memory, computer manufacturers couldn't fulfill orders for their own customers. While contracts don't guarantee a steady supply of DRAM, they do take precedence over spot market buyers. Therefore, when inventories are low, OEMs are first to consume parts, making it very hard to find memory. This drives demand, and prices, even higher.
Demand
There is no way to define every factor that affects demand for memory. But of all the players in the market cycle, a few consistently dominate the list.The biggest player is the PC industry.
PC popularity
Just five years ago, it was very unlikely that your grandmother surfed the Web, let alone had her own computer. Nowadays, that's commonplace.
More than half of U.S. households now own a computer, according to a 1999 study performed by the market research firm Odyssey. That's up 25% in just a single year. In fact, the home computer is becoming so popular, it's frequently referred to as the "new household appliance."
So what does that have to do with memory prices?
Every single one of those computers contains memory. Plus, as PC popularity rises and software programs advance, computer manufacturers move to increase the DRAM capacity in their systems.
Just a year ago 32MB was the standard amount of memory built into a new computer. Today, consumers expect at least 64MB to 128MB. As individual computer manufacturers move to the higher memory capacities, other PC makers follow. In turn, OEMs seek larger quantities and a broader range of product types. This capacity increase has consistently been a driving force behind memory price appreciation.
You'll notice a similar trend with laptops. Five years ago, most consumers considered the mobile PC a heavy, clunky annoyance used only by traveling executives. Today, they're sleek, trendy and attracting a broad mix of consumers. Again, this drives demand for DRAM higher.
PC Parts
Availability and pricing of individual PC parts and peripherals also play a large role.
For instance, when processor availability lags, so does PC production. Without processors, OEMs can't build as many computers so they obviously don't need as much DRAM. On the other hand, processor price cuts typically result in increased demand for DRAM. If the computer is less expensive to build, you'd better build now, right?
Higher demand will also follow the introduction of memory-intensive software. Just look at Windows 2000. According to recent tests, Microsoft's latest operating system needs at least 128MB to run well. Not long ago, that much RAM was considered exorbitant. These types of applications have brought minimum memory requirements to a whole new level.
But we can't blame it all on the PC industry.
High Tech Industries
Telecommunications is commanding an increasingly stronger influence on demand. Cell phones, routers, and hubs all require memory to operate. Even the most casual observer can see how quickly this industry has grown. Next time you're on the road, take a look at the drivers around you. Most likely, someone is talking on a cell phone. Parents, children, friends and coworkers all use mobile phones to communicate. As the industry continues to proliferate, so will its demand for memory.
Nearly every other booming high-tech industry produces a similar effect. There's memory in the bar code scanners at cash registers, in your MP3 player, your PDA (personal digital assistant), and in many other pieces of modern day equipment.
Economics
The relative health of different world economies can have a significant impact on demand. If an ailing nation pulls out of its sluggish economy, OEMs in that country will begin to buy more memory and build more systems, resulting in higher demand for DRAM worldwide.
Fiscal seasons generate their own pricing cycle. As month and quarter ends approach, many OEMs focus on reducing inventory levels. Demand falls, supply grows, and prices drop.
Then there's Santa Claus and the Chinese New Year. Increased purchasing activity typically precedes holiday seasons followed by light activity during and afterwards. This lack of demand can cause price levels to weaken and supply to grow.
Supply
Just as demand for memory fluctuates, so does the amount of DRAM that manufacturers produce and ship.
The cost of production
DRAM manufacturers make memory in expensive, state-of-the-art fabrication facilities, or Fabs. These Fabs are extremely expensive to maintain and operate. The equipment alone costs hundreds of millions of dollars. It doesn't make sense for manufacturers to operate these facilities at full capacity when not enough customers are buying their product. That's why major DRAM manufacturers may scale back production when there's a glut in the market and smaller players might shut down their Fabs altogether, or they'll switch to other memory products such as SRAM or flash.
The result is less DRAM available for purchase. In turn, OEMs will rely on the spot market (outside of contract) for ongoing production. After a while, demand catches up with supply and memory prices go up. Manufacturers then ramp up production to increase supply and the cycle comes full circle again.
Keep in mind, however, it can take months to return an idle Fab to full production capacity. And it can take just as long for the price of memory to react.
DRAM evolution
Today's memory modules look essentially the same as they did 10 years ago - with one major exception - size. The chips just keep getting smaller. This continuous reduction in size has dramatically increased manufacturers' ability to produce more product. How? Memory chips are made from silicon wafers. Literally hundreds of chips can be etched onto each wafer. As a manufacturer shrinks its chip (die) size, the number of chips each wafer can yield goes up and so does production capacity.
Manufacturers will also increase wafer size to boost output. In fact, most new Fabs coming online are using larger and larger silicon wafers. Simultaneously, old Fabs are being upgraded to accommodate the larger sizes. Within a few years most DRAMs will be made from 300mm (12") diameter wafers compared to the 8" wafers used today.
Adding a few inches might not seem like a big deal, but it is. Going from 6" to 8" gives you 77.8% more area on the wafer. Going from 8" to 12" gives you 2.25 times more area on the wafer. In other words, you get a lot more product from the same processing time/cost (not including testing and packaging.)
Supply is also affected when memory technologies evolve to next generation DRAM, such as switching from 128Mb to 256Mb technology. As product changeovers occur, availability of trailing edge technology dwindles and high-end technology grows. Sometimes, manufacturers may discontinue a product altogether, eventually causing prices to rise.
Fewer players. More products.
Changes in the DRAM supply base itself have fueled market volatility. Recent mergers and acquisitions have led to a more consolidated industry, giving fewer companies a much larger role on the world business stage. Today, the top three manufacturers (Micron, Samsung and Hyundai) hold 60% of total DRAM market share. That means if one manufacturer chooses to stop making a part or to leave the DRAM business altogether (as some manufacturers have done) there can be a much more pronounced affect.
Additionally, the memory market is becoming more fragmented. In late 1998 and 1999, it was pretty easy for DRAM manufacturers to make as much SDRAM as they could. Now they're also making DDR and RDRAM in the same Fabs and they have to juggle the right product mix. Since it can take as long as 60 days to turn a silicon wafer into finished product, manufacturers cannot simply start a new batch to replenish low inventories in a couple of days. That's why using forecasts to schedule factories for the correct product mix is becoming more critical
But DRAM manufacturers aren't the only forces behind the memory supply chain.
Outside Drivers
Mother Nature plays her part. Severe weather conditions and natural disasters have been known to close markets and shut down production for days. The result? Lower inventories, higher demand, and unsettled prices.
A recent example is the September 1999 earthquake in Taiwan. Even though most DRAM is produced in other countries, Taiwan is a hotbed for PC component manufacturing. The quake's ripple effect disrupted DRAM demand and pricing worldwide.
Labor strikes can also have an impact. The lack of production causes inventories to shrink. Even after a strike ends, it can take a couple of weeks for normal production capacity to resume. Once again, the diminishing supply pushes prices higher.
Riding the Pricing Roller Coaster
Consider the many different factors affecting the price of memory and one thing becomes quite clear. The DRAM pricing roller coaster ride isn't going to end anytime soon.
In fact, as our society becomes more and more dependent on high-tech products and as PC popularity grows and the Internet becomes an integral part of our daily lives, we can only expect that the forces behind the memory market will gain momentum.
Fortunately, no matter what's happening with memory prices, upgrading your RAM is still the most cost-effective way to get more performance from your computer.