At Valiant Computer in North Austin, personal computer hobbyists have been shocked this month by the sudden runup in prices for computer memory.
A 256-megabyte "stick" -- or module -- of memory that cost as low as US$19 in November cost US$54 on Thursday. The price is far from fixed. Manager Shane Gotcher readjusts his store's memory price up and down almost daily in reaction to the spot market, which has risen dramatically since bottoming out in November.
Memory -- the temporary resting place for retrieving computer data and instructions -- is one of the fundamental elements of any computer. Adding memory is one of the simplest ways of upgrading the performance of a computer, because more memory enables the computer to quickly access more information. Seven years ago, memory was one of the most expensive components in a personal computer, but price wars and technology improvements have made it a relative bargain.
But rock-bottom memory prices have risen by upwards of 200 percent in the past month. The price spike has been fueled by greater demand, primarily due to better PC sales over the holidays, and concerns that consolidation in the industry could limit supply. The prices have caught customers at Valiant Computer and thousands of other computer part suppliers by surprise.
"Some people are buying less memory," Gotcher said. "Some of them are buying more because they expect the price to go up even further."
Gotcher is unperturbed. His store sells DRAM modules at close to cost as a way of bringing in customers to buy other computer-related products. Just as consumers are noticing the surge in memory prices, so are large and small computer manufacturers. Falling prices for memory and many other computer components enabled PC makers like Dell Computer Corp, Compaq Computer Corp and others to drive down product prices in 2001, giving consumers their best bargains ever for high-performance machines. Those bargain-priced machines helped stimulate a recovery in PC buying late lasy year to give the industry a little relief from a prolonged sales slump.
But rising memory prices and expected price stability for other key components, including microprocessors, may force PC makers to take a slower approach to lowering prices. Some analysts say stabilizing prices for computer components could signal a temporary truce in the PC price wars.
"When component costs are rising or stable, some of the advantages of direct distribution are muted," said Bill Shope, an analyst who follows PC stocks for ABN AMRO. "The [PC price] declines we've seen from Dell has been the company passing on component price declines and then some."
Dell is affected more by price swings because it doesn't have nearly as much inventory of components as its competitors. When prices are falling, Dell benefits from not having long-term contracts. When prices rise, Dell pays more than others who locked in a older, lower prices. Dell declined to comment. Compaq said Wednesday when it reported fourth-quarter earnings that stabilizing component costs helped it stem the rapid decline in PC prices that had sapped its profits.
The increase in memory prices alone won't affect computer makers' profits much, analysts say. Companies such as Dell will simply end some promotions of free memory upgrades and pass along higher memory prices to customers.
And memory accounts for much less of the overall cost of a PC today than it did a few years ago. "It used to be couple hundred dollars," said Bear, Stearns analyst Andrew Neff. "Now it's a few dozen or tens of dollars. As a percent of the total cost, it's relatively small. But it gets all the press."
So long as computer makers can get the supplies they need, albeit at higher prices, the impact will be limited. Memory producers voluntarily taking some production offline is far different from the Taiwan earthquakes in late 1999 that crippled production and caused prices to spiral without warning, hurting Dell's earnings because the company couldn't increase prices quickly enough.
"Dell learned from its mistakes from the last time there were memory price spikes," Neff said. Now the company has clauses in supply contracts that allow it to automatically increase prices to allow for changes in component costs.
Analysts say that large manufacturers, such as Dell and Compaq, will continue to get the processors that they need. The losers will be small firms, so-called "white-box" vendors, who build non-brand-name computers. Even at today's higher prices, computer memory is still an incredible bargain. In the early 1990s, adding a single megabyte of memory cost at retail more than US$20. Today it costs a little more than US$0.20. Many dealers no longer sell memory modules that are smaller than 128 megabytes, an amount that would have seemed enormously large just five years ago.
The reason is competition and technical innovation. The 1990s brought a flood of new competitors into the memory chip business and improvements in manufacturing processes multiplied the productive output of each chip factory. Memory went from being in extreme shortage in 1995 to being in heavy oversupply in 1996 and the market hasn't fully recovered since.
The personal computer sales slump hit last year, the price of memory tumbled into a near-death spiral. Worldwide sales of memory chips dropped 62 percent to just under US$11 billion. In the face of weak demand, memory makers dropped prices again and again just to bring revenue in the door.
"It was the worst year ever for the DRAM business," said analyst Brian Matas with IC Insights.
At Samsung Austin Semiconductor's five-year-old memory factory in Northeast Austin, the price of a 128-megabit chip dropped from more than US$10 in the fall of 2000 to less than US$1 in early December, less than it cost to make the chip. The 950-employee chip factory is owned by South Korea's Samsung Electronics Corp, the largest maker of memory chips, with an estimated 30 percent share of the worldwide market.
Having to sell chips for less than cost "sucks the air right out of your lungs," said Samsung spokesman Bill Cryer.
Prices have risen enough in the past month to allow most memory makers to make a modest profit on the chips they sell, analysts say.
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