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Changing the pyschology of memory pricing: instead of free fall pricing, memory purchasers are starting to adopt a more stable purchasing strategy  (Source: Samsung)
Practically every new mobile device today uses flash memory for storage -- are the parallels obvious?

One attendee at the Samsung FutureUnlimited conference described NAND factories as "the digital equivalent of an oil well."  It's certainly not hard to link the incredible margins of NAND memory to that of the world's largest commodity, but the similarities don't stop there.

An industry that totaled just one billion dollars in 2001 will eclipse the entire DRAM market within the next two or three years, totaling just over $15 billion in revenue last year.  Conservative estimates put the 2008 revenue total at $21 billion.

The world's insatiable appetite for solid-state memory dominates every facet of portable electronics, and with the introduction of 64GB and 128GB solid-state hard drives, the desktop is next. 

In just the last year, the major flash memory players sunk incredible amounts of money into new facilities.  Toshiba and SanDisk announced a joint-venture estimated to cost $16.7 billion to build three NAND factories in Japan. Samsung's one million square-foot NAND fab under construction in Austin is the largest single foreign investment in the U.S. ever; an appropriate home for digital Texas Tea.

Apple, Intel and SanDisk, to name just a few, adjusted earnings based solely on NAND pricing projections. Cheap, ubiquitous flash memory is bad for suppliers like Intel, but good for consumers like Apple.  The inverse is true during a shortage.

"Pricing has moved very rapidly, much more so than we thought," Intel CEO Otellini admitted earlier this week.

Samsung vice president of memory marketing Jim Elliot believes a fundamental change will occur with flash memory this year.  "We're going to see a psychology change this year.  The stair-step model for NAND pricing will become a sideways S-curve."  Elliot then flipped his slide deck to a picture of Sigmund Freud with a squiggly line on his forehead.

An outage last August at a Samsung NAND fab cost the company a "mere" $54 million in lost revenue, but it propelled the memory industry into speculation and unstable prices for months after.  Similar trends occur in the oil market when a refinery malfunctions.

"In the past, NAND prices tended to exhibit trends of oversupply and falling prices, followed by undersupply and flat prices," Elliot elaborated.  This is a trend typically found in markets like microprocessors.  "Moving forward, instead of minimizing inventory risks, we project companies will opt for strategic buy-aheads to take advantage of rise-and-fall price fluctuations."  This trend is more akin to the jet fuel market.

What Elliot describes is a bonafide futures market. The end result for consumers?  As the NAND market begins to stabilize, we'll stop seeing the price-per-gigabyte halve each year, and we'll stop seeing companies dramatically adjust earnings based a market that isn't as volatile.

With so many competitors in the NAND production game, it only takes a new factory or outage to upset the delicate spot market pricing. But as more companies like Intel and Apple begin to adopt the S-curve mentality, consumers will ultimately benefit from companies that can project supply and pricing for longer periods of time.



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Commodity Market
By TomZ on 3/7/2008 3:52:44 PM , Rating: 4
So in other words, NAND is becoming a commodity market. I'm not sure how significant of an observation that is.

Drawing a parallel between NAND and oil necessarily drags in all kinds of other baggage like politics, environmentalism, etc. that don't really apply the same way as they do to the NAND market. So I'm not sure it's an apt comparison.

Makes for an interesting headline, however.




RE: Commodity Market
By spluurfg on 3/7/2008 9:44:59 PM , Rating: 3
Agree completely -- a significant amount of electronics is highly commoditized -- options are traded on DRAM, for example, which is still highly volatile.

The trick with oil is that while finite, it is relatively abundant (you can still find millions of barrels in the ground) and is an easily tapped source of energy. People won't switch until it is economically sensible to do so (which might be starting to happen now).

Flash memory is simply manufactured, lasts a long time, and it's entirely possible that a newer, better, or cheaper alternative will be developed within 10 years which would be phased in without consumers ever learning the abbrevation NAND.


RE: Commodity Market
By KristopherKubicki (blog) on 3/7/2008 10:47:27 PM , Rating: 2
While DRAM has been a commodity for years, NAND has never been. Yeah it seems trivial, but this is a big deal to companies that that make products that are well, completely subject to NAND pricing (Apple, SanDisk, etc).


RE: Commodity Market
By spluurfg on 3/8/2008 1:52:31 PM , Rating: 2
Yeah, I think we all agree that NAND is heading in the direction of commoditization. However, the petroleum analogy does not make sense to me, beyond that it might be an expensive commodity, which I could claim about a variety of things.


RE: Commodity Market
By KristopherKubicki (blog) on 3/13/2008 2:06:39 PM , Rating: 2
Well -- except for the fact that fluctuations in NAND have extensive effects throughout the entire electronics industry. Electronics need and love NAND, and many of them can't do without it now. This is much different than say, coffee, which really only affects a localized market in times of fluctuation.


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