A tectonic shift from PCs to mobile devices is remaking the DRAM market, moving a historically volatile business onto firmer, safer ground.
Since the 1980s, the DRAM business has been a high-volume, commodity business, with the lion's share of production going to PCs. Supply and demand were often wildly out of balance. When the PC market boomed, it could cause DRAM shortages, which led to high DRAM prices and led memory makers to increase production. Then the industry would crash as supply caught up with, and then overshot, demand. DRAM makers were living in clover in the good times, and scratching the barrel in others. It was a tough business.
But the rise of mobile devices is changing that cycle. Today's DRAMs fall into one of three major categories: traditional DRAM for PCs (DDR3), DRAM for mobile (low-power DDR2), and specialty DRAM, manufactured for higher performance in particular niches, according to Michael Howard, senior principal analyst, DRAM and compute platforms, at IHS Corp. These three are generally not interchangeable; you can't use PC DRAMs in smartphones and tablets.
And demand for mobile DRAM is rising fast. Smartphones sales surpassed PC demand in the fourth quarter of 2011, according to market research firm Canalys. IDC has predicted that mobile devices as a whole will outsell PCs by more than two-to-one this year. As of the second quarter of 2012, PCs accounted for less than half of the market for DRAM, the first time its share has ever fallen below 50 percent, according to IHS. "The decline in DRAM share for PCs appears irreversible," said the company in a report, predicting that it will fall from 49 percent in second quarter of 2012 to 43 percent by the end of 2013.
It's already making a difference in who has survived the brutal DRAM market of the last few years. Mobile DRAM and specialty DRAM are not commodity products, so companies that make them, in addition to traditional DRAM, have had more stable pricing. "Mobil DRAM is built to order," said IHS's Howard during an interview with me. "Prices are negotiated on a quarterly basis." That means production is more likely to meet demand, and to generate higher margins for memory vendors.
By the end of next year, the DRAM industry will have shrunk to only three major players, says Howard: Samsung, SK Hynix, and Micron. While there are other DRAM makers, they don't own the technology and have to license it from these three, he notes. The DRAM manufacturers in Taiwan, for example, are still hanging on. "They just refuse to go out of business."
The DRAM vendor in the best position is Samsung, which has about 40 percent of the overall DRAM market and 60 percent of the mobile DRAM market, according to Howard. It also has a stable customer -- itself, in Samsung Mobile. Hynix SK has 22 to 24 percent of the overall DRAM market and 22 to 24 percent of the mobile DRAM market. Micron historically had about 13 percent of the overall DRAM market and only 4 percent of mobile DRAM. It is fixing that by acquiring Elpida, which has about 20 percent of the mobile DRAM market.
With the right balance of PC DRAM, mobile DRAM, and specialty DRAM, these companies should be in a more stable market. All three of them also make NAND flash as well. And even though NAND is made in different fabs, "if they feel there's way too much capacity in DRAMs, they could transition those fabs to produce NAND," according to Howard.
In some ways, the NAND market has the elasticity of the old DRAM market, in the sense that OEMs can always stuff more memory into their products. That's particular true for the solid-state drive market, notes Howard. On the other hand, the mobile device market doesn't have that flexibility. Once a smartphone or tablet is designed, it's not so simple to just add more NAND memory.
Nevertheless, "the elasticity component of the DRAM market is shrinking [as the PC market shrinks], whereas the elasticity component of the NAND market is growing."
Taken together, these factors should help the remaining memory companies build a better business future. "They aren't out of the woods yet, but long-term I think the industry is going to be a lot healthier," Howard adds. By 2014, "we anticipate this being a tidy, profitable industry."