The memory market

This section is dedicated to describing aspects of the memory business.

DRAM manufacturers

The most important components of a memory module are its memory chips. The quality of the DRAM chips used determines the overall reliability of the module.

The large manufacturing plants required to build DRAM chips cost a great deal of money -- about $2 billion for a typical plant -- and can take up to two years to build. Making the decision to build a DRAM manufacturing facility requires careful consideration. To justify such a decision, a company must be able to predict the demand for the product two years in advance and sell the DRAM for a sufficient period of time and at a high enough price to cover the investment and make a profit.

Add to this the factor of evolving technologies: computer technology advances at such a rapid pace that by the time a company has built a plant to produce a particular DRAM chip, the technology and the demand for that chip may be outdated. Also, if there's a surplus of chips on the market and prices decline, a company may not be able to cover the cost of building the manufacturing facility -- let alone make a profit.

Because of the heavy investment and risk involved in manufacturing DRAM chips, DRAM manufacturers tend to be large, established companies. Many of these companies are government-subsidized or rely on partnerships with other large companies (such as Hitachi®, Toshiba®, Samsung® and so on) to generate the required capital.

How memory is sold

Once the manufacturing facilities are built, DRAM manufacturers must make and sell extremely large quantities of chips in order for the investment to pay off. Eighty percent of DRAM production is sold to companies that buy in quantities of 5,000 to 120,000 units based on long-term contracts. The duration of the contracts can range from three months to one year, during which time the quantity purchased and the price are guaranteed. This system protects the chip manufacturers from fluctuations in the DRAM market and ensures steady profits. DRAM manufacturers tend to limit their contract-based DRAM sales to well-established companies with whom they have developed long-term relationships. Companies sell the remaining 20 percent of their chips -- those not tied to contracts -- to smaller companies through a distribution channel. Again, this is to protect the DRAM manufacturers from fluctuations in pricing and to ensure economies of scale.

The broker market

In many cases, a company that buys chips on contract ends up with more than it needs. When this occurs, the company sells the excess inventory to memory brokers who buy and sell memory the same way a stock broker buys and sells stock. Brokers typically have sales channels in numerous countries, will buy from whoever gives them the lowest price, and sell to whoever pays the highest price. Because the memory market fluctuates daily, memory components may pass through the hands of several brokers before they end up in a computer.

The gray market

The gray market is similar to the broker market; in fact, the terms are often used interchangeably. The primary distinguishing attribute of the gray market is that the seller is not authorized by the original manufacturer. For example, if you buy XXXX memory from someone who is not an authorized XXXX reseller, you are buying on the gray market. In such a case, you can be sure the memory has changed hands at least once since it was sold by the last authorized member of the distribution channel.

What drives demand for memory

As you can see, the memory market is governed by classic supply-and-demand economics. The factors that create demand for memory include:

• The development of high-performance software applications and operating systems such as Windows® NT and OS/2®
• Increased need for memory in a variety of consumer products such as video games, automobiles, and cellular phones
• Increased capabilities in film, multimedia, and video conferencing software packages
• An increase in both the number of personal computers sold and their standard memory configurations
  • In 1996, worldwide PC shipments grew roughly 19 percent to 70 million units; forecasts for the year 2000 predict almost 120 million systems shipped worldwide
  • Previously, standard configurations ranged from 1 to 4 megabytes of memory; currently, most new systems come standard with 16 or 32 megabytes and require upgrading to 64MB to utilize new software applications
• The migration to Microsoft®, Windows® 95 and NT
  • Studies at the time of release show that Windows 95 will require at least 16-32 megabytes of memory to utilize the full functionality of the system
  • With NT sales on the rise, Microsoft estimates that 10 to 15 percent of new systems will ship with this Operating System
  • Microsoft also estimates that 70 to 80 percent of new systems will ship with Windows 95
  • As 32 bit Operating Systems and applications become prominent, 32 to 64MBs of base memory will emerge as a minimum starting point for PC memory requirements

Developers of software applications and operating systems will continue to drive the need for memory. Ultimately, developers themselves are driven by the needs and expectations of the market. As computer technologies evolve rapidly, people's expectations of what computers can do continue to escalate dramatically. Developers must respond to these changing needs and expectations with additional features and functionality in their software applications and operating systems. So far, enhanced features and functionality in software have always required additional memory. All indications suggest that this trend will continue.

Choosing high-quality memory

When the demand for DRAM is higher than the available supply, some companies cannot secure enough allocation to fill all of their memory requirements. When supply of chips is higher than demand, excess product is "dumped" onto the gray market. This causes people to turn to the gray market to get a "a good deal". Because there is no way of knowing how many times memory purchased from these markets has changed hands, it's difficult to ascertain its quality and reliability.

Here are two suggestions on evaluating memory at the time of purchase:

First, inspect the chips on the module to see if they come from one of the major manufacturers.