In the tech world, DRAM is radioactive. In November, Infineon Technologies ( IFX) announced it was spinning off its DRAM memory-chip business. And Micron Technology ( MU) has crafted a strategy that revolves around whittling down the mix of commodity DRAM within its product portfolio in favor of products such as image-sensor semiconductors. It's hard to blame them. Last year's precipitous decline in DRAM prices, by some accounts up to 50%, ravaged the top line at each of those companies. But according to some industry watchers, the $25 billion DRAM business is undergoing a transformation. The volatile, highly commoditized memory market is evolving into a more complex business that could bring greater financial stability to these chipmakers. And though investing in memory-chip companies once meant betting on the DRAM industry as a whole, the financial performance of memory companies no longer moves in lockstep with industry fortunes. The DRAM industry used to be an all-or-nothing proposition, says Nam Hyung Kim, an analyst with electronics research firm iSuppli. "Everybody made money, everybody lost money." Today, says Kim, a company's particular focus, cost structure and strategy can help it break out of the pack. "It's not really a simple calculation anymore," he says. Driving the change has been demand for different flavors of DRAM used in devices beyond the desktop PC, as well as the growing popularity of NAND flash, a type of memory that retains data even when the power supply is cut off. DRAM today comes in several different interfaces as well as in versions designed for low-power consumption, graphics or other special tasks. With this broad variety of memory products all based on similar materials and manufacturing processes, memory makers can now shift factory resources to different products in response to market conditions.
That's a significant difference from just a few years ago, when memory makers produced one type of memory and pumped out DRAM chips using 100% of their manufacturing capacity. Excess inventory was sold on the spot market, often at a big loss to the memory makers. The DRAM business is in some ways getting " de-commoditized" says Bob Merritt of Semico Research. Instead of simply competing on manufacturing efficiency, the memory makers now compete on anticipating the correct level of demand for the various types of memory they produce. In January, Samsung and Hynix Semiconductor, the world's top two DRAM makers, each reported robust fourth-quarter profits despite the plunge in DRAM prices that pummeled some of their competitors. Much of their success owed to strong sales of flash memory chips, which are used to store digital music and photos in gadgets such MP3 players. Flash's success is also helping DRAM. With memory makers now fielding a mix of memory products that includes flash and various DRAM types, the odds increase that companies' supplies will be "out of mix," or short of a certain kind of memory. And in markets with that type of model, says Merritt, average selling prices tend not to decline as much. "I think it should lead to, if not higher profitability, at least stabilized profitability, which by itself is a remarkable change in the business model for the memory manufacturers," says Merritt.
Some analysts are predicting a shortage of DDR2 DRAM, the most common type of DRAM for PCs, as a result of the industry's recent shift of manufacturing resources toward NAND flash. The explosive demand for flash memory, along with its beefy profit margins, prompted Samsung and Hynix to convert some of their DRAM manufacturing capacity to flash production last year. Now, with fewer resources for producing DRAM available, prices are on the rise. Recently Samsung reportedly raised its contract prices with major customers. And DDR2 prices on the spot market have risen roughly 7% in the past month, according to DRAMeXchange. What's unclear is whether factory resources will be reallocated toward DRAM production in order to ease supply constraints. iSuppli's Kim says the big memory makers have already begun converting production capacity back to DRAM from NAND flash. The net result is that DRAM prices will soon head south again, Kim wrote in a recent report, maintaining the firm's neutral rating on the DRAM market. "For suppliers, many of which sell both DRAM and NAND flash, the memory business is turning out to be a zero-sum game in the first quarter," said Kim. Merrill Lynch analyst Simon Dong-je Woo is skeptical that capacity will be reallocated toward DRAM because margins for NAND flash remain so much more appealing. Moreover, converting flash equipment back to DRAM production isn't easy, he said. "Our analysis clearly suggests that it would be far superior to raise DRAM prices this time around than to opt for the risk and opportunity from shifting NAND capacity to DRAM," Woo says of the memory-chip companies. Whichever way the DDR2 supply situation shakes out, it's clear that the memory makers are playing by a new set of rules.