It?s one of the curious ironies of computing that tiny slivers of silicon control the price of a PC. That?s not only true for CPUs but also for memory. But the trouble with Dram memory chips is that, like pork bellies, they are a commodity and are traded widely.
So when the Korean government, alarmed about the 80 per cent slump in Dram prices over the past year, took action last week to protect Hyundai, Samsung and LG - the three chaebols that between them supply half of the world?s Drams - it caused the alarm bells to ring at every PC manufacturer and distributor around the world. Sources at Samsung confirmed the government had restricted export of the chips by a massive 37 per cent to shore up prices.
Opinions vary about whether or not the steep price hikes the industry has seen over the past week will continue but it is likely that Taiwanese and Japanese manufacturers will follow the Korean giants' lead, according to a senior source at memory distributor Kingston Technology.
This March, all the Dram manufacturers will agree on a reference price for memory and it is in all their interests to keep the price up by restricting supplies. Making fabrication plants for memory chips is an expensive business and prices of the chips had slumped so much over the past year that Samsung, Hyundai and LG were perilously close to the point where they were selling them at cost.
If the price sustains its upward thrust, the chaebols will be very happy. Although all three do not completely depend on memory for their continued growth, Drams are the bread and butter that have fuelled their growth over the past 10 years. In its turn, the South Korean economy looks to these conglomerates to maintain its position as one of the ?tiger economies? in the Far East.
What does this mean for end users, the industry itself and the distributors and dealers that trade in Dram?
Brian Green, product manager at ALR UK, which sells servers into the corporate market, said that while the rises will have an almost immediate effect on retail PCs, many of the large vendors will attempt to stave off price rises until the end of March. The reason, he said, was that the corporate buying season is between January and March and vendors will not rock their best period by imposing price premiums because of memory price rises. There is already a shortage of 200MHz Pentium Pros, used in symmetric multiprocessing servers, which are in stiff demand.
?It [the price rise] will make an impact on both retail and corporate sales. Anyone with a server running an application or using Windows NT with SQL will have 128Mbytes or even a quarter of a gigabyte of memory. This will dramatically impact server prices,? he said.
That was confirmed by Roy Taylor, managing director of memory distributor Vanguard, which sells Taiwanese Dram. ?Some people think that this will be a short term rise in prices but I have a different take,? he said. ?This could be the beginning of a longer shortage.?
While the variables are complex, Taylor said that he had three reasons to suppose that the price increases will last longer than a month. ?This is the biggest selling quarter of the year for PC vendors,? he said. ?Hardly any corporates have bought any PCs since they found out about the price cuts in February and the new MMX chips.
?The OEMs we are talking to are saying there?s a big backlog of PCs to build between February and March."
The second reason why he thinks the rises will continue is the agreement between memory manufacturers, which comes up for renewal in March. ?We?ll have a price reference agreement then,? he said. Although there is an existing agreement, it had not been adhered to very closely and that will change with the next round of talks."
Thirdly, Taylor said, there was a direct relationship between the price of memory and the number of PCs shipped. ?It?s an easy sum to calculate the amount of Dram manufactured and the number of PCs being made. This year, 70 million PCs and two million workstations will be made. If you take that 70 million and assume that each has 16Mbytes of memory, there will still be surplus,? he said.
That means stasis between the memory manufacturers and the PC vendors, he said. ?It?s been a game of poker and no-one?s left the table. Prices have gone down and down and down. Windows NT take-up was so small and there were no compelling reasons for corporates to change over,? he said.
But 1997 will bring a change in the picture, Taylor thinks. ?The really compelling reason for corporates to buy PCs with 32Mbytes rather than 16Mbytes of memory will be Office 96. The corporates will now move over to Windows 95 and NT and Office needs 32Mbytes of memory.?
Just two years ago, when Windows 95 was first announced, Dram prices were so high that between them memory and CPUs accounted for a large proportion of the cost of the PC. While that changed during 1997, giving buyers incredible bargains, a persistent move upwards in the price of memory will mean inevitable price increases for machines. If the memory manufacturers have their way and the prices continue to rise, that will have reverberations for everyone involved in the industry. It could even mean that the bad old days when Dram was a highly desirable target for thieves will return.
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