ST,
It is a well known economic principle that in the long run the price of any commodity is the cost of its production. In case of DRAM, this principle manifests itself in an interesting way; In the early stages, supply is below demand and the product is quite profitable. As more and more producers jump on the band wagon, the price drops to its cost of production. However, the inevitable underestimation of industrywide capacity to produce as well as the cyclical nature of the business, brings the price of the most mature segments well below cost. At which point anyone who has not already jumped on the next-hot-segment will do so and the cycle repeats.
We're almost in agreement. The price will never come down to the pure cost of production (assuming that's what you meant) in any commodity, because businesses also have to cover the cost of doing business, such as paying for employees, paying for new capacity plans, etc., as well as the cover the opportunity cost of the capital and other resources (which includes the profit). In any business, including commodities, some manufacturers are more efficient at production, or have better sales people (and win more business which drives the production quantities up and cost per unit down), or change the business model to reduce unnecessary costs (like Dell and Gateway did with the direct model). So different businesses will have different costs of building and selling the product and therefore different levels of profitability. The manufacturers with the highest costs (and, therefore, the lowest levels of profitability) usually drop the product from their product lines first. This reduces competition, allowing the remaining manufacturers to keep the price points (and profitability) up a little longer and extend the life of the product. Eventually, however, profits shrink to the point where it's not worth it for anyone to build the product.
I agree with you that it tends to be cyclical and very difficult to control. But, again, no one ever forecasts that they're going to lose market share, so it's partly a problem of their own making.
Dave |
