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Technology Stocks : Rambus (RMBS) - Eagle or Penguin -- Ignore unavailable to you. Want to Upgrade?

To: Don Green who wrote (25534)	7/23/1999 10:44:00 AM
From: Dave B	Read Replies (1) \| Respond to of 93625

Don, Very True, but without DEMAND, which to me is the BIG question, the supply / oversupply likely... based on YOUR thoughts above..May eventually lead Rambus the company to accept receiving LESS!!!! "fees" to make it happen! If that word ever comes out WATCHOUT below. I'm not sure if you mean Rambus will receive less fees because they have to cut the royalty rate to encourage production, or if you mean that falling prices will mean that they're revenues will fall just because they're getting a % of a smaller number. I'll assume the first case. For RDRAM the royalty will initially be a very small portion of the overall picture. Let's assume a 128Mb SDRAM chip sells for $80, and it costs them 85% of that to make (it's probably more than that) or $68. So they'd make $12 per unit gross margin. RDRAM costs 20% to 30% more to build (I'll use 25%), which comes to $85, but will sell initially for double the $80 price, or $160 (or maybe more). The 1.5% royalty on $160 is $2.40, leaving $72.60 gross margin. So $2.40 is a drop in the bucket when comparing $12 per unit versus $72.60 per unit. And a 45% gross margin is really, really exciting in a world where 15% is probably considered excellent. Now in the hard drive and DRAM businesses businesses most profits are generated in the first 3-6 months of a products life when competition is minimal (before the product becomes commoditized). The first company to bring out a new hard drive capacity or a new DRAM chip capacity gets to charge a premium until everyone else catches up. And since everyone wants a part of these profits, they all try to get there first. So to paraphrase the vernacular, "oversupply happens." Based on the above numbers, I believe the DRAM companies will jump on the RDRAM wagon to get these extraordinary profits before all the production really kicks in. (If any of the DRAM mfrs. are into playing games, they would be downplaying the importance of RDRAM while at the same time building capacity to try to make the competition question whether or not to do RDRAM). So in the end, production will increase rapidly as everyone tries to be the first in and builds capacity. As production increases, then prices will drop because no one will want to sit around with a warehouse full of parts that are losing value everyday. Falling prices will encourage PC vendors to include RDRAM in lower and lower end systems to get a competitive advantage of their own (assuming that the "perceived" value of 800Mhz could be a sales tool). And again, by the time we get to Timna, there won't be an option unless you want to buy one of those other low-end chips that only supports that really slow 133Mhz memory (perception, not necessarily reality <G>). JMO, Dave