wishful thinking from MU holders. These LTAs or SCAs are just hedges on the prices going even higher. Once spot prices start dropping, all of the agreements will be broken in a millisecond. The break up fees have already been paid! There's absolutely nothing the buyer has to do, but to simply not buy at the inflated old price and instead buy from someone else at the new, lower price.
Does anyone really think that there is any agreement in the world that will keep companies paying $1000 for a product priced at $20 on the market? The larger the gap the larger the incentiv to break the agreement.
I think you are right but would like to keep in consideration that penalty clauses are real and can be enforced in court. We have no (or perhaps: have some) clue how far the bargaining power is leaning toward the suppliers. Maybe the signatories in the SCA are so cornered, they will sign anything and think ‘boom or bust’.
It's funny how everyone (especially here on HN) accepted (and expected) extremely high profit margins from software businesses, but now that hardware companies are increasing their margins to match it is suddenly outrageous. The same was reflected in engineering salaries, with software engineering salaries being often a multiple of hardware engineering ones. All this despite the fact that software businesses is arguably much easier, less risky and less capital intensive.
For decades now we have seen the expectations that software businesses (and in particular FANGs) have pushed any hardware margnins to be more and more like commodities, while they were extracting all the value.
This phenomenon of "hardware companies are increasing their markets" is just a consequence of the fact that the memory market is now dominated by quasi-monopolies.
Decades ago, when memory production still existed in many countries, no such margin increases would have been possible.
Even now, this would not have been possible without the US government actively suppressing competition in the memory market, by sabotaging the Chinese memory producers.
The so-called "sanctions" against the Chinese memory producers have started some years ago precisely in the moment when Micron was threatened to lose market share to the Chinese producers (e.g. when Apple was considering to switch to them as providers). Based on the "Cui prodest?" principle, it is extremely likely that Micron was the entity who lobbied the US government to sabotage the Chinese memory producers, creating the environment where companies like OpenAI could successfully drive the memory prices to record levels.
This exactly. The software industry has enjoyed lack of antitrust for decades now, and only complains now that others are able to ask any price against them.
Yeah they're going to diversify... to one of the other two memory companies who will likely be raising their prices too, because why should they be suckers?
The suckers are those companies agreeing to this deal. 'Your margin is my opportunity' means prices will fall eventually once more production come on line. The invisible hand will slap their faces
"... involve a commitment to buy a certain quantity of product and pay for it in a pricing band that has a floor and a ceiling price. The floor price covers the historically high gross margins mentioned above, and the ceiling price means those who commit to an SCA are insulated if memory prices go even higher."
So clearly 16 large buyers consider it likely that prices will go even higher. How likely? >10% chance? Likely enough to sign an agreement.
Well, apparently those companies believe memory prices will continue to rise, so they'd better lock in supply at the current (high) prices. We'll see if they're right...
"Eventually" doing a lot of work. Micron (and implicitly anyone signing this deal) are betting demand is going to outstrip capacity for several years, taking into account what new capacity can be brought online and when.
nobody is agreeing to what the headline says. the SCAs are just a hedge against even higher prices. the agreements will be broken the second prices drop.
> To date, five manufacturers have pleaded guilty to their involvement in an international price-fixing conspiracy between July 1, 1998, and June 15, 2002, including Hynix, Infineon, Micron Technology, Samsung, and Elpida.
It is history; we have not learned; we are doomed to repeat it.
Why? Part of the problem is that chip manufacturers (from tsmc to to memory makers) are reluctant to ramp up production as the AI bubble may pop and they would find themselves with huge over capacity, a scenario they have gone through many times.
By giving them stability of cash flows, the AI companies are enabling them to make those investments and to ramp up production. That's a good thing, not a bad thing. Over time it should ease the squeeze on chips.
It feels different this time. I bet there will be a generation of PC enthusiasts that are going to remember Crucial exiting the consumer market to chase AI dollars. And similar, when they hear Micron/Samsung/Sk Hynix, they'd be wary of the price gouging. Gamer's Nexus is doing really good job exposing the DRAM cartel.
PC enthusiasts aren't exactly sentimental when in front of a spec sheet and a price list. Plus where else are you going to go. All manufacturers are hiking up their margin if you believe their stock prices.
In all seriousness, the payoff of a real competitor not in the cartel entering at some time in the next five years would be huge. They would have business through the busts because people would go to them first. The challenge will be fighting corruption every step along the way. They would have to keep a sharp legal team on staff for all the litigating necessary to defend against anti-competitive practices and even then would only succeed in a legal and political environment accepting of anti-corruption enforcement.
Huh. It looks like Micron managed to lock in these contracts because companies are scared that prices will continue to rise. But in doing that, Micron has managed to lock themselves in a comfortably high floor prie, potentially for longer than the boom is going to last. Big win for Micron.
Well, I didn't say the price is fixed. Just that even if the boom goes away, Micron will have their price floor. The benefit to a customer signing a contract like that, of course, is the price ceiling. But indeed, prices can continue to grow within that range.
"consolidated gross margin came in at 84.9 percent"
They are in saas metrics territory in terms of margins, this is insane.
wishful thinking from MU holders. These LTAs or SCAs are just hedges on the prices going even higher. Once spot prices start dropping, all of the agreements will be broken in a millisecond. The break up fees have already been paid! There's absolutely nothing the buyer has to do, but to simply not buy at the inflated old price and instead buy from someone else at the new, lower price.
Does anyone really think that there is any agreement in the world that will keep companies paying $1000 for a product priced at $20 on the market? The larger the gap the larger the incentiv to break the agreement.
I think you are right but would like to keep in consideration that penalty clauses are real and can be enforced in court. We have no (or perhaps: have some) clue how far the bargaining power is leaning toward the suppliers. Maybe the signatories in the SCA are so cornered, they will sign anything and think ‘boom or bust’.
The article says a large part is paid upfront.
Predatory. I hope the tech community remembers this and diversifies away from companies that behave this way
It's funny how everyone (especially here on HN) accepted (and expected) extremely high profit margins from software businesses, but now that hardware companies are increasing their margins to match it is suddenly outrageous. The same was reflected in engineering salaries, with software engineering salaries being often a multiple of hardware engineering ones. All this despite the fact that software businesses is arguably much easier, less risky and less capital intensive.
For decades now we have seen the expectations that software businesses (and in particular FANGs) have pushed any hardware margnins to be more and more like commodities, while they were extracting all the value.
This phenomenon of "hardware companies are increasing their markets" is just a consequence of the fact that the memory market is now dominated by quasi-monopolies.
Decades ago, when memory production still existed in many countries, no such margin increases would have been possible.
Even now, this would not have been possible without the US government actively suppressing competition in the memory market, by sabotaging the Chinese memory producers.
The so-called "sanctions" against the Chinese memory producers have started some years ago precisely in the moment when Micron was threatened to lose market share to the Chinese producers (e.g. when Apple was considering to switch to them as providers). Based on the "Cui prodest?" principle, it is extremely likely that Micron was the entity who lobbied the US government to sabotage the Chinese memory producers, creating the environment where companies like OpenAI could successfully drive the memory prices to record levels.
This exactly. The software industry has enjoyed lack of antitrust for decades now, and only complains now that others are able to ask any price against them.
Yeah they're going to diversify... to one of the other two memory companies who will likely be raising their prices too, because why should they be suckers?
The suckers are those companies agreeing to this deal. 'Your margin is my opportunity' means prices will fall eventually once more production come on line. The invisible hand will slap their faces
"... involve a commitment to buy a certain quantity of product and pay for it in a pricing band that has a floor and a ceiling price. The floor price covers the historically high gross margins mentioned above, and the ceiling price means those who commit to an SCA are insulated if memory prices go even higher."
So clearly 16 large buyers consider it likely that prices will go even higher. How likely? >10% chance? Likely enough to sign an agreement.
Well, apparently those companies believe memory prices will continue to rise, so they'd better lock in supply at the current (high) prices. We'll see if they're right...
"Eventually" doing a lot of work. Micron (and implicitly anyone signing this deal) are betting demand is going to outstrip capacity for several years, taking into account what new capacity can be brought online and when.
nobody is agreeing to what the headline says. the SCAs are just a hedge against even higher prices. the agreements will be broken the second prices drop.
https://en.wikipedia.org/wiki/DRAM_price_fixing_scandal
> To date, five manufacturers have pleaded guilty to their involvement in an international price-fixing conspiracy between July 1, 1998, and June 15, 2002, including Hynix, Infineon, Micron Technology, Samsung, and Elpida.
It is history; we have not learned; we are doomed to repeat it.
waiting for you[0] to lay the $10B on the table for a new DDR fab - there's only so long I can wait for a new PC for the kids
[0] can actually be anyone
How do you want them to behave? There is more demand than production. How would they choose who to sell to at lower prices? Organize a lottery?
Why? Part of the problem is that chip manufacturers (from tsmc to to memory makers) are reluctant to ramp up production as the AI bubble may pop and they would find themselves with huge over capacity, a scenario they have gone through many times.
By giving them stability of cash flows, the AI companies are enabling them to make those investments and to ramp up production. That's a good thing, not a bad thing. Over time it should ease the squeeze on chips.
> I hope the tech community remembers this and diversifies away
Doubt it. Has it EVER happened before?
It feels different this time. I bet there will be a generation of PC enthusiasts that are going to remember Crucial exiting the consumer market to chase AI dollars. And similar, when they hear Micron/Samsung/Sk Hynix, they'd be wary of the price gouging. Gamer's Nexus is doing really good job exposing the DRAM cartel.
https://www.youtube.com/watch?v=jVzeHTlWIDY
PC enthusiasts aren't exactly sentimental when in front of a spec sheet and a price list. Plus where else are you going to go. All manufacturers are hiking up their margin if you believe their stock prices.
What are they going to do about it? Start their own DRAM fab?
With blackjack and hookers.
In all seriousness, the payoff of a real competitor not in the cartel entering at some time in the next five years would be huge. They would have business through the busts because people would go to them first. The challenge will be fighting corruption every step along the way. They would have to keep a sharp legal team on staff for all the litigating necessary to defend against anti-competitive practices and even then would only succeed in a legal and political environment accepting of anti-corruption enforcement.
There is a futures market for DRAM and NAND for exactly this purpose.
Why not just sell on the open market, and let traders and financiers and all their prediction models give you the best possible price?
That's ... just sad.
Huh. It looks like Micron managed to lock in these contracts because companies are scared that prices will continue to rise. But in doing that, Micron has managed to lock themselves in a comfortably high floor prie, potentially for longer than the boom is going to last. Big win for Micron.
The article says they locked in floor prices, so they can even continue to climb is what I understood. So maybe they are buying capacity instead.
Well, I didn't say the price is fixed. Just that even if the boom goes away, Micron will have their price floor. The benefit to a customer signing a contract like that, of course, is the price ceiling. But indeed, prices can continue to grow within that range.
https://news.ycombinator.com/item?id=48676382
This is Capitalism working as intended - resources (RAM) are allocated to those which can extract most value from them (AI labs)
You mean those who can pay the most for them? Value is not in the picture here.
You can pay the most if you can get the most value out of it