It's easy to see why the DRAM industry has declined since the mid 1990s. The industry has always been tied to the computer industry. When PC sales were growing 20% per year, DRAM manufacturers' sales also grew. In fact, DRAM sales grew at an even higher rate because memory content per system increased each year.

However, the PC industry has matured because of market saturation. Slower growth rate of PCs means less DRAM demand. While memory content per PCs is growing, it is not rising at the same rate as the mid 1990s. In addition, while there are fewer DRAM manufacturers than 10 years ago, there is still too much DRAM capacity relative to demand.

All of this has resulted in a buyers' market for DRAM that has gone on for several years. Supply has been plentiful and prices have fallen. However, DRAM manufacturers say the buyers' market is coming to an end and supply will soon be aligned with demand. While no one is forecasting a sellers' market, suppliers suggest that supply will soon be aligned with demand and prices will firm.

DRAM manufacturers say there are three reasons why the DRAM market will move toward supply-demand balance. The first is that companies will upgrade their computer systems which will boost DRAM demand. Companies are long overdue to upgrade computers. Many have not upgraded systems since 1999.

Besides corporate buying of computers, DRAM demand will also increase because more types of equipment will use DRAM. New cell phones and consumer electronics equipment will use DRAM and the amount of memory used in such devices will increase as new versions of products are introduced.

Manufacturers say DRAM revenue growth will increase because of the transition from synchronous DRAM to double data rate (DDR) and DDR 2 DRAMs. Demand for the new architectures will outstrip supply because of a lack of capital investment by DRAM manufacturers during the downturn.

DRAM revenue growth forecasts vary. The Semiconductor Industry Association (SIA) says the DRAM market will grow a modest 2.9% to $15.7 billion. However, market intelligence provider iSuppli sees the DRAM market growing to $16.5 billion in 2003. By 2004 the market will reach $22.5 billion, according to iSuppi.

The reason forecasts vary is no one is sure when the corporate upgrade of computer systems will begin. "We know business will pick up in the second half," says Mike Sadler, vice president of worldwide sales for DRAM manufacturer Micron. "There will be back to school demand and the usual end of the year PC demand. But when are we going to see a re-acceleration of corporate IT spending for PC and server upgrades? That is the multibillion dollar question," he says.

Sadler says so far there haven't been any significant signs that companies are upgrading. "The good news is that each quarter that goes by when we don't see a significant uptick in terms of IT spending, the amount of pent up demand becomes more significant," says Sadler.

Before corporate upgrades begin, there has to be some stability in the equity market and corporate profits need to increase, says Sadler. "We are starting to see that, but it may be somewhat premature to declare victory. The groundwork is being laid for re-acceleration of capital spending. It is just a matter of time," he says.

Jim Cantore, director of memory for iSuppli, says corporate computer upgrades would have a significant impact on the DRAM industry. The corporate market represents about 70% of the overall PC market. ISuppli forecasts an upturn in demand for computers from the corporate market in the second half of the year.

"You can only push the old machines so far," says Cantore. "Corporations will be forced to upgrade because stuff (new software) won't run. They are at the end of their rope as far as how long they can hold off the upgrade," he says.

New applications

While PCs will remain the dominant consumer of DRAMs, DRAM manufacturers are excited about emerging new applications for DRAM including cell phones and consumer electronics equipment such as set-top boxes, video game consoles and digital televisions. Some manufacturers say 25-30% of DRAMs could be shipped to consumer electronics manufacturers by 2007.

"The spirit of innovation in DRAMs is shifting from the PC domain to consumer electronics and the mobile wireless domain," says Ivan Greenberg, director of strategic marketing for Samsung Semiconductor, the leading DRAM manufacturer.

"Innovation on the PC side is more about extracting more value out of existing systems," he says. "That's because it is a mature market. "On the consumer electronics and mobile wireless side, innovation is unbounded. That's where the really exciting stuff is taking place. Consumer electronics is exploding with innovation," says Greenberg.

An example of innovation that will drive DRAM demand is the home media server, which will hit the Japanese market later this year and the U.S. market next year. The media server will allow for home networking of electronics equipment.

"The media server sits in a home and acts as a conduit of sorts as well as a storage device for video and audio files," says Greenberg. "It transmits the stuff throughout the home to displays through an ethernet or wireless network," says Greenberg.

The devices used with the media server will require large amounts of memory. "The DRAM usage explodes because if you want a rich user experience when you're doing a personal video recording, fast forwarding or rewinding, you want a huge amount of working RAM on your platform so you can buffer everything up," says Greenberg. Set-top boxes or TVs used with the media server may have 250 and 300 megabytes of memory two or five years from now.

"That will be significant because in 2006 about 30 million digital TVs and 60 million digital set-top boxes will be shipped," he says.

Cell phones, video game consoles and even automobiles will also drive DRAM demand in the near future, according to manufacturers and analysts.

"Cell phones are the most interesting product from a potential volume application for DRAM," says Sadler. "We are working with all the major cell phone manufacturers to incorporate DRAM into the 3G (third generation) cell phones to facilitate Web browsing," he says.

The amount of DRAM sold to cell phone manufacturers will be significant. "The market size for cell phones is about 450 million units," says Sadler. "But by the time DRAM gets traction you are looking at 550 or 600 million units."

SRAM is currently used in many cell phones. "A typical GSM (global system for mobile communications) 2.5G cell phone has low power asynchronous SRAM used for base band cache. It is typically 8 megabits moving to 16 megabits," says Sadler. "That product is transitioning to what we call a cellular RAM, which is really a DRAM with an SRAM interface. Many of the phones that will be introduced next year are going to have either a 32 megabit (Mb) or 64 Mb cellular RAM as base band cache memory."

Sadler says Micron is also seeing cell phone designs that require low power synchronous DRAM, similar to what is used in PCs. "You are going to see the same type of functionality in a mobile phone that you see in a desktop computer with respect to surfing the Internet," says Sadler.

The new cell phones will use about 16 megabytes of memory. However, the amount of memory in cell phones will grow the way that memory content grew in PCs. "Eleven years ago a typical PC had 4 megabytes, but the amount grew over the years. The same thing will happen with cell phones," says Sadler.

Video game consoles will also use more memory. "Right now X-Box has 64 megabytes of memory, GameCube has 30 or 40 and Playstation has 40 megabytes. When those systems refresh in 2005, they will have 5-10 times more memory," according to Greenberg.

Telematics in vehicles is a potential huge application for DRAM that is being carefully watched by memory IC manufacturers.

Cars equipped with navigation systems will have personal digital assistants (PDAs). "We are seeing a need for PDA in an automotive space because the PDA provides wireless connectivity into the car's navigation system and other systems of the car," says Greenberg.

PDAs shipping with cars will require 32, 64 or 128 megabytes of memory.

The use of DRAM in cell phones and consumer electronics equipment could impact future DRAM design. "There may be a slight disconnect between the requirements of PCs and consumer audio-video devices and mobile wireless devices," says Greenberg. "On the consumer electronics side it is about streaming media. In the PC space it is about accessing data. On the mobile side the issue is power. The way DDR is designed may not be the best architecture for the consumer electronics world," he says. So in the future there could be different DRAM designs for different applications.

The impact

It may take several years for the impact of the emerging applications to be felt on the DRAM industry. While some DRAM manufacturers expect consumer and wireless applications will have a significant impact on business, some analysts aren't so sure.

They point out emerging applications use a small amount of memory compared to the total amount of memory in a PC. That point is not lost on Jim Sogas, director of memory marketing for DRAM manufacturer Elpida.

"There are at least eight DRAMs in a PC and they are always high density," says Sogas. "But with consumer electronics equipment you may have one or two DRAMs and they may not be at the highest density. Cell phones are moving 128 Mb. That is one chip per phone."

Cantore of iSuppli says to be successful in DRAMs a supplier has to produce and sell large volumes. Some of the DRAMs sold in non-PC applications are specialty DRAMs that are sold in small volumes.

"Some of these specialty DRAMs are pretty large. There is overhead on the die in addition to the memory cells. They don't sell for the same price per megabyte. The price is higher which limits them to small niches and small volumes," he says.

PCs will continue to be the dominant user of DRAM because while computer shipments aren't increasing 20% per year anymore, there is still growth and the amount of memory per system continues to rise. Cantore notes that by 2007, the average amount of memory in a computer will be 1 gigabyte. Today the average is about 300 megabytes.

Watch out

In the short term, DRAM buyers concerned about pricing and overall supply should keep a close eye on PC shipments and IT investment by companies. If PC shipments and IT investments increase, DRAM tags will likely rise. In fact prices will likely rise in the third quarter as PC manufacturers increase production for the PC Christmas selling season.

However, any price increases will likely be modest especially when considering the first quarter price decline.

Cantore says the DRAM price per megabyte fell 21% in the first quarter of 2003 from the fourth quarter of 2002. That is nasty. It is scary," he says.

Nam Kim, senior analyst, DRAMs for iSuppli predicted a 7% decline in DRAM price per megabyte for the second quarter. However, he says prices should increase 14% in the third quarter as demand rises. In the fourth quarter pricing should be flat.

Whether prices stay firm or even rise remains to be seen. Bit demand is forecast to grow 54% in 2003. While that sounds healthy, it is actually modest. When DRAM demand is strong bit demand grows around 75-80% per year. During boom times, bit demand grows 90-100% per year.

If bit demand in 2004 reaches the 70% range, it could cause some serious supply problems for buyers because of the lack of capital expenditures by DRAM manufacturers. The downturn has forced many chip companies to cut back on capital expenditures (capex) for new equipment and fabs.

In 1996 DRAM suppliers spent $20 billion on capex. In 2002, they spent just $5 billion, says Kim.

"We see continued reduction in capex by companies who are pinched for cash," says Cantore. "You can only cut your capex so much. Soon few suppliers have the capacity. Actually, that sets the stage of the recovery," he says. When suppliers don't have enough capacity, prices increase because supply is limited.

Buyers should be most concerned about supplier investment in DDR DRAMs and in DDR 2 technology. Production volumes of DDR 2 DRAM will begin next year. If the market moves to DDR 2 faster than expected, it will result in shortages of parts and higher prices.

However, for this year, most DRAMs shipped will be DDR. Of all DRAM bits shipped, 82% will be DDR, 13% will be synchronous DRAM, 3% will be Rambus and 2% DDR2.

By density, 256 Mb devices lead the pack. 73% of DRAM bits will be 256Mb, 128 Mb will account for 15% of bit shipments and 512 will be 6% of shipments. However, the density scenario will change in 2004 when 256 Mb will account for 54% of DRAM bits and 512 Mb bit shipments will rise to 30% while 128Mb will represent 10% of all DRAM bits.

While 256 Mb density will slowly give way to 512 Mb devices, the 256 Mb chip may have a longer life than previous density DRAMs because it is a low cost solution.

"The sweet spot for PCs is a 256 megabyte module and it is moving toward 512 megabyte," says Sadler of Micron. "Both can be configured with 256 Mb DRAMs or 512 Mb DRAMs. However, more than 95% are configured with 256 Mb because it is the most cost effective device," he says.

However, while 256 Mb may be part of the DRAM landscape, for several years, PC manufacturers will opt for the higher 512 Mb density. Computer companies will also begin to use double data rate 2 DRAMs in earnest next year.

"DDR 2 volume production will ramp up in early 2004," says Sadler. "There are platform validations occurring right now in preparation for the 2004 ramp up."

Key advantages of DDR 2 over DDR are lower power, faster speed and higher performance, according to Sadler. High-end desktops will first use DDR 2 and it will be "driven to value desktops as quickly as the market is able to digest it from a cost standpoint," he says.

"There is some manufacturing cost premium of DDR 2 compared to DDR 1. There is some additional die overhead on DDR 2," says Sadler. It also requires different testing and DDR 2 will come in a ball grid array package.

Despite the extra cost, Sadler says the DDR 2 rampup will be relatively quick.

In fact some companies are already using DDR 2 DRAM. "DDR 2 chips are being shipped right now," says Sogas of Elpida. "Graphics applications are using DDR 2 like Nvidia graphics cards and ATI products. In computers the big numbers will start the first part of next year," he says.

An eye on supply

DRAM buyers should also keep an eye on the supply base because at least one manufacturer may drop out of DRAMs. Most DRAM manufacturers are losing money and some have been losing money for a longtime.

"Micron has lost money for 10 consecutive quarters," says Kim, of iSuppli. "Hynix and Infineon are in a similar situation," he says.

Suppliers acknowledge that there may be more consolidation and some even welcome it because it would mean less competition. However, suppliers are cautiously optimistic that a DRAM industry upturn is just around the corner although they may have to work harder than in the past to grow sales and boost profitability.

"I don't think we will see 1995 again when industry revenue reached $40 billion," says Sogas. "Back then a PC sold for $2,000- 3,000 and there was a couple hundred dollars of DRAM in a computer then. Today electronics equipment is cheap. The available budget for memory is small," he says.

The key will be to limit supply which DRAM manufacturers find hard to do.