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beginner's guide to semiconductor memory boom-bust cycles

a simple explanation of this often repeated historic drama for newcomers to the SSD market, along with a cautionary footnote about SSD's own future
by Zsolt Kerekes, editor - StorageSearch.com - February 11, 2016
I recently discussed the memory boom bust cycle with a non technical reader who asked me to explain why high volume semiconductor memory makers get into the situation of oversupply and lossy pricing.

Here's some of what I said.

The semiconductor memory business has wavered between under supply and over supply since the 1970s.

In the 1980s the best analagy was what economists called the "hog cycle".

But any study of memory market history for the past 40 years shows that there are also other competitive factors involved.

Simplest example when suppliers choose to use price as a way to gain advantages in the market.

But another factor is that memory is not a usable product by itself. And memory technologies have to be designed to be optimal for end markets.

Memory makers have to guess years in advance what the mix of products in the market will be to ensure they will get a share of the end market.

If they get those guesses wrong there is under / over supply which impacts prices.

The investments which have to be made in manufacturing plants are huge and take place years in advance of even knowing in detail what the detailed mix of products will be.

Flexxon SSDs for indistrial medical and automotive applications - overview image
IMA (Industrial, Medical & Automotive)
XTREME series SSDs - from Flexxon
Memory makers mitigate their risks by choosing manufacturing processes which have flexibility. (For example the ability to switch between making DRAM or nand flash using the same equipment). But even with long term roadmaps such plans can go wrong.

For example - sometimes technologies are harder to get working than expected.

In 2017 such factors - discussed in my (July 2017) article 3D nand fab yield - the nth layer tax - resulted in memory shortages which had widespread consequences.

As a sanity check FYI the entire SSD market wasn't in any memory maker's technology road map until recently. But it affects everything they now do.

In the long term the risk of being uncompetitive (no one buys the memory and you certainly go bust) or the fear of being locked out of the SSD market counts as worse score than temporarily having too much product at too low a price. Because being in the game means you will get another opportunity to supply memory and adjust product lines in the next memory boom cycle.

You wouldn't believe how much data the memory people suck in and analyze.

The problem is they are disconnected from the end markets and because of that cannot make optimal judgements.

They're also biased by their interpretation of how they managed risks and investments in the past.

That's one reason why all the big companies will want to become enterprise storage box suppliers. (It's more than branding, and involves assumptions about being able to raise the revenue ceiling from the same raw flash while also racking up incremental design efficiency gains which are only possible at scale.)

But the memory makers don't understand enough at present to make it work. And they may have the wrong cultures too.

If the market stabilizes as I predict in this article then the enterprise SSD market may become as predictable as the PC and server market were in earlier decades.

But we're nowhere near that yawn-inducing stability yet.

Instead we need to go through some more rounds of extreme instability first.

(Because as I said a year ago (in 2015) - "I don't think we've reached stability in reference enterprise SSD designs and use cases"

Later:- as you'd expect with such a vast topic - the boom and bust business cycles in memory have been analyzed and dissected many times before.

Here are some links I found later which provide helpful guidance for those - like my reader - who want to get a better feel without being buried by semiconductor concepts.

For historic reasons - most such discussions focus on DRAM - because that was the dominant memory revenue earner in earlier decades - but the memory type makes absolutely no difference to the principles.
  • The life cycle of memory generations is related to price and volume in - DRAM Pricing - a white paper (2002) on the web site of Tezzaron - which says - "this life-cycle has been repeated often enough to exhibit some predictable patterns."

    I would encourage anyone (even experienced semiconductor veterans) to note the 8 patterns listed. This list includes almost everything you need to know to understand what drives the predictable aspects of memory market behavior.
What's the relationship between the memory market and the SSD market?

The relationship between the SSD market and raw memory market has changed over time and will change significantly again.

Before the enterprise flash era you could go far in understanding the pricing models and cost base of SSD products based on an understanding of the raw memory market - because memory was one of the main ingredients of cost. Also in those earlier days - SSD market revenue was so insignificant in comparison to the raw memory market - that SSD-specific requirements did not in any way influence the behavior of memory companies.

From 2007 it started to become clear that controller architecture could play a bigger part in the SSD pricing equation than memory - and by 2011 the activity in the market (measured by product success) showed clearly that SSD-aware software too had the potential to differentiate SSD products in business ways which de-emphasized the role which memory played in characterizing SSDs (in nearly all markets).

And in 2012 I commented on this paradign shift in my end of year analysis in these words... "A safe rule of thumb is that knowing the generic memory type characteristics doesn't give you enough useful info about the SSD's characteristics and limitations any more. Whereas only a few years ago - knowing the exact memory type was an essential starting point in understanding the SSD."

Looking ahead (from today in 2016) to the long term future for the memory market - the same kind of conclusion I analyzed for the hard drive market in my 2012 article How will the HDD market fare... in an SSD storage world? - which I summarized as... "the SSD market will be bigger in revenue than the HDD market ever was" is likely to hold true for the semiconductor memory market too. That is to say - "SSD market revenue will be a much bigger (high multiple in revenue) of the raw memory market.

But it is by no means inevitable that the biggest memory companies will become the biggest SSD companies.

I discussed the strategic business pressures (for memory, HDD, storage and server makers - who all face similar disruptive challenges) in my 2013 article - hostage to the fortunes of SSD.

What relevance does this have to this article about memory boom bust cycles?

It's not safe that they will be closely tied to future SSD boom bust cycles.

I already discussed the potential of next generation SSD software adoption to result in segment-specific crashes in SSD revenue in my 2013 article - meet Ken - and the enterprise SSD software event horizon. We've already seen this type of thing happening. This lesson is an extrapolation from real vendor revenue experiences - not just a blue sky what-if?

So you can take the "SSD software event horizon" as an extreme market boundary condition factor whereby future SSD busts could become even more distantly connected to raw memory production costs.

And here's a simpler example of memory to SSD business disconnect.

A big collapse in memory prices could be seen as a good thing by independent SSD companies (which don't have their own memory wafer fabs) because low memory prices may help the SSD makers to open up new markets.

I'll just conclude this by saying:- SSDs (with the right software and architecture and ecosystem context) have roles which can sometimes be equivalated to storage, processors and memory.

But because SSDs enable a wider range of potentially competitive data system implementations than were ever before possible before (the modern era of SSDs) it's unwise to analyze and project SSD business models simply by parachuting in models from other previous (and deceptively) similar markets.
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and what about semiconductor memory pricing?

This issue got an interesting airing on linkedin in May 2017 following an initial post by the CEO of BeSang - Is Micron's 3D memory (really) cheaper than 2D? - ostensibly about the comparative costs of 3D nand and planar and the respective SSD prices from Micron.

At the time the industry was in a rare supply shortage with high book to bill. Also the industry was undergoing revolutionary changes unlike any seen since the 1970s with new memory types and new application roles for memory architecture.

The note below is part of one of my comments in these streams.

Manufacturing costs are only a small part of the pricing decision process. More important are the competitive environment and user value propositions.

So when it comes to nand flash then key pricing factors are whether differences in characteristics can be used to advantage in higher value systems products or not.

It also involves judgements about whether there will be customers in the ecosystem who are willing to make the investments in software and controller IP to deploy the memory in higher value products such as enterprise, industrial and military SSDs and what their competitive supplier options are.

If 3D had worse endurance say than same market generation 2D it would always be sold at a lower price regardless of how much the costs. Because the market values endurance and can do useful things with it.

Other useful characteristics in memories have traditionally been latency and power density.

Going back to the role of manufacturing costs...

Semi companies cross subsidise new products based on their analysis of the projections of use and mix they see. This is a riskier business than those outside the semi business appreciate and only works on a casino strategy.

Fab independent SSD products are akin to card counting - and have many odds stacked in their favor - because everyone is a hostage to the fortunes of SSD and in particular rackmount implementations which deliver the highest efficiency (greatest user value at lowest chip count - compared to solo drives).

But with disruptive new memory such as 3DXpoint the casino can lose too.

Pricing is a complex business.

My wife Janet Downes used to run a 4 day workshop on pricing strategies and the disconnects between cost and price for product managers in some of the world's largest tech companies. (I only read the cover sheets).

I think Sang's (CEO of BeSang) naïve in appearance but provocative post and the various comments (including those still to come) might warn readers outside the hub of the industry that these issues are more complex than first appear. And the better that people understand the semiconductor memory market the more easily we can communicate with them and learn their often unstated needs.

related reading

what goes into the cost of an SSD? - what goes in and what stays out

user value propositions for buying SSDs - which led to early market adoption

exiting the astrological age of enterprise SSD array pricing - how marketers unblocked uncertainty with innovative pricing schemes

problems with identifying segments in the enterprise SSD market during disruptive market change - why gaps exist and why vendors risked over competing in too few easily located segments
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Get used to this.

Your local installed base memory "RAM" will be bigger than all your enterprise storage.
after AFAs - what's the next box? (January 2017)

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SSD ad - click for more info

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90% of the enterprise SSD companies which you know have no good reasons to survive.
market consolidation - why? how? when?

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StorageSearch.com / popular SSD articles / SSD market history
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a question about memory boom bust

SSD education
who's who in the SSD market in China?
terabyte talliers and other storage market researchers
miscellaneous consequences of the 2017 memory shortages

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It was the best of times. It was the worst of times. 2017 was a year like no other in 40 years of SSD history. The trajectory of SSD market's onward rebound from memory shortages will be directed by existential questions.
looking back at 2017 - StorageSearch.com

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"I would be the last person to say this isn't a cyclical business because the one thing that suppliers will never be able to control is the demand environment and as you know we're in a very capital-intensive business.

So, once you have the capacity then almost no circumstances will you choose not to produce because you have a very, very high fixed cost structure and so the industry responded appropriately to the weakening PC demand environment and first nobody added capacity, and secondly, we all shifted our output to those more lucrative segments... "
Ernie Maddock, CFO - Micron (January 10, 2017) at Micron Presents at Needham Growth Conference (transcript - by SeekingAlpha.com) - in reply to a question about the cyclical nature of the memory business and similarities to the previous 2014 cycle.

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Ironically, DRAM producers' entrance into flash memory production actually contributed to defeating their original purpose for entering: flash memory's average selling price dropped below that of DRAM in 2006 due to oversupply.

Estimating proper supply for the flash memory market is complicated by the unpredictable nature of flash memory demand it is unclear what consumers will deem the next great gadget to drive the market, and when it will appear.
The Rise of the Flash Memory Market: Its Impact on Firm Behavior and Global Semiconductor Trade Patterns - 1990 to 2007 (pdf) (USITC site). This document also includes flash market revenue from 1990 to 2007.

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As companies invest in new fabrication facilities to produce new technologies, the risks inherent in these business investments continue to increase.

In 1983, it cost $200 million to manufacture 1,200-nanometer chips in a leading-edge semiconductor facility.

In 1997, it cost approximately $1.3 billion for a 350-nanometer facility, and in 2003, it cost as much as $3 billion for a 130- nanometer facility.
Semiconductor Manufacturing: Booms, Busts, and Globalization (2005) - article in The Bridge, (NAE site )

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"Not since 2000, have the memory suppliers been in an undersupply situation. It is the force which in 2H 2016 resulted in increasing memory prices for a number of reasons..."
Alan Niebel , CEO - Web-Feet Research - March 29, 2017 - Web-Feet Reports on NVM Market Shares in 2016

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"Although a weak economy may contribute to poor results, fundamental structural factors have an even greater influence on the memory sector. In fact, they may largely explain why memory suffers more than other semiconductor segments during downturns and why memory players were not able to create economic value between 1996 and 2012, even though their technological innovations significantly contributed to the semiconductor industrys growth.

First, competition was intense.

Second, both DRAM and NAND flash were commoditized and primarily differentiated based on price per gigabyte"
Memory:- Are challenges ahead? - a blog by McKinsey (March 2016).

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This chart shows memory prices (various technologies) plotted over time from 1957-2015.
Memory Prices (1957-2015) by Professor John C. McCallum (retired)

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RAM used to be components:- SRAM, DRAM etc. Now after 8 years of the PCIe SSD market learning curve experience we have to entirely rethink the RAM concept.
what's RAM really? - RAM in an SSD context

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In the year 2000 no one caught a cold from the Y2K bug - but 3 things did happen which would shape enterprise server performance for the next 16 years.

1 - hard drives reached the latency limit set by waiting for a 15K RPM rotating platter (they never got faster)

2 - 64 bit processor clock speeds reached almost their maximum clock speeds (they got more cores but the cores didn't get faster)

3 - in the RAM market - the fastest server motherboard memory latencies in 2000 were very similar to what they are today (in 2016)

We all know that SSDs came to the rescue of latency constrained advances in computing which had been stalled by (1) and (2) above.

With some help from software the next target is (3).

Why's DRAM so bad?

Most of us thought that DRAM was the gold standard for latency you can rely on (unlike that cheap flipperty gibbet flash).
DRAM's indeterminate latencies and the virtual memory slider mix - a new blog (March 2016) from StorageSearch.com

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"Even though DRAM ASP growth is forecast to slow in the second half of the year, the annual DRAM ASP growth rate is still forecast to be 63%, which would be the largest annual rise for DRAM ASPs dating back to 1993 when IC Insights first started tracking this data. The previous record-high annual growth rate for DRAM ASP was 57% in 1997."
IC Insights (July 18, 2017) in a research note about the memory market which also noted that unit shipments of DRAM and nand were the same or less than in the previous year - reflecting that the transition to more layers of 3D memory in the past year resulted in more bits but not more throughput of working chips through legacy fabs. (Discussed in SSD news.)
memory price data from IC Insights

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"...the multinationals can only produce a tiny percentage of China's memory needs, prompting the government to jumpstart its own 3D NAND and DRAM efforts."
China Unveils Memory Plans - a blog by Mark LaPedus in Semiconductor Engineering - (January 2017)

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As nand flash is still the dominant memory technology used inside over 99.9% of SSDs and as the switch from planar 2D to 3D was pitched as the lowest risk solution to continue supplying the growing need for more flash storage - because memory geometry shrinks had gone about as far as they dared go - there has been much uneasiness and disquiet recently in markets which use these memory chips about the shortages which have been the most obvious sign that progress has not been entirely plain sailing.
are more dimensions of analysis needed to get a clearer picture of future 3D nand successions

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We've seen compelling evidence in the SSD market that the companies which design memories are not the best at extracting the value from what they make.

Despite many acquisitions the odds are stacked against the memory companies being able to fix these IP deficits internally. They don't have the internal pressure and they dont have external market knowledge they need.

The emergence of NVMdurance for example shows that a parallel universe exists of unsatisfied alternate routes through the maze of endurance permutations with shipping and future flash memory.
StorageSearch.com' s editor (August 2016) in reply to questions about the market.

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So why does Micron want more RAM capacity?

A semi-serious interpretation might be - it's a poison pill. Who would want to buy a RAM company?

Another interpretation is that - by paying a premium price for Inotera - Micron is saying it is worth more too.
Micron's $3 billion gamble on Inotera (December 17, 2015)

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4 Semi Kings Joust for 1 Crown... who's going to win?
seeking semico SSD REX (May 2010)