As long as I've been an adult, hardware was a commodity, and software was where the value was. Software could capture most of the value that was in the total supply chain.
Now, with AI, software becomes less able to demand the margins it once did.
Meanwhile, the history of low margins of hardware have created a situation where there are so few players able to demand now software-style high margins.
Hardware has always been valuable but was unable to capture it's value. Those days might be over.
I hope this encourages people who would build software companies to look to hardware. A lot of fun challenges there. Deeply technical, interesting ones. And now solutions will pay.
LLMs is where value capture is anticipated by the market. There's scant evidence they can capture value if they aren't relying on hardware scarcity and their own investment and contractual risks.
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’.
Can't the government step in and break the cartel like they did in 2010? I guess not because this was entirely driven by market demand and not manufactured supply restriction.
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.
> Because software you build it once and can resell it as much as you want, a stick of RAM is only sold once.
Yes exactly, and theoretically if there was a functioning market that should have driven prices way down, because the marginal cost to enter the market is so low. However, the non-functioning anti-trust laws as well as the expansion of ip laws as allowed a few enormous corporations to essentially control the market and keep prices up.
> Arguably software is much more difficult to build because it is never complete.
There are hardly any hardware companies where the hardware is ever complete. Disregarding the fact that many hardware products contain some form of software that needs to be updated. In pretty much any field hardware companies need to continue developing new revisions/improvements on the hardware to stay ahead of their competitors, however those revisions/improvements are significantly more complex to put into reality.
> Yes exactly, and theoretically if there was a functioning market that should have driven prices way down, because the marginal cost to enter the market is so low. However, the non-functioning anti-trust laws as well as the expansion of ip laws as allowed a few enormous corporations to essentially control the market and keep prices up.
What? Software is not expansive, most of it is free. Its just that the same code can be used by more than one user, unlike hardware. The high profit margins come from economies of scale which is greater than whats possible with hardware.
> There are hardly any hardware companies where the hardware is ever complete. Disregarding the fact that many hardware products contain some form of software that needs to be updated. In pretty much any field hardware companies need to continue developing new revisions/improvements on the hardware to stay ahead of their competitors, however those revisions/improvements are significantly more complex to put into reality.
Most of the deployed hardware is complete. The RAM in my PC is complete but the software running on it needs to be updated every month or so.
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.
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.
If you need to sponsor an event or something, you have to choose between an American big tech, another American big tech, another American big tech, or another American big tech
Except they aren’t getting high margins through market forces. They are pushing margins into the future through contracts on sales into the next five years. And the only reason they can do that is by the leverage they have as a result of the chip shortage driven by AI. That’s an abuse of their market position.
They know that as new factories come online the current shortage will be resolved and their pricing power will disappear. I was equally critical when Microsoft used these types of contractual provisions.
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.
"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.
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...
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.
Well a couple Chinese RAM companies already did that a couple years ago & now they are getting the global consumer market handed on a silver platter due to the hubris and shortsightedness of the current RAM cartel.
the 'cartel' almost went bankrupt the last cycle where they overbuilt capacity into lower demand, so they are legit scared of avoid this scenario at all costs.
if the chinese DRAM is any good, prices should start stabilizing... I wouldn't get my hopes up too high on them going back to the before times level anytime soon, however.
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.
If the gaming community is any indication (nvidia, lootboxes and gatcha mechanics, pre-ordering etc.), most people won't care and will be just happy that prices are down again and FOMO will win.
I just don't understand how the multi-billion dollar industries (who employ hordes of people whose entire careers are spent researching how to best influence the average person) keep winning!
Hey, I'm a PC enthusiast and I'm sentimental about Crucial exiting. They made some of the best memory and flash storage, and they didn't market it stupidly -- they were just reliable and dependable and that was it. They also didn't try to hide their components by packaging it into some flashy shell, which I incredibly appreciated. Of course, I've been going more TEAMGROUP lately anyway, but Crucial was tried and true, and now it's dead.
It lives with some of the other things I'm grieving due to the AI boom, like Apple's car project.
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.
This agreement puts a floor on the price that Micron can sell their chips at, and a ceiling on the price that tech companies buy them.
Micron wants the floor, so they can invest in more fab capacity without going bankrupt if there's a memory glut.
Tech companies want a ceiling so they can keep selling their products even if there's a shortage.
If there's a glut, the tech companies will just resell these chips at a loss, or take a bath on their $22 Billion of deposits. It doesn't "lock in high prices" for consumers, just the producers.
At some point would it be more cost efficient to replace DRAM by SRAM or some other technology and use standard cpu/gpu silicon wafers to build ram chips ?
The problem isn't people valuing certainty and doing deals based on that, the problem is monopoly of supply.
You could argue strategic deals like this allow the manufacturers to make the massive capital investments in manufacturing capacity to increase supply.
Otherwise it might be simply too risky - and in the end you end up with lower supply and higher average price.
They can only pay so much because of the expectations about the generated value. Those might turn out wrong, as any expectation, but value is very much in the picture.
If by value you mean profit, but that's a conflation that you shouldn't be making. Often profit is generated by actively harming people (eg. human trafficking).
No, you pay the most if you believe that you might get the most value out of it.
Moreover, the AI companies have not bought anything with their own money, but with the money of naive investors who believe that their money will be used by the AI companies to buy things out of which they will be able to get the most value.
So for now, this is strictly only speculation, which has driven the prices sky high. It remains to be seen who will really get any value (besides Micron, NVIDIA and the like, who have got good money for their products).
Yes, Capitalism is working by a mechanism where some people have access to huge fictitious resources, a.k.a. money, for whom they have never given anything equivalent in exchange, and they use those fictitious resources to outbid the other people and take possession of the real physical resources, which they can use then to make more money, in a positive feedback loop.
Money was supposed to be a means by which it is recorded what someone has given to others, so that they may receive equivalent resources in return. But now money has retained this function only for employees and other low-income categories.
so you are against lending, stock markets and investing in general? because they are all based on "give me money today and I promise I will give you more money back tomorrow"
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 price, 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.
As long as I've been an adult, hardware was a commodity, and software was where the value was. Software could capture most of the value that was in the total supply chain.
Now, with AI, software becomes less able to demand the margins it once did.
Meanwhile, the history of low margins of hardware have created a situation where there are so few players able to demand now software-style high margins.
Hardware has always been valuable but was unable to capture it's value. Those days might be over.
I hope this encourages people who would build software companies to look to hardware. A lot of fun challenges there. Deeply technical, interesting ones. And now solutions will pay.
we have a third category now - LLMs. this is where the value is captured now
LLMs is where value capture is anticipated by the market. There's scant evidence they can capture value if they aren't relying on hardware scarcity and their own investment and contractual risks.
"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’.
Can't the government step in and break the cartel like they did in 2010? I guess not because this was entirely driven by market demand and not manufactured supply restriction.
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.
> It's funny how everyone (especially here on HN) accepted (and expected) extremely high profit margins from software businesses
Because software you build it once and can resell it as much as you want, a stick of RAM is only sold once.
> The same was reflected in engineering salaries, with software engineering salaries being often a multiple of hardware engineering ones.
Arguably software is much more difficult to build because it is never complete.
> Because software you build it once and can resell it as much as you want, a stick of RAM is only sold once.
Yes exactly, and theoretically if there was a functioning market that should have driven prices way down, because the marginal cost to enter the market is so low. However, the non-functioning anti-trust laws as well as the expansion of ip laws as allowed a few enormous corporations to essentially control the market and keep prices up.
> Arguably software is much more difficult to build because it is never complete.
There are hardly any hardware companies where the hardware is ever complete. Disregarding the fact that many hardware products contain some form of software that needs to be updated. In pretty much any field hardware companies need to continue developing new revisions/improvements on the hardware to stay ahead of their competitors, however those revisions/improvements are significantly more complex to put into reality.
> Yes exactly, and theoretically if there was a functioning market that should have driven prices way down, because the marginal cost to enter the market is so low. However, the non-functioning anti-trust laws as well as the expansion of ip laws as allowed a few enormous corporations to essentially control the market and keep prices up.
What? Software is not expansive, most of it is free. Its just that the same code can be used by more than one user, unlike hardware. The high profit margins come from economies of scale which is greater than whats possible with hardware.
> There are hardly any hardware companies where the hardware is ever complete. Disregarding the fact that many hardware products contain some form of software that needs to be updated. In pretty much any field hardware companies need to continue developing new revisions/improvements on the hardware to stay ahead of their competitors, however those revisions/improvements are significantly more complex to put into reality.
Most of the deployed hardware is complete. The RAM in my PC is complete but the software running on it needs to be updated every month or so.
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.
Look at my posts elsewhere, I am very critical of the lack of antitrust.
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.
> is just a consequence of the fact that the memory market is now dominated by quasi-monopolies.
And software isn't?
If you need to sponsor an event or something, you have to choose between an American big tech, another American big tech, another American big tech, or another American big tech
Except they aren’t getting high margins through market forces. They are pushing margins into the future through contracts on sales into the next five years. And the only reason they can do that is by the leverage they have as a result of the chip shortage driven by AI. That’s an abuse of their market position.
They know that as new factories come online the current shortage will be resolved and their pricing power will disappear. I was equally critical when Microsoft used these types of contractual provisions.
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.
"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.
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...
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.
More production can only come online if the producers have money to do so.
Turns out Apple fucked Micron in 2023 so they couldn't expand capacity: https://9to5mac.com/2026/06/25/micron-exec-suggests-apples-a...
It's a five year agreement. Good luck financing, constructing, equipping, and bringing new memory fabs online in less than 5 years.
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.
Price-fixing is illegal. Raising prices is not.
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
Well a couple Chinese RAM companies already did that a couple years ago & now they are getting the global consumer market handed on a silver platter due to the hubris and shortsightedness of the current RAM cartel.
the 'cartel' almost went bankrupt the last cycle where they overbuilt capacity into lower demand, so they are legit scared of avoid this scenario at all costs.
if the chinese DRAM is any good, prices should start stabilizing... I wouldn't get my hopes up too high on them going back to the before times level anytime soon, however.
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.
If the gaming community is any indication (nvidia, lootboxes and gatcha mechanics, pre-ordering etc.), most people won't care and will be just happy that prices are down again and FOMO will win.
I just don't understand how the multi-billion dollar industries (who employ hordes of people whose entire careers are spent researching how to best influence the average person) keep winning!
Hey, I'm a PC enthusiast and I'm sentimental about Crucial exiting. They made some of the best memory and flash storage, and they didn't market it stupidly -- they were just reliable and dependable and that was it. They also didn't try to hide their components by packaging it into some flashy shell, which I incredibly appreciated. Of course, I've been going more TEAMGROUP lately anyway, but Crucial was tried and true, and now it's dead.
It lives with some of the other things I'm grieving due to the AI boom, like Apple's car project.
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.
Those are literally the only 3 DRAM manufacturers left; all the other ones left the market over the past 15 years because the margin was too low.
Just don't buy consumer electronics for the next 3 years. You might even be able to buy a non-smart TV in the near future because of RAM prices!
Isn't this the market working as intended?
This agreement puts a floor on the price that Micron can sell their chips at, and a ceiling on the price that tech companies buy them.
Micron wants the floor, so they can invest in more fab capacity without going bankrupt if there's a memory glut.
Tech companies want a ceiling so they can keep selling their products even if there's a shortage.
If there's a glut, the tech companies will just resell these chips at a loss, or take a bath on their $22 Billion of deposits. It doesn't "lock in high prices" for consumers, just the producers.
What stops Chinese from mass-producing more RAM? Or is this as hard as producing GPU?
lack of EUV machines
US gov. bans and tariffs
Smells like a cartel. Wonder who else is in on it?
Micron knows the volatility that may come and secures their own seat. Makes sense. No idea why companies said yes to this.
That's ... just sad.
At some point would it be more cost efficient to replace DRAM by SRAM or some other technology and use standard cpu/gpu silicon wafers to build ram chips ?
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?
what's the future market for that? won't Micron in particular have to be a counterparty to that anyway to ensure delivery - why would they want that??
https://news.ycombinator.com/item?id=48676382
That should be illegal.
The problem isn't people valuing certainty and doing deals based on that, the problem is monopoly of supply.
You could argue strategic deals like this allow the manufacturers to make the massive capital investments in manufacturing capacity to increase supply.
Otherwise it might be simply too risky - and in the end you end up with lower supply and higher average price.
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.
They can only pay so much because of the expectations about the generated value. Those might turn out wrong, as any expectation, but value is very much in the picture.
If by value you mean profit, but that's a conflation that you shouldn't be making. Often profit is generated by actively harming people (eg. human trafficking).
You can pay the most if you can get the most value out of it
No, you pay the most if you believe that you might get the most value out of it.
Moreover, the AI companies have not bought anything with their own money, but with the money of naive investors who believe that their money will be used by the AI companies to buy things out of which they will be able to get the most value.
So for now, this is strictly only speculation, which has driven the prices sky high. It remains to be seen who will really get any value (besides Micron, NVIDIA and the like, who have got good money for their products).
in Capitalism value=profit
OK I accept this definition for the scope of this comment, but there's no profit on the horizon.
Yes, Capitalism is working by a mechanism where some people have access to huge fictitious resources, a.k.a. money, for whom they have never given anything equivalent in exchange, and they use those fictitious resources to outbid the other people and take possession of the real physical resources, which they can use then to make more money, in a positive feedback loop.
Money was supposed to be a means by which it is recorded what someone has given to others, so that they may receive equivalent resources in return. But now money has retained this function only for employees and other low-income categories.
so you are against lending, stock markets and investing in general? because they are all based on "give me money today and I promise I will give you more money back tomorrow"
Doesn't sound like it to me.
> where some people have access to huge fictitious resources
The "huge" adjective seems to be the core of the problem.
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 price, 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.
Thank you, AI. /s