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Rising prices of dynamic could mean bad news for users who hope to find cheap computers packed with lots of memory.

A three-month rally in memory prices is causing discomfort among PC makers and may lead to cuts in the amount of DRAM shipped with some low-end PCs if prices continue upward, industry observers say. If memory prices rise too much, PC makers will be faced with a choice of reducing the amount of memory in some systems or raising PC prices. If vendors cut memory, users will have to pay extra to get more DRAM inside their PCs.

This week, spot pricing in Asian markets for a 256MB module containing 266MHz of DDR DRAM was around $39.50, according to market analyst ICIS-LOR, which tracks memory pricing. By comparison, the same modules were selling on the spot market or around $28.25 on January 1 and for around $25.00 on April 1, 2003, the analysts say.

Spot prices for other memory types, such as SDRAM and 333MHz DDR, have also shown significant gains during this period. Contract prices, which represent the bulk of memory transactions, are also rising but the change is not as steep as in the spot market.

Samsung Sees Trend

At Samsung Electronics, the world's largest DRAM producer, customers are "not comfortable" with the increase in memory prices, says Kim Il Ung, vice president of the company's semiconductor business.

The rise in DRAM prices threatens to slow down the current trend of increasing the amount of memory that vendors ship with each PC, Il Ung says. He notes that Samsung's ten largest customers shipped an average of 440MB of DRAM with each PC in the first quarter of 2004, an increase of 15 percent over the previous quarter, which also hinted of price hikes.

The Samsung executive estimates PC makers may reduce the average amount of memory per PC if prices for a 256MB DDR module rise above $42. Still, he he concedes that Samsung is not certain what is the breaking point for PC makers.

"We are trying to make a survey of what will be the breaking point of megabyte per system in terms of pricing," he says.

Looking ahead to the second quarter, Il Ung expects memory demand will remain strong due to healthy corporate demand for PCs and demand for DDR2 memory. But he says supply will also remain tight due to low production yields of DDR2 chips and problems encountered by manufacturers migrating their memory production to more advanced production processes.

PC Vendors Worry

The surge in spot prices for DRAM chips and modules has caused panic among PC makers, according to an analyst at iSuppli.

"Shocked and confused OEMs and spot market buyers have gone into panic mode due to the price hikes," Nam Hyung Kim, a principal analyst at iSuppli, writes in a recent research note. "If the price increases are too sharp, they could serve to depress DRAM sales in the second half of the year." He expects vendors may trim the DRAM in systems if memory prices rise.

Intel is also eyeing memory prices.

"There's a lot of rumblings right now that memory prices in general are going up and we're still frankly trying to run ourselves through it," says Louis Burns, vice president and general manager of Intel's Desktop Platforms Group, speaking in Taipei last week. "I don't see it as a big issue (but) we're paying very close attention."

Citing the cyclical nature of the memory industry, Andrew Norwood, a Gartner principal analyst, downplays the significance of rising memory prices. DRAM makers have labored through an extended downturn and are now in the midst of a recovery, reflected by higher memory prices, he notes.

Moreover, this isn't the first time vendors have faced the possibility of reducing the amount of DRAM on systems to avoid raising PC prices, Norwood says.

PC vendors count on declining component costs, which allows them to sell systems with successively greater performance at the same or lower price as previous models, he says. However, the DRAM market sometimes bucks this trend with higher prices, as is happening now, he says. Also, PC makers have benefited from low memory prices in recent years, Norwood notes.

"Every PC sold over the last two years has had about $30 of free DRAM in it," Norwood says, explaining that many memory makers were forced to sell memory chips at cost or at a loss in recent years. "The PC [makers] have really had it good over the last two years and it's time they stopped getting a free ride."

Is the Worst Over?

With PC vendors eyeing rising memory prices, other signs hint the pressure on memory pricing has already abated somewhat.

"End users appeared to have picked up sufficient parts over the past weeks to tide them over (for their) immediate requirements and were said to be keeping to the sidelines for the moment," ICIS-LOR says in a recent memory market report. Just this week, activity on the Asian spot market is showing signs of picking up again. Prices are remaining steady and DRAM sellers indicating they are unlikely to fall due to tight regional supply of memory, according to ICIS-LOR.

With some prices stable, or at least fallen from the heights of recent weeks, the big question is what happens next.

"In terms of future pricing trends, the major question now is whether spot buyers and system manufacturers are going to buy more DRAM at the present high prices--or wait for a downward adjustment," iSuppli's Kim says. Present spot market prices are "overheated" and should start to drop in May, he adds.

However, any respite from higher memory prices may be brief. ISuppli predicts a DRAM shortage in the second half of the year, when demand for memory outpaces increases in production capacity.

Market analyst IDC also expects a shortfall memory supplies later this year. In a February report, analysts predict a supply shortage of 4 percent to 5 percent in the fourth quarter as vendors shift production capacity to non-DRAM memory types to diversify their revenue sources and boost profits. However, IDC also says it doubts PC makers will reduce the average amount of DRAM shipped with each computer.

A PC typically shipped with 438MB of memory in the first quarter, IDC says--close to Samsung's estimate of 440MB. The research firm projects that amount will jump to an average of 472MB in the second quarter. What's more, IDC expects increases in the second half of 2004, projecting a jump to 500MB in the third quarter and 528MB in the fourth.

Price Predictions

However, these increases in average memory per PC could be slow if memory prices stay high, says Soo-Kyoung Kim, program director for semiconductor research at IDC and author of the February report.

Looking ahead, IDC's Kim expects memory prices to fall off somewhat in May before rising again in August and September. The current price increases result from supply-related problems, rather than demand, he says. He expects memory makers will adjust production to meet vendors' demands in the coming weeks.

Vendors can keep prices down for several months even if memory costs more, because it will take some time to adjust, Kim says. If prices stay high through the third quarter, then vendors will be forced to make some changes, particularly at the low end of their product lines, he says.

"If the current pricing stays so high, PC [vendors] may adjust the memory configuration of their value PC lines," Kim says.

Even so, Gartner's Norwood doubts the amount of DRAM built into PCs will drop, even in low-end systems. The average amount of preloaded DRAM will rise again before too long, he says.

Martyn Williams of the IDG News Service contributed to this report.