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Micron dangles predictable memory price agreements in front of vendors
The idea? To get investors muttering: DRAM, those gross margins are stable...
Memory and storage maker Micron Technology has revealed a new business model intended to address the volatility in the memory market that has resulted in sharp swings in pricing over the past several years.
Revealed at Micron's Investor Day 2022 event, the new forward pricing agreements enable a Micron customer to sign a multi-year deal that guarantees them a supply of memory at a predictable price that follows the cost reduction that the chipmaker sees during the lifecycle of a particular product.
Micron's chief business officer Sumit Sadana told Investor Day attendees that the chipmaker has already signed up an unnamed volume customer to one of the new agreements, which the company is currently trying out to see whether it delivers on the expected benefits.
"This is not just a theoretical exercise, I am super excited to announce that a top 10 customer has already signed up on this model with us, more than $500m a year of revenue for a three-year agreement," Sadana said.
He added that the goal of this kind of agreement is to make it an "evergreen" three-year deal, so that after the first year, another year is added to the agreement. "And you ensure that you are constantly doing price corrections to the curve to ensure that is a fair kind of a price curve for both to the customer and us," he said.
The idea builds on the long term agreements (LTAs) that chipmakers like Micron already have with volume customers, but these typically do not include any agreement on pricing, just a commitment for the customer to take a certain volume of a product.
Sadana explained that if you look at the typical market price of DRAM over multiple years, it can be seen to have peaks and troughs, whereas Micron sees a different picture where its costs are declining over time at a different slope.
"You have variability, sometimes prices are strengthening, sometimes they are falling, so the gross margin has variability coming from the ups and downs of price, versus a steady downward trend on cost," he said.
The idea behind the forward pricing agreement is for the net price through the period of the agreement to be the price that Micron charges to customers, set so that it follows the curve of Micron's steadily falling production costs.
According to Sadana, this agreement has benefits for both customers and Micron. Customers get a guaranteed supply, and guaranteed price reductions, while the chipmaker gets planning predictability and stable gross margins.
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"Our customers get guaranteed supply, because we would give them that guaranteed volume and preferential allocation in situations when supply is tight. They would not have to worry about building inventory unnecessarily if the price is going up so, they can have their working capital be much more efficient and they will get guaranteed price reductions following our cost curve down," he said.
Sadana also noted that the cost of DRAM accounts for a large share of the price tag of a typical server, and so for system builders to be able to have predictable pricing on DRAM, "that locks in a known level of economic return for them ahead of time that can be very attractive," he claimed.
Meanwhile, Micron also disclosed details of its NAND and DRAM roadmap at the Investor Day event, revealing that it has 232-layer 3D NAND in development and a roadmap out to 500-plus layers, as reported by our sister site Blocks & Files.
Micron reported revenue for the whole of 2021 of $27.7 billion, roughly a 30 percent increase over that for 2020. ®