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Consumers Gain, Computer Industry Reels from Drop in Memory Chip Prices

June 13, 1996

NEW YORK (AP) _ Prices for computer memory chips this year have dropped farther and faster than any time since 1985, a gale-force change that has affected every part of the computer industry.

Consumers and businesses have responded by buying more memory chips, now less than half the price they were in October, to make their computers more powerful.

Makers of computers and software face new economic equations.

A PC maker must decide whether its consumer-targeted models this fall, the biggest sales period of the year, will have more memory and cost the same as last year’s models or the same amount of memory as last year but sell for less.

A software developer can bring a program to market faster, leaving in lines of code it might have cut out, since customers will have more computing power to conceal the inefficiency.

But the companies that make memory chips are struggling.

Lower prices cut into profit margins, threatening their financial performance despite a rise in unit sales. Manufacturers must juggle production to prevent losses while still bringing in enough money to pay for new technologies and factories for more advanced chips later.

During the past three weeks, all of the leading Japanese and South Korean companies that make memory chips have said they would either cut existing production or put a hold on plans to expand production for the rest of 1996.

Meanwhile, Micron Technology Inc., one of two U.S. companies that make memory chips, has asked the Commerce Department to look into whether two South Korean manufacturers have been dumping chips, charging less than it costs to make them, in the United States.

Micron has stopped building a new plant in Utah, capped production and stopped hiring people at its existing facilities in Boise, Idaho, and cut salaries of top executives.

No one is sure when the drop will stop, although the industry got some good news Tuesday when its monthly performance barometer showed an improvement in the Americas last month for the first time this year. That gave a lift to chipmakers’ stock prices Wednesday.

Some analysts expect memory chip pricing to level out later this year but said that depends on chipmakers adhering to the production cuts they have declared.

With the exception of Micron’s actions, the tumult is less visible in the United States than it was a decade ago. At that time, more U.S. companies were making memory chips and the price drop was slightly steeper.

``That was about the time a lot of the U.S. companies got out of the memory market,″ said Mel Thomsen, analyst at Pathfinder Research in San Jose, Calif. ``For a lot of the Asian companies, all the profit and loss in (memory chips) gets absorbed into a much larger corporate entity.″

The price-performance measurement, or price per bit, of all computer chips historically gets cut in half every two years or so. It is tied to the pace of improvement in chip design.

But memory chips bucked that pattern from early 1993 until last fall, when the price per megabit was about twice where the historic trend suggests it should have been. That’s largely because Japanese manufacturers did not invest in new plants during the early 1990s due to recession, putting a squeeze on manufacturing capacity that is now over.

Within the last two or three weeks, the price per megabit is believed to have returned to the historic trend line, though it is still moving downward.

For PC owners, the drop has been great news. Memory chips had become the second-most expensive component in a PC after the microprocessor. A year ago, a 4-megabyte module cost about $200. It now costs $50 to $80.

Many people learned the importance of memory power last summer when Microsoft Corp.’s Windows 95 operating system became available and wouldn’t run well on systems with less than 8 megabytes of memory.

Some makers of memory chip modules _ the strips of chips that consumers see in stores _ say their unit shipments this spring have been as much as 70 percent higher than a year ago.

``People can get more memory for the money,″ said Michael Ventriello, spokesman for PNY Electronics, a memory module maker in Moonachie, N.J. ``A lot of people might have put off the upgrade in the past. Now it’s become an impulse purchase.″

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