Friday, February 22, 2019

How Elastic is NAND demand?

When Memory prices drop dramatically, we are always told that demand is elastic so demand will pick up to make up for the drop. I am not sure this always happens.

When I worked in memory manufacturing, I would say "whenever people are talking about elastic demand, we are about to lose money. The memory market is more profitable today but I wonder how elastic demand is and in which markets. 

Some thoughts:
  • Smartphones are a leading customer of NAND memory. I just checked Apples website and they are currently charging $200 for adding 256GB of memory. The cost for this memory to Apple is about $32 and dropping. So it is pretty clear that a change in the price of NAND is not whats driving 256GB vs 512GB sales. Side note: This also the reason I refuse to let my kids get memory increases on their Iphones .... I can't get myself to pay Apple 80c/GB for NAND!
  • In 2017 NAND prices were flat to up a little. While client SSD sales slowed, overall NAND bit growth was still 35% despite an increase in NAND prices when we expected a decrease of 20%+
  • In Q4 2018, Client SSD unit sales were recently shown to be up 35% YoY. The client SSD pricing has dropped over 40%, which more than double the consensus ASP reduction predicted at beginning of 2018. The prediction for SSD unit growth was 30-35%. So did the crash in SSD pricing dramatically help client sales? Revenue dropped 5% YoY
We are always challenged with the unknown what if of "if prices didn't,crash, then units would have dropped" 

A possible model: There is elasticity but it has two characteristics.

1) Elasticity is delayed by 1+ year. AWS is not going to redesign there datacenters in a month based on low SSD costs. They need time to redesign and show the financial benefit and to ensure it is a sustainable change. Also people based future designs and architectures on the expectation that ASP will drop. AWS is planning for NAND ASP of about $25/TB in 2025 and they are making plans based on that.

2) When it happens, Elasticity is smaller than people think. Obviously a instantaneous 50% drop in ASP could easily lead to people buying 2x the chip size or 2x the capacity in an SSD. But do more units get sold? Prices drop on average and bits grow on average. A simple proposed metric: An incremental 15% ASP reduction will lead to an incremental 5% increase in bit growth. So if ASP was predicted to drop 25% and bits grow 30%, If ASP drops 40% we will see 35% bit growth.

I have data to back these ideas up and anecdotal stories from purchasing discussions with PC, Hyperscale and  Handset OEMS. We can also talk about how this affects memory revenue and margins in 2019. Call for more info and discussion

Mark Webb