The problem isn't the price. No matter how much you pay, you can't take delivery of a chip that doesn't exist. Now, you could raise prices to the point where you destroy demand. But that's a tricky window to maneuver through.
My ram is worth 5x what I paid but if I pull it out I don’t have a functioning computer lol plus so many people have laptops which are increasingly soldered/otherwise permanently locked together, so stripping for parts isn’t always an option. For Macs it’s outright impossible.
If there is demand for N chips at $X price, but you only have N/2 chips, then half the people aren't going to be able to buy them. The people who really need the chips, and would be willing to pay a lot more than $X for them, will be competing with people who are only willing to pay $X for them. You will end up getting scalping and shortages and hoarding. Since people know that there are enough people willing to pay a higher price, everyone will try to buy them at $X, even if they don't need them at all. Just buy them at $X, and immediately sell it to one of those companies willing to pay a lot more.
The market is extremely inefficient... since the manufacturer isn't charging enough, you get way too many people trying to buy them from the manufacturer.
So you find the price where the demand is N/2 chips, and everyone who is willing to pay that much will get one, and there is no profit for scalpers so the only people who will buy them will be actual companies that need them.
> The people who really need the chips, and would be willing to pay a lot more than $X for them
The people who really want the chips, and are able to pay a lot more than $X for them.
Please can y'all stop pretending that raising prices allocates resources by need and willingness to pay? With the level of spending power imbalance, the person who wants something and has too much money will ALWAYS squeeze out the people who actually need something and have less money. Always. No other factors are considered by the market.
The cure for high prices is high prices. Selling out creates scalpers and sometimes even a speculative bubble. High prices means producers invest in new fabs (though it may take time).
That’s what makes this so distinct so it probably shouldn’t just be some offhand parenthetical at the end. It’s incredibly expensive, it takes a long time, and it’s incredibly specialized. You can absolutely forget the idea of a “disruptive startup” entering that space too.
Maybe not a traditional disruptive startup but isn’t CXMT from China stepping in to build all those fabs?
Previously investing in that space didn’t make a lot of sense. Now that there are a lot of consumers willing to buy something they can build and sell at a price between the previous low point and the current high point.
The only tricky thing is that the current shortages need to continue until the fans are well up and running.
Even if the supply side suddenly crashes due to the AI bubble bursting or someone inventing a way to only need 1/10 of RAM, I can imagine them keeping the prices relatively high.
It takes several years to get production and distribution started. You’re not going to see a rush chasing current consumer ram prices like you would a popular toy or something.
Distribution is already mostly in place. The existing channels have run dry so they can be filled with the new supply.
Building things happens a bit quicker in PRC compared to the US. If they see it as a way to undercut the US/Taiwan hegemony on the chip markets, it might even just fun to do it.
HBM3E is something China can’t do yet. And their DDR5 17nm node process just cleared high yield rates 2 days ago. It will be interesting to see what happens here.
This is a myth. The volume of inventory remains the same regardless of the price. When demand is higher than supply you have shortages regardless of price simply because you have unmet demand. If you raise prices, that demand is still unmet, you're now filtering that demand by who is willing to pay more so you maximize your own value and profit. Not even rationing prevents shortages because, again, the demand exists. Rationing simply tries to spread the supply around so more people get some rather than none. Price hikes instead say "who wants it badly enough?"
This ignores that whenever the margins for an industry increase, this interests new investments in it, and new players to come aboard, as well as new product lines that can satisfy the demand in a new way that people either didn't consider or rejected before due to being outclassed by the formerly cheaper alternative.
You aren't just filtering by who is willing to pay more, because willing to pay more is also indicative of how valuable that inventory is to the people buying it.
All demand is not equal. Some companies have very valuable business they can do with the inventory while other businesses have less valuable uses for it. The more valuable uses are willing to pay more, so higher prices means the most valuable uses get filled first.
If demand outpaces supply then there’s a shortage no matter what you do.
I don’t believe scalpers are an issue in B2B; these aren’t concert tickets being sold to the general public.
It’s clear you grasp the economic theory as it’s taught, but my comment was meant for you to question it. If someone is hungry you can charge more for food. The market allows and encourages it. But don’t mistake that for “willingness” and don’t mistake raising the prices purely to get extra money from the exchange as some inevitable law of the universe. You’re welcome to love the concept, but don’t whitewash it.
> If demand outpaces supply then there’s a shortage no matter what you do.
Demand is elastic. If the price of potatoes rises to $1000 / kg most people will switch to using pasta or rice for their dinner instead. There might be a shortage of potatoes at $1 / kg, but not at $1000 / kg.
If my 7-year-old computer were to die tomorrow I would've normally replace the entire thing. It has had a good life, the newer generations of hardware are a decent bunch faster, and it would be nice to get some additional features. With current RAM prices? No way I can afford to upgrade to DDR5, I'll have to get a replacement AM4 motherboard / CPU to fix it.
> I don’t believe scalpers are an issue in B2B
They are called "speculators". DRAM is a commodity and is traded no different from, say, potatoes. It's why there are companies like DRAMeXchange. DRAM module assemblers like Kingston, G.Skill, and Corsair will buy chips from whoever gives them the best deal. Similarly, anyone assembling hardware using DRAM will have stockpiled it when the AI boom became noticeable - with some almost certainly selling it off now that it has become too valuable to use for cheaper products.
I just did exactly that. I had an old i7 with 64GB of DDR4 that I bought when it was cheap. DDR5 was so expensive I just bought an AM4 and moved the RAM over.
My MacBook is showing its age, though. Hearing that 2027 wont be any better makes me hopeful all the vibe coders can ask for memory efficient implementations to stretch existing hardware a little further.
> Hearing that 2027 wont be any better makes me hopeful all the vibe coders can ask for memory efficient implementations to stretch existing hardware a little further.
I've been thinking about this too. After being forced to work off a laptop with 6GB of RAM for a few weeks it made me appreciate my 32GB at home where I run Electron apps with abandon. It still seems crazy to me that we've normalized running an entire browser for a single program just because the UI frameworks are too hard/unfamiliar to the majority of programmers.
> just because the UI frameworks are too hard/unfamiliar
i'm not sure if thats the biggest issue. working at a few large companies that had to support multiple platforms, the management was always looking for ways to deduplicate work with things like flutter, kmp etc; they just want one codebase to manage and qa because 2 or more gets to be hard for them to handle (hiring is also easier)
i take it even with ai companies will still do this, whith exhibit a being the electron-based codex app from openai...
> Demand is elastic. If the price of potatoes rises to $1000 / kg most people will switch to using pasta or rice for their dinner instead. There might be a shortage of potatoes at $1 / kg, but not at $1000 / kg.
If potatoes suddenly became $1000/kg, everyone would agree that there is a shortage of potatoes. While sure, people won't starve and will eat other things, it doesn't change the basic fact that there aren't enough potatoes.
The situation with RAM is even worse. If I'm trying to build and sell computing devices, I need RAM. Whether no one is willing to sell RAM at all, or whether they'll sell it only for 10x yesteryears's price, it doesn't make much difference to me, I'm still going out of business. Sure, that will then make demand technically go down, but not the shortage.
This whole thread is a bad analogy. Take all potatoes out of the market, and:
1) Some people won't be able to afford alternatives. They will starve to death
2) There may not be enough of other foods, so even if people have money, people will starve to death.
There are years where corn or rice or oats are of poor yield. A couple of years of that, and canned food and stored food is gone. It doesn't take long for "we have no <core staple food>", and things become bad.
This isn't a 3 month or year long blip in RAM pricing. If nothing changes, no bubble bursts, we won't see RAM become plentiful until 2035 at least. And a tight supply until 2030.
That's not a year of no potatoes. That's a decade of a core crop, with loads of calories, gone. That's "people are going to starve somewhere" trouble.
(I hate this food analogy, because in the West we've not seen a drought cause people to starve for half a century, if not longer. People are too complacent.
To speak to that, we grow crops where we get best value for the money. And best results. Corn cannot be grown in much of Canada, it needs a LOT of sun to mature, where as wheat can with a shorter growing season. Rice needs lots of water, where as other crops are more tolerant. Potatoes do well in certain soils. If there are no potatoes, you cannot just grow anything in that location.
Take away a core crop, and you can just lose those calories. Especially as farmers won't switch on the first year of a lost crop.)
RAM is quite durable, so I can imagine buying new servers with new CPUs, but instead of DDR5, it has DDR4 RAM slots. A loss of performance to be sure, but a good way to renew your fleet, and reduce the impact of all of this. But such boards aren't really here I don't think, not in quantity.
> Demand is elastic. If the price of potatoes rises to $1000 / kg most people will switch to using pasta or rice for their dinner instead. There might be a shortage of potatoes at $1 / kg, but not at $1000 / kg.
When demand exceeds supply you have two options: make the people who value those goods the highest compete with each other to pay the natural market price for them, or have a lottery with price ceilings. Price ceilings create inefficiency, and they create black markets.
In a lottery, the goods are misallocated to a bunch of people who aren't getting the most value out of the goods, creating economic inefficiency. A bunch of GPUs would be sitting in warehouses waiting to be resold (either when the price goes up, or in the inevitable black market), or in my basement screwing around with them, instead of being deployed in a way that the most people can benefit from creating maximum economic value from their deployment.
Your gaming PC isn't as economically valuable as JPMorgan using AI for fraud detection, for example.
Moreover, if you are appointed god and force everyone to sell GPUs at one dollar just because you want cheap GPUs, then this is the last batch of GPUs that will ever be produced and you'll have a shortage until the end ot time.
There are many other ways to allocate capacity. For example, you could give preferential access to customers who sign long-term purchase commitments, or some other favourable terms. These other methods might correlate well with value to the seller and might be easier for buyers to pay.
Other methods could be "allocate to customers that you want to maintain a good relationship with." I suspect HBM is not allocated either with pure auctions or by lottery.
Yes it's well known that luxury goods do not fit this model. GPUs are capital goods. It isn't hypothetical when you understand the difference in the demand curves for different types of goods.
Not that I'm advocating for this with RAM, but another tried and true solution for necessary goods with limited supply is rationing. This is what got everyone through WW2, for example.
Rationing works when people can make do with a small amount of something despite preferring a larger amount. In particular, food rationing was not about alternatives, but simply about restricting everyone's diet so that a limited food supply would be consumed more slowly without starving anyone.
> The people who really need the chips, and would be willing to pay a lot more than $X for them, will be competing with people who are only willing to pay $X for them.
If there was an Ozempic shortage tomorrow, it's not the morbidly obese people who "really need" it who would be getting it, it would be the Hollywood A-listers who need to drop 4 pounds for their next movie, or the billionaire who's feeling a little tubby. Price is a good allocation system, but it's important to recognize that it's not a mechanism for attaining some kind of ethically "best" allocation.
What's the functional difference between "I can't afford it" and "I can't get it due to a shortage"?
(Other than a convenient-for-some/inconvenient-for-others "let the richest get the stuff first!" shift, and just pretending that we are all fully independent actors instead of members of a community?)
People seem to be thinking of "affording" as merely a property of having more cash. It is more than that, it is about the potential RETURN on the investment. The businesses that can 'afford' to pay more are the ones who are going to put the chips to the most valuable use (at least in the macro sense). A company might have plenty of money, but won't pay above a certain amount for the chips because the business case they are using them for is not valuable enough.
Raising prices is a way to filter for most valuable use.
The supplier receives more money in the first of those scenarios, which (a) can be used to expand its own supply and (b) creates a demand signal for competitors to attempt to clear the barriers to entering the market.
Can we stop abusing the technical economic definition of "shortage"? In economics a shortage means the price is too low for the demand quantity, but in everyday usage a shortage means the supply quantity is too low.
With the basic supply/demand curve, "shortage" and "discount" are synonyms and I know which word makes more sense to describe the scenario.
What? There's no abuse going on here, because (1) the technical economic definition of "shortage" is simply demand exceeding supply, exactly the same as the everyday meaning; and (2) even if the meanings were different, technical or domain-specific-jargon meanings of words don't trump everyday-use meanings, unless you're in a technical meeting of people within that narrow domain.
It is the other way around, When people want something they are willing to pay more for it. The manufacturer wants to sell to the person that will pay the most. While the person wants to buy from the manufacturer that charges the least. As such when the manufacturing capacity is below demand the price goes up until the item is worth what people will pay for it(at large, statistically, it works like an auction). The promise of capitalism is that as the price goes up it should incentivize manufacturing capacity to go up and as the capacity meets demand and the manufactures start to fight each other to be the one to sell the item the price goes down.
Thank you for taking the time and effort to provide a clear explanation. I’m familiar with supply and demand though. My emphasis was on “must” as a lazy protest against greed being considered a mandatory part of capitalism. Prices don’t have to go up, someone just wants more money.
If you happily sell apples for $1 and see a hungry person walking towards you, must you raise the price?
I think that basic thought gets lost sometimes when people talk about shortages causing the price to increase. The shortage didn’t cause anything, some executive decided they want more money. That’s all. There’s nothing inherent in the system that requires it. Whether that’s OK or not is up to the reader, I just think people lose sight of the reality and talk about it like it’s gravity, rather than simple decision making.
> If you happily sell apples for $1 and see a hungry person walking towards you, must you raise the price?
if you happily sell apples for $1 and now there are VC-funded companies who need a ton of apples to produce some dubious crap and can pay you $5 per. And you are the only company selling apples.
what you should do is keep selling $1 apples to retail customers and charge corporations as much as they accept. you invest it into more apple trees and maybe subsidize the hungry people even
But what do you suppose the corporations do with the apples you’re selling to them? Adding a degree of separation doesn’t change what you’re doing, and you’re not morphing into Robin Hood.
To be clear, I’m not taking a fully altruistic position. I’m just tired of price hikes on things, from apples to memory, being blamed on the weather rather than openly understanding that it’s a person wanting more money. “I can’t afford gas because of the shortage” - No, it was the CEO saying a number in a meeting and that person has a name. When someone is robbed we don’t say “an economic disparity caused a wealth adjustment.”
The issue with that solution is that in order to sell to retail customers, they sell to other large corporations, which they think are going to sell to retail customers. Guess what happens when they find out, you are charging other corporation higher prices.
>> Now, you could raise prices to the point where you destroy demand
Isn't that topic .. the first chapter of any economics 101 course? Supply and demand and how they influence each other? You think after hundreds of years of economic study we don't have any sort of grasp on these absolute most basic concepts?
>You think after hundreds of years of economic study we don't have any sort of grasp on these absolute most basic concepts?
Nonetheless, even after all these hundreds of years of economic study, companies still make mistakes (and occasionally, commit fraud). And we still have massive economic crashes. If only everyone understood the "basic concepts", all of this would go away and we would achieve 100% economic efficiency at all times. What a pity.
Aren't the advertised prices just a number now? When OpenAI or some other big player comes to buy months worth of production capacity, they aren't doing it at a publicly advertised price.
I don’t understand how there being essentially unlimited demand for their products that far exceeds supply and is driving up prices accordingly is somehow a bad sign for the industry?
> Now, you could raise prices to the point where you destroy demand.
You know supply and demand is like a curve right, you can find an optimal equilibrium? It’s not a cliff that you can fall off.
"Demand destruction" doesn't literally mean all demand is destroyed; it refers to the demand curve you reference. But as a sibling commenter notes, real business is rarely as clean as an econ textbook. In the real world, a supplier can contract to supply more units than they can actually produce. Their customers rely on the representation to make other related deals. And of course, the supplier can book the contracted revenue, causing investors to rely on the forward sales. They can't raise the price at that point, it's fixed in the contract. So if it turns out they physically can't deliver when the time comes, some number of the deals have to be blown up, causing related deals to blow up, etc., etc. That is the risk I was referring to.
Or: Supply and demand oscillate in a delayed way based on each other. A quick increase or decrease in one side takes time to ripple, and by the time it does, the organization may have reversed course.
An airline overbooks flights. Lots of people get their flights cancelled. Takes six months for the fallout to settle where everyone who got burned booked their future flights on a different airline. 3 months out the airline has to cut the number of flights and cut prices in the face of falling revenue to reclaim market share. As soon as they do that, they're flooded with too many bookings. So they take the bookings and overbook flights again, but it takes time to bring the new flights online.
It's not a 1:1 situation. Each time you miss the market you wobble a little further until all the inefficiencies of bad predictions eat you up.
No one has claimed that. Only that there is a risk that semiconductor manufacturers will be incentivized to overcommit, resulting in collateral economic damage when they fail to deliver.
> In the real world, a supplier can contract to supply more units than they can actually produce.
Did this actually happen though? Is there any evidence or you are just imagining a scenario which if it did happen could lead to the scenario you outlined?
Yes, it happens all the time. Sometimes it's actual fraud, sometimes it happens due to unforeseen supply chain issues. Sometimes it's a gray area in between, where production is possible but the supplier hides relevant risks in order to secure the deal.
Several examples can be found in lists of supply chain disasters, eg the 1995 Apple production shortfall:
> The problem isn't the price. No matter how much you pay, you can't take delivery of a chip that doesn't exist
I’m confused because this reads like a denial of basic economics. If the price is high enough, the chip will be produced for you.
Do you mean because of the production lead time, higher prices won’t result in increased production? Commodities like corn have been managing this for a long time… what’s special about chips?
Nontrivial markets don't behave like Economics 101 textbook examples.
Samsung, SK Hynix, and Micron have a combined market share of 90% - with most of the rest being a very new-to-the-market CXMT. It is a cutthroat market which behaves like a stereotypical "pork cycle". Semiconductor fabs cost billions to build and take years to complete, so you better be damn sure you have buyers before you start constructing one. You and your competition overestimated the demand? You have to pay back the construction cost, so you're now in a race to the bottom and one of you is going bankrupt.
Ever wondered where Intel came from? They started out as a DRAM manufacturer, which dominated their revenue well after the introduction of their first microprocessors. But in the early 1980s the glut of supply from new Japanese manufacturers made it so unprofitable that they had to ditch the memory market altogether. The stories of Texas Instruments and Motorola aren't much different. And that's not even mentioning the likes of Mostek, which once held a 85% market share and was dead less than 5 years later! Oh, and those Japanese manufacturers? All gone, pivoted like Intel or died like Mostek.
So no, the three remaining DRAM manufacturers aren't going behave like headless chickens and start ordering new fabs just because there's a bubble causing a temporary demand peak. Unless those AI companies are going to pay in advance, in cash, for an entire fab, they'll just have to wait and deal with the price increase.
Corn is heavily subsidized,also has (in the US) federally prvided insurance programs against plunging prices, has paid uselessness(ethanol). Despite all of this corn has caused massive agriculture bankruptcy/takeover when it has failed anyway.
So it's more "what's special about corn". It is also fairly hilarious to claim the parent is denying basic economics and then bring up corn as an example of having successfully managed economics. If the scales were not being thumbed, and "basic economics" were in play, corn would be in very very bad shape.
In the case of DRAM, there is an incredibly long history of these gloom/glut cycles, and they have stayed roughly the same timeframes (~3 years) since the 1990's.
Almost all the ones who have survived this long are either in the same kind of boat as corn - protected in various forms from the downside - or don't increase production and get caught out until they are absoultely forced.
The very temporarily increased profit is not worth going bankrupt for - they make more money long term by being very cautious and know this.
There are a near infinite number of economic studies you could look at (and several sibling comments cite some) - DRAM manufactuers don't chase the price and probably couldn't anymore if they want to.
None of this denies basic economic theory, of course, since economic theory is not exactly "rigorous", even to the degree it could be (IE even the parts that are pure analysis of data rarely reproduce!).
People are happy to play with AI when the tech companies are burning hundreds of billions of dollars to subsidize it. It remains to be seen who is actually willing to pay for it at the prices required to recoup those insane investments.
Which directly leads to the next big development: all the big players are investing in silicon with "baked-in" models, like [0,1]. Turns out you don't need an expensive general-purpose GPU with heaps of RAM to contain a model when you can make a custom ASIC around one specific model! Why spend a fortune on DRAM / HBM when all you need is some finetuning parameters which are easily stored in on-die SRAM?
> It remains to be seen who is actually willing to pay for it at the prices required to recoup those insane investments.
Everyone. Open models are going to keep prices down. A lot of current models are more than usable. Self-hosting would have been an option if hardware prices get back to sane values.
The insane investments have to do with insane over-valuations, VCs involved and hence media spam on it. Chinese labs for example make do with 1% of the valuation and 1% of the resources.
Prices must raise a lot to make self hosting mainstream or at least fairly popular.
Yesterday a coworker posted on a customer's Slack the specs of a box he is planning to buy to run local models. It's about 5k Euro. I am paying 18 Euro per month for Claude Pro and I'm going through a migration (almost a total rewrite) of a web app from Vue 2 / Vuetify 2 / Vuex to Vue 3 / Vuetify 4 / Pinia. I never hit the 6 hours limit. I could consider running an equivalent model on a 500 Euro machine (about 2 years of Claude Pro) but 5k is 20 years and that box will be obsolete or will have failed beyond repair (no spares) much earlier than that.
The problem is that is speculation and the market barriers are currently too high for losing business to be a threat. The two outcomes are (1) you overbuild, you end being wrong, you go bankrupt and lose everything or (2) you are right, but since you didn't overbuild, you lost out on some revenue, but demand still exists 3 years later and you didn't lose everything.
In any other business choosing (2) would mean someone else swoops in and steals all your business. It doesn't look like this is at all possible for memory fabs.
"In any other business choosing (2) would mean someone else swoops in and steals all your business. It doesn't look like this is at all possible for memory fabs."
FWIW - Lots of people seem to believe the "in any other business", but it turns out there are tons and tons of places it is equally untrue, even where there is near zero time or cost barrier to entry.
It makes sense, CXMT takes as much profit as possible, then use that money to build more capacity, ultimately becoming one of the biggest competitor (only?) to the cartel.
The capital investment needed to bring new chip fabs online and to staff them is likely orders of magnitude higher than that needed to buy land to grow corn on. And then the ratio of investment to sell price on that land + infrastructure is probably significantly worse for chip fabs that potentially aren't needed to satisfy demand anymore a few years from now.
"If the price is high enough" is of course technically true, but the scale of what high means in this context is important.
Also supply contracts exist which is what started all this: OpenAI signed huge orders for most of the market all at once. No one had any chance to properly include that information in their pricing or bidding.
> I’m confused because this reads like a denial of basic economics. If the price is high enough, the chip will be produced for you.
That's a classic stereotype of what an economic "expert" is going to say, while completely ignoring reality. Just because someone is willing to pay for it, does not mean, that goods just materialize. Sure, a lot of the time someone finds a way, but that is still limited by physical constraints: lack of expertise, lack of needed resources or as in this case simply lack of time.
>Commodities like corn have been managing this for a long time… what’s special about chips?
Chips aren't grown, for starters. They require very expensive facilities that take a long time to plan, build and start up. And ag firms are not seeing their stock price skyrocket based on the assumption that they will show exponential revenue growth every quarter, so there's no incentive for them to overbook their capacity and hope for the best. Maybe if the population was doubling every six months, you'd see something similar in corn. Prices in the real world are not perfectly elastic, and big deals are often locked in long before actual production.
