Buyers can expect more price erosion for memory chips over the next six months although the rate of decline will ease compared to the first half price plunge of 2007.

The Semiconductor Industry Association, market analysts and suppliers say the memory market will grow through the year because of strong demand and less price erosion. After DRAM prices fell dramatically in the first half of 2007 suppliers eased back on production bringing supply and demand more into balance.

As a result, the average price for a DRAM started to rise in the third quarter. It will increase by about 5% from $2.87 in the second quarter to $3.01 in the third, according to researcher iSuppli, based in El Segundo, Calif. However, prices will fall in the fourth quarter and through at least the second quarter of 2008.

Production levels had been high in the second quarter, DRAM production increased 24% and the price dropped 38%, says Nam Hyung Kim, director and chief analyst for memories at iSuppli. "There had been an oversupply [in the memory market]," he says. "But suppliers slowed production, shipments were lower and demand increased. Therefore pricing is more stable now."

Kevin Lee, Samsung Semiconductor's vice president of memory marketing, concurs. He says in late 2006, suppliers were anticipating growing demand for the launch of Vista, Microsoft's new operating system, which requires more memory than previous operating systems. However, suppliers over-projected DRAM demand and over-produced. "We were building on capacity and not realizing what happened," he says. What happened was that the Vista transition was a little slower than expected. Since late June, demand has picked up and prices started to recover.

Kristie Syndikus, commodity management director at Celestica in Toronto, says that she is expecting mostly steady prices for DRAM. "It is unlikely that memory prices will continue to erode. Slowing capacity additions will stabilize memory prices," she says.

As for flash memory, that too was in over-supply with unit shipments growing 32% in the first quarter while prices fell 38%. But by the second quarter when suppliers slowed production, shipments grew another 9% with the price increasing about 5%, says Kim.

Samsung's Lee suggests that much of the increase can be traced to seasonal demand. With the holidays less than six months away, seasonal demand nearly always increases—sometimes sharply—in the third quarter.

"Much of this is cyclical demand," Lee says. "We are seeing the [flash] price increasing higher than DRAMs. We are looking forward to solid, healthy demand through the end of the third quarter and into early fourth quarter."

While memory prices fell in the first half, so did microprocessor tags. Matt Wilkins, principal analyst for computer platforms at iSuppli, says the price erosion was due to an extremely competitive environment over the last 18 months especially between Intel and Advanced Micro Devices (AMD). Prior to Intel's launch of its new Core Duo processor, AMD led the market in terms of performance, he says. After the launch, Intel offered higher performance with a lower clock speed.

The launch led to price cuts as AMD revised its pricing to ensure its chips remained price competitive with Intel's.

"They nearly got into a price war which is good for PC OEMs but bad for AMD and Intel, hurting their bottom line," says Wilkins

He expects pricing to remain aggressive throughout the end of this year, projecting that just before Christmas, buyers will be able to purchase a dual-core MPU for less than $100.

The dual-core chips will continue to be in higher demand because of their higher performance at lower clock speeds requiring less power. Currently, Wilkins says these devices are in high demand from desktop and laptop manufacturers.

Intel's new quad-core device will be used in high-end desktop and PCs. AMD's Barcelona, a new quad device, should be out this quarter.

As is typical, quad-core prices will fall as suppliers ramp-up production and demand increases for all product families.

Wilkins says supply and demand for MPUs currently on the market appears to be well balanced.

Prices for most other chips should be steady through the year and into 2008.

"It is unlikely that there will be significant price erosion on any semiconductor family in the next six months," says Syndikus of Celestica. She says the exception could be noncompliant Restriction on Hazardous Substances (RoHS) parts which some OEM customers still use for exempt products or equipment not sold in Europe

"Non-RoHS semiconductors will continue to have pricing increases into 2008," she says. "The market demand for these products has dropped significantly so economies of scale no longer exist to support the previous pricing levels," she says.