Memory-maker Micron has found a way to keep prices for its products sky-high for another five years, by signing 16 “strategic customer agreements” (SCAs) that include a floor price the company says comes with “a very robust gross margin for Micron, well above our peak quarterly margins in any past cycle.”
Micron CEO, president and chairman Sanjay Mehrotra explained the SCAs in prepared remarks delivered during the company’s Q3 earnings call. He explained that Micron has signed 16 SCAs, most of them covering 2026 to 2030, and that they involve a commitment to buy a certain quantity of product and pay for it in a pricing band that has a floor and a ceiling price. The floor price covers the historically high gross margins mentioned above, and the ceiling price means those who commit to an SCA are insulated if memory prices go even higher.
I wonder if anybody has told Micron about what happens when customers sign a contract but then declare bankruptcy shortly after.
Or what happens to the stock price once the temporary surge in demand fades or new companies enter the market and disrupt it.
That’s the point of the agreement. It locks in that demand by contractually requiring the companies agreeing to it to buy a certain amount of product regardless of whether they actually want it.
Personally, I view this as a sign that Micron believes the AI bubble is going to burst within 5 years, so they’re locking people in at bubble prices now.
Software developers: more Electron and bloated frameworks are what the people want! Running 10 independent browser instances for simple chat apps is a great idea!
The same Micron that plead guilty to price fixing of memory 20 years ago.
https://www.theregister.com/off-prem/2004/02/27/memory-makers-hit-by-price-fixing-claims/1070959
“Locks in”…if all of a sudden there was no demand you can be assured they would “lock out”. Micron likes to put the boot to the throat when they have an advantage. Not someone I’d do business with.
Yeah, everyone was paying to back out of their contracts as soon as the prices went through the roof. The customers will do the same when they come back down if they are stuck in these contracts.
I believe that most of the customers signing these agreements are also the ones responsible for the memory shortage in the first place, and will go bankrupt when the AI bubble bursts, so the contracts will be voided in bankruptcy court.
Assuming these customers are the reason for the price hikes, their backing out is the demand loss needed to bring prices back down.
Isn’t that called price fixing, and is generally illegal?
This is just like selling / buying options in any other industry, e.g farming to buy something at a specified price in the future.
They’ve agreed to buy XYZ product at 123 time at a price between $100 and $200.
If prices plummet, they’ve still agreed to buy it at $100 (similar to selling an options $100 Strike PUT), but if prices skyrocket, they don’t need to pay more than $200 (similar to buying an options $200 Strike CALL)
Anything in between is just the price, so if it’s $150 then its just $150
It’s not exactly the same as using options, but the rough idea.
I’ve never signed a contract to buy something 5 years from now at a certain price.
It’s a real thing.
You’re not a company dealing with massive inventories :P
its price fixing if the agreement is among ‘competitors’ - this is price fixing for a customer(s)
Unfortunately yes, but the current government is not going to enforce the laws
Yes, but the fine is far lower than their profits here… so, it’s only illegal if you can’t afford it.
Yes, but it’s AI, and Peter Thiel have bought all the politicians he could, so they will let them get away to “gain an advantage against China in AI”.
gross margin for Micron
Gross indeed. Fucking greedy scumbags
I read this as Mormons. 😶
Well, I know who’s gonna take a beating when the bubble pops and the market falls out from under them. What a stupid decision.
“Hey guys, this AI thing is gonna be like this forever. We’ll never lack for insane demand ever again.”
They’re all positioning for government bailouts anyway. Whether Trump or a neoliberal lickspittle, they know they’re pretty much covered. All of the important c-suite people will be perfectly fine.
I think the logic for the customers is that either: A) It will work out exactly as predicted and we can afford whatever the hell we want, so it’s worth it to have secured supply
B) Declare bankruptcy, the purchasing obligations no longer matter.
Five years is too long for the buyers. The AI bubble will burst before then and then the market price will drop as the inflated demand disappears, especially if this continues long enough for more production capacity to come online.
They might not have had much of a choice in making the deal, though. Micron has been extracting the absolute maximum they can out of this situation. Make a deal or get nothing. Their clients will remember, though, and flag them as an unreliable supplier. Once this ends—and these always end—they’ll likely have a lower market share and end up having to cut prices.
Micron is optimistic in saying the demand won’t start easing until 2028. A lot of the rest of the technology manufacturing industry is about to grind to a crawl if not a halt because it’s nearly impossible to get components. Some companies are already delaying product launches and I think a lot more are about to this summer as they realize what’s happening. If non-AI businesses start to slow, the whole economy starts to slow, the AI demand will falter and that’s when the bubble bursts. I’m thinking maybe by the end of this year, more likely next year.
When the bubble bursts I’m guessing at least a couple of the companies Micron signed SCAs with will fold and Micron won’t get anything.
When the bubble bursts I’m guessing at least a couple of the companies Micron signed SCAs with will fold and Micron won’t get anything.
This is the key. The plan for a lot of these companies is that only two outcomes exist, unimaginable success where being gouged hardly matters or just utter failure and the obligations go away in bankruptcy.
Alternatively, they just break the SCA and maybe pay some penalty less than their obligation otherwise would have been. I have seen companies sign agreements knowing up front they will break the agreements, but the contract penalties still make business sense.
I’m still waiting to see what happens when OpenAI decides to back out of some of their purchasing obligations. It’s bound to happen, even if OpenAI does great. If folks think the tech sector is a bit wobbly the past few days, it pales in comparison to what such an announcement would do to the industry.
Does it go something like this? Those companies who buy the NAND chips to make AI accelerators, SSDs and RAM for data centers are the Microns customers, like Nvidia. Even if they are in trouble and know that the datacenters are not being built, they can’t cancel the deals because that would call the bubble into question. They will have to take any markup deal that Micron gives, them because if they don’t there will be nothing for them nor Micron anyway.
Soooo if you raise the price sooo high then it lowers the price of barriers to entry. Congrats on maybe a year of monopoly before memory becomes a commodity like corn. Or AI crashes so hard that your customers refuse to come back. I feel like the later since using Micron memory for the past 30~ years.
is there any good reason to charge more? I remember a long time ago, the people who run youtube had to have new technology invented to be able to store the videos on there.
is anything like that happening with ram chips?
Simple supply and demand problem
Shocker
