Dylan Patel: prediction

Transcript context

…If you look at the bill of materials for an iPhone, what fraction of it is the memory? How much more expensive does an iPhone get if the memory is two times more expensive? I believe an iPhone has 12 gigabytes of memory. Each gig used to cost roughly $3-4, so that’s $50. But now the price of memory has tripled. Let’s say it’s $12 per gig for DDR. Now you’re talking about $150 versus $50. That’s a $100 increase in cost for Apple. Apple has some margin, they’re not just going to eat the margin. NAND also has the same market dynamics, so in reality, it’s probably a $150 increase on the iPhone. So now that’s a $100 cost increase and that’s just on the DRAM. The NAND also has the same sort of market. So in fact it’s probably a $150 increase on the iPhone. Apple either has to pass that on to the consumer or eat it. I don’t see Apple reducing their margin too much, maybe they eat a little bit. But at the end of the day, that means the end consumer is paying $250 more for an iPhone. Now that’s just on last year’s pricing versus today’s. There is some lag before Apple feels the heat because they tend to have long-term contracts for memory that last three months to a year. But at the end of the day, Apple gets hit pretty hard by this. They won’t really adjust until the next iPhone release. But that’s the high end of the market, which is only a few hundred million phones a year. Apple sells two or three hundred million phones annually. The bulk of the market is mid-range and low-end. It used to be that 1.4 billion smartphones were sold a year. Now we’re at about 1.1 billion. Our projections are that we might drop to 800 million this year, and down to 500 or 600 million next year. We look at data points out of China from some of our analysts in Asia, Singapore, Hong Kong, and Taiwan. They’ve been tracking this, and they see Xiaomi and Oppo cutting low-end and mid-range smartphone volumes by half. Yes, it’s only a $150 BOM increase on a $1,000 iPhone where Apple has some larger margin. But for smaller phones, the percentage of the BOM that goes to memory and storage is much larger. And the margins are lower, so there’s less capacity to even eat the margins. And they have also generally tended not to do long-term agreements on memory. Why this is a big deal is that if smartphone volumes halve, that drop will happen in the low and mid-range, not the high end. So it’s not like the bits released are halving. Currently, consumer devices account for more than half of memory demand. Even if you halve smartphone volumes, because of the shape of the halving, the low end gets cut by more than half, while the high end gets cut by less than half, because you and I will still buy the high-end phones that cost north of a thousand dollars. We’ll buy them even if they get a little bit more expensive. And Apple’s volumes will not go down as much as a low-end smartphone provider. The same applies to PCs. What this does to the market is quite drastic. DRAM gets released and goes to AI chips, who are willing to do longer-term contracts and pay higher margins, because at the end of the day the margin they extract from the end user is much larger. ic. DRAM gets released and goes to AI chips, who are willing to do longer-term contracts and pay higher margins, because at the end of the day the margin they extract from the end user is much larger. This probably leads to people hating AI even more. Today, you already see all the memes on PC subreddits and gaming PC Twitter. It’s cat dancing videos saying, “This is why memory prices have doubled and you can’t get a new gaming GPU or desktop.” It’s going to be even worse when memory prices double again, especially DRAM. Another interesting dynamic is that it’s not just DRAM, it’s also NAND. NAND is also going up in price. Both of these markets have expanded capacity very slowly over the last few years, NAND almost zero. The percentage of NAND that goes to phones and PCs is larger than the percentage of DRAM that goes to phones and PCs. As you destroy demand, mostly for DRAM purposes, you unlock more NAND that gets allocated and can go to other markets. The price increases of DRAM will be larger than those of NAND because you’ve released more from the consumer, and in fact, you’ve produced more memory for AI.…

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