A three-month rally in memory prices is causing discomfort among PC makers and may lead to cuts in the amount of DRAM shipped with some low-end PCs if prices continue upward, industry observers say. If memory prices rise too much, PC makers will be faced with a choice of reducing the amount of memory in some systems or raising PC prices.

This week, spot pricing in Asian markets for a 256MB module containing 266MHz of DDR DRAM was around $39.50, according to market analyst ICIS-LOR, which tracks memory pricing. By comparison, the same modules were selling on the spot market or around $28.25 on January 1 and for around $25.00 on April 1, 2003, the analysts say.

Spot prices for other memory types, such as SDRAM and 333MHz DDR, have also shown significant gains during this period.

The rise in DRAM prices threatens to slow down the current trend of increasing the amount of memory that vendors ship with each PC, says Il Ung, vice president of semiconductor business at Samsung, the world's largest DRAM producer.

The Samsung executive estimates PC makers may reduce the average amount of memory per PC if prices for a 256MB DDR module rise above $42. Still, he concedes that Samsung is not certain what is the breaking point for PC makers.

"We are trying to make a survey of what will be the breaking point of megabyte per system in terms of pricing," he says.

Looking ahead to the second quarter, Il Ung expects memory demand will remain strong due to healthy corporate demand, while supply will remain tight due to low production yields of DDR2 chips and problems encountered by manufacturers.

The surge in spot prices for DRAM chips and modules has caused panic among PC makers, according to an analyst at iSuppli.

"Shocked and confused OEMs and spot market buyers have gone into panic mode due to the price hikes," Nam Hyung Kim, a principal analyst at iSuppli, writes in a recent research note. "If the price increases are too sharp, they could serve to depress DRAM sales in the second half of the year."

Citing the cyclical nature of the memory industry, Andrew Norwood, a Gartner principal analyst, downplays the significance of rising memory prices.

This isn't the first time vendors have faced the possibility of reducing the amount of DRAM on systems to avoid raising PC prices, Norwood says.

PC vendors count on declining component costs, which allows them to sell systems with successively greater performance at the same or lower price as previous models, he says. However, the DRAM market sometimes bucks this trend with higher prices, as is happening now, he says. Also, PC makers have benefited from low memory prices in recent years, Norwood notes.

"Every PC sold over the last two years has had about $30 of free DRAM in it," Norwood says, explaining that many memory makers were forced to sell memory chips at cost or at a loss in recent years. "The PC [makers] have really had it good over the last two years and it's time they stopped getting a free ride."