A monopoly shared among a small number of players is supposed to be highly profitable.
In memory chips, however, not so much. Micron (NASDAQ:MU) has never been hugely profitable, but it has survived a bruising memory chip industry shake-out to stand as one of three main survivors, alongside SK Hynix and Korean conglomerate Samsung, following the purchase of bankrupt Japanese player Elpida for $2.5 billion. The deal will give Micron about one-fourth of the total market.
Micron will now be the only way for the public to play the Dynamic Random Access Memory, or DRAM, chip market as it prepares for its next adventure, the cloud.
Despite the lack of industry profits, DRAM chips have made enormous strides in the last decade. Starting with "thumb" drives that became the 21st century's version of the floppy disk, chip memory has taken over the client memory market from aluminum hard drives, which have moving and spinning parts.
Do you have an iPad or an Ultrabook or a phone sporting 8 Gbytes of memory or more? That's all chip memory. It's all DRAM.
The problem for the industry is that intense competition and the demands of Moore's Law for constant improvements have kept the industry in an almost permanent state of glut despite these advances. As DramExchange, which follows the market, notes, the industry is in the process of moving lines from 45 nm apart to 30 nm, and then to 25 nm.
Each time lines move closer together, and chips get more densely packed with circuits, their complexity and initial manufacturing cost also increases. This is what I call "Moore's Second Law," the continuing rise in the cost of capital associated with chip manufacturing that, in time, squeezes out competition.
Since February, when Elpida announced its bankruptcy, industry price volatility has decreased markedly. The hope is that the number of competitors is now small enough that, as with Coke and Pepsi, competition can turn into a mutually profitable arrangement.
Micron is one of those in the black. That's why the stock is up 4.75% in the first hour of trading, and why it may be headed higher still. Turning hopes of shared monopoly into reality would be very bullish for MU.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.