The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Supply-demand conditions in the server memory semiconductor market look solid amid greater demand for telecom and streaming services. Memory prices should continue to climb through 2Q20. That said, a government-demanded downgrading in bit rates for OTT services presents a risk factor.
Memory supply-demand conditions to be solid through 2Q20
Despite the effects on the real economy of the Covid-19 outbreak, there has been little negative impact so far in terms of server and data center demand. In fact, data traffic has been exploding amid increased demand for telecommuting, online games, and streaming services. In Korea, where the impact of Covid-19 has been relatively small compared to the global picture, OTT service traffic upped 44% m-m in February. In Italy, where the impact of Covid-19 has been severe, Facebook video play time has more than doubled, and group talk time has leaped roughly 1,000% from before the outbreak.
Memory semiconductor supply-demand conditions should remain favorable until 2Q20, led by the server application segment. Given such, 2Q20 prices for DRAM and NAND are likely to expand sharply q-q—we estimate that 2Q20 memory contract price growth will clock at around +13% q-q for DRAM and +10% q-q for NAND. With China gradually starting to emerge out of the Covid-19 crisis, the Chinese government is concentrating its resources on building up 5G infrastructure. Also positive, Chinese 5G-equipped smartphone sales momentum is expected to recover partially from 2Q20.
Risk factor: Downgrading of bit rates for OTT services
But, also in play is the risk factor of governments demanding bitrate reduction from OTT firms in order to reduce network congestion amid the Covid-19 crisis. Netflix, YouTube, and Facebook have all recently cut their video bitrates for the European market -- Netflix expects related traffic to drop by 25% due to this downgrade.
We point out that advertising is the most important source of revenue for Internet players. In the event of ad revenue decreases due to economic woes stemming from the Covid-19 outbreak, additional bitrate reduction measures will likely be implemented. If burdened by lost revenue, Internet companies will likely have limited resources for beefing up their data center investments in order to fully meet the explosion in traffic. Against this backdrop, from 3Q20, whether there is a recovery in the real economy (in response to the measures being implemented by governments to prevent further spread of Covid-19) will be of critical importance in spurring demand for server semiconductors.