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Micron signs another long-term memory chip deal, with Gateway

On the heels of a similar deal with Compaq Computer, Micron Technology enters into a five-year strategic agreement to provide Gateway with memory chips.

    On the heels of a similar deal with Compaq Computer, Micron Technology said today it has entered into a five-year strategic agreement to provide Gateway with memory chips.

    The long-term deal calls for Micron to supply the second-largest direct sales PC maker with a "near majority" of memory chips for its PCs. Micron said the agreement takes effect immediately. Terms of the agreement were not disclosed.

    The move will help Gateway ensure that it has a ready supply of memory chips going into the holiday season, one of the strongest sales seasons of the year for the company.

    The arrangement comes as recently rising DRAM (dynamic random access memory) prices have begun squeezing already tight PC profits, leading some companies to move to secure extended-term supply contracts. Compaq Computer signed a similar memory chip deal earlier this week.

    The price increases have been created more out of fear than any long-term supply condition, analysts say.

    PC companies have been working to put "build-to-order" plans in place, which don't require them to hold inventory of products that can lose value quickly. The formula has been hugely successful for Dell and Gateway in recent years, but September's Taiwan earthquake and the subsequent disruption in memory chip manufacturing has jolted PC makers into realizing they need to make sure they have enough chips to put into PCs--or else put less memory into a system, an unpopular option for many consumers.

    Dell is among those feeling the effects. Memory price hikes have added nearly $75 to the manufacturing cost of roughly one-third of all Dell computers, the company recently said. In addition, Dell said it would start packing its PCs with less memory in an effort to cut costs. (See related story)

    Compaq and Gateway have found a solution by securing supply through Micron, the largest U.S. memory maker. Typically, PC makers will get a guaranteed spot in line in return for giving Micron a minimum order size and price, say analysts.

    However, deals to secure memory chip supply could be "a bit premature because we don't believe demand has yet reached capacity," said Jim Handy, memory chip analyst for Dataquest.

    Dataquest is forecasting a downturn in chip prices soon that should last through the first quarter of 2000. By the third quarter of next year, the supply will start tightening up again, said Handy.

    Micron's stock closed at 61.75, a slight decrease from the previous day's close. Gateway's stock closed down 1.25 to 62.00. News of the agreement was released after the close of U.S. markets.