January 16, 2001
redherring.com
Let the chips fall
By Iolande Bloxsom
Redherring.com, January 16, 2001
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Chip makers, from Intel (Nasdaq: INTC) to Texas Instruments (NYSE: TXN) , have spent years drafting strategies to escape the barren wilderness of low-margin PC chips and reach the promised land of high-growth, high-margin chips based on new processing methods, and of chips devoted to powering ever-faster communications.
Intel, the acknowledged leader, is perhaps the most adrift of the large chip makers in executing a new strategy. Intel's much-delayed Itanium chip has prevented it from realizing its grandiose plans for life after the PC. Its most ambitious project in 32 years, Itanium, is proving to be a costly misstep.
But Intel is not alone. Other chip makers, from Texas Instruments to Cypress Semiconductor (NYSE: CY), risk an Intel-like fall from grace in the shifting sands of the post-PC world. These established chip makers are turning to information-appliance and communications chips. But their innovation may come at a costly price: buying out the competition.
Itanium, Dean Takahashi reports, is "the worst example of Intel's failure to execute (link to main "intel" story) ." After spending billions of dollars and more than six years of engineering, manufacturing, and testing, Intel faces criticisms that Itanium (code-named "Merced") will function primarily as a prototype, to enable customers to develop products for McKinley (its second 64-bit architecture chip).
Intel defends itself by stressing the project's complexity. However, those close to the project believe the real problem is that delays have forced the specs of the project to change multiple times just to keep pace with the performance requirements of the market. And Intel officials acknowledge that there have been several course corrections along the route to Itanium.
This is, of course, good news for Intel's competitors. AMD, for example, has chipped away at Intel's dominant market position, increasing from 12.6 percent in the third quarter of 1999 to grab 17 percent of the market a year later.
Meanwhile, other chip-making monoliths like Texas Instruments, Cypress Semiconductor, and PMC Sierra, began four years ago to reposition themselves away from PC chips to the manufacture and sale of communications chips.
But, Om Malik argues, unless these companies continue to innovate, and -- through acquisition (link to main "chips" story) -- force their way into new product categories within the enormous market for communications chips, they could be outpaced by any of several startups.
Established chip makers must tackle gigantic core markets for communications chips: telecommunications, wireless applications, and optical networking. Designing and manufacturing for these sectors carry high risk, as there will be many product dead ends for both new and old companies chasing what they think will be the next high-growth sector.
Red Herring looks at Intel and its much-delayed Itanium chip and at the possibilities for communications chip makers in this special report on the state of the microprocessor industry.
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