Rambus Revisited
Personal Disclosure:
Rambus represents a small portion of my portfolio. It is a stock I traded several times last year while watching it?s products struggle to reach market. Last year the stock fluctuated between $55 and $117 several times and many investors got burned. In GG terms its products had not crossed the chasm.
Rambus is now a more interesting story. It?s products have crossed the chasm and have the potential for becoming the industry-wide standard. Rambus products are a discontinuous innovation with an open proprietary architecture. Rambus is being mentioned very favorably this week at the Intel Developers Forum and the stock market is taking notice. The following is an overview of the company to stimulate discussion. Comments and questions are encouraged:
Business:
Rambus designs and licenses high speed chip to chip interface technology to enhance performance of computers and electronic systems. The company licenses semiconductors companies to manufacture and sell memory solutions that increase the data transfer rate or ?memory bandwidth? so that memory devices can keep pace with new processors and controllers. ( The performance of a computer or other devise is typically constrained by the speed of its slowest component. In the past, that component was the microprocesssor. In recent years the processors have become faster and the bottleneck has become the component that stores the instructions and data needed by the microprocessor?the DRAM. Rambus has currently focused its efforts on DRAM solutions and the RAMBUS DRAM or RDRAM is the result.)
In 1996 Rambus entered into a development and license agreement with Intel. To date, Intel has developed and begun producing 2 Rambus controllers as part of new chipsets. One, designed for use in workstations was released on time. The other chipset meant for use in the much larger PC market was delayed due to technical problems. Those problems have been resolved. This week Intel is expected to announced the use of RDAM in 2 future generation high speed chipsets.
Business Model
In an attempt to establish Rambus technology as an industry standard, Rambus does not manufacture or sell semiconductors incorporating its technology. Instead it licenses its technology on a nonexclusive basis. ( Think QCOM royalties). It currently has licensed 14 DRAM manufactures which collectively account for 95% of the worldwide market: Fujitsu,Hitachi,Hyundi,IBM,Micron Tech, Matsushita, Mitsubishi, NEC, OKI,Samsung,Seimans,Toshiba, Vanguard and Winbond. Other licensees include Advanced Micro, Compaq, HP, Intel, LSI,S3, and TI.
Royalties are paid as products are shipped and range in rates from 2.5% for RDAMS and 5% for logic IC?s.
Patents and Intellectual Property
The Company holds 62 US patents and has 90 applications pending.The company has 10 foreign patents with 36 applications pending. Most patents have yet to be tested, but the proliferation of so many prominent licensees bodes well. One lawsuit is pending which I will discuss later.
Is there a need for Rambus products?
Absolutely. Intel and AMD are already bumping their heads against current memory limitations. They both must find solutions before they call sell future generation higher speed chips.
Competition:
The semiconductor market is intensely competitive and has been characterized by price erosion, rapid technological change and short product life cycles. Most DRAM manufacturers produce versions of DRAM that compete with RDRAM?s at the present time. Some are also making DDR SDRAMs, aimed at doubling the memory of SDRAMS. In addition, a consortium of DRAM manufacturers and systems companies has been formed to find alternative technologies to lower costs and royalty payments. Notwithstanding, most commentators, even those who are negative on the cost and viability of Rambus, do not see any viable alternatives in the near term.
Market:
The largest market for DRAMS is the PC market which accounts for 55% of all DRAMS. The next largest market is the workstation/server market. Of the non-PC markets, most of the remaining DRAMs are sold as individual devices for diverse applications such as game machines, printers, communications equipment,such as networking boxes, and other miscellaneous products. In the post PC era , watch for more demand for memory bandwidth in hand held devices, game machines,MP3 players and recorders , HDTV and VCR devices.
Has Rambus crossed the chasm?
Yes. Dell ,HP , Acer, IBM, Compaq, Micron and Gateway now offer computer systems containing RDRAM. Sony Playstation II will be released in March and will contain RDRAM. On February 14, Rambus and several semiconductor manufacturers announced high volume production of RDRAM. Samsung is now producing more than 2 million devises per month. Toshiba is in mass production for the Sony Playstation II. NEC has seen ? increasing demand from OEM?s for validated Rambus devices? and as a volume producer ? will help alleviate the current shortage of Rambus components.?
What obstacles remain for a tornado to occur?
1. mass production of Rambus devices. It is happening. See above. Both Dataquest and Instat forecast that RDRAM market share will be 10% in 2000 ,30% in 2001 and over 50% in 2002.
2. pricing: Is RDRAM too expensive? As production ramps up, cost will come down. Management anticipates that the current 40% price penalty will decline by year end to 10%.
Barriers to Entry
DRAM development is in general a longer cycle than that of ASICs, taking more than a year from start to first production of a DRAM . Building a fabrication plant is a big, expensive decision. A new state of the art facility could cost over $1 billion. The delaying action by todays manufacturers in moving to mass production of RDRAM will apply also to any new discontinuous innovation in the future. None is yet is sight. The vice president of marketing for Samsung said about Rambus ?As an industry we?ve put billions of dollars into developing [ Rambus manufacturing facilities]. We can?t walk away from it?
Value Chain
Substantial value chains now exist. 32 Semiconductor manufactures have now licensed RDRAM technology, along with many infrastructue vendors such as testers, connectors, RIMMS, clock chips, etc. See names above.
Misc.
Is Intel committed to Rambus? Yes confirmed this week at the Intel Developers Forum. Intel now needs a rambus solution for its newer faster processors or they have no market.
Intel at the IDF confirmed that DDR as an alternative to Rambus does not work for future chipsets.
Lawsuit.
Rambus recently filed suit against Hitachi stemming from an agreement dating back to 1992. Hitachi has not produced any chips supporting Rambus technology, but has produced chips incorporating SDRAM and DDR SDRAM. Rambus claims that this technology infringes the patents which were filed for beginning in 1990,but were just issued in 1999. Hitachi had access to the Rambus technology and allegedly incorporated it into their other memory systems. The suit has taken the industry by surprise, since all manufacturers had assumed that DDR Sdram was a royalty free alternative to Rambus. Rambus stated at its recent shareholders meeting that if Hitachi did not settle before trial, they would not be issued a license to manufacture RDRAM, which could be the industry standard going forward. This is now a high risk proposition for Hitachi. Note that if Rambus loses, only its claim involving DDR SDRAM is effected, whereas if they settle or win, Rambus sets the stage for a huge windfall from all manufacturers.
Sources.
10K, numerous press releases and many comments from the Rambus thread. All errors of interpretation are mine. |
