Big plans at ESS to deliver 'entertainment SoCs'
By Robin Lamb, EBN
URL: ebnews.com
ESS Technology Inc. is no stranger to change. From its inception in 1984 as a maker of chips for toy audio systems, the company evolved rapidly into a PC component supplier before finding its latest calling just five years ago as a DVD chip manufacturer.
Now cozy in the high-growth but niche DVD sector, ESS has been raising capital and planning an expansion strategy focused on establishing the Fremont, Calif., company as a major player in the home digital entertainment market.
“We're moving ahead with what we're calling a digital entertainment system on a chip. Then you could have one box in your house managing all of these devices,” said Robert Blair, president and chief executive of ESS. “We are also looking at expanding our communications technologies, possibly into digital amplifiers.”
Competition heating up
The latest transition may not be as easy as ESS is expecting. Other semiconductor companies, including Mediatek, Via Technologies Inc., and Zoran Corp., are eyeing the same market and developing products that will take on ESS' chips in the home entertainment industry. Additionally, ESS may have to explore new applications for its products to be viable, according to analysts.
“The long-term challenge for [ESS] is to diversify into other high-volume consumer end markets such as set-top boxes and home gateways,” said Kalpesh Kapadia, an analyst at C.E. Unterberg, Towbin, San Francisco. “The key is to acquire someone to help expand into other markets.”
Blair said these challenges may prove less daunting to ESS than some of the obstacles it has had to overcome. Five years ago, the company was generating 100% of its revenue from the PC industry. That decreased to 65% by 1999, after Intel Corp. integrated a competing 3D accelerated audio chipset into its Pentium product, and is just under 10% today.
Today ESS is the largest supplier of decoder chips to the DVD market, owning a 40% to 50% share and posting 2001 revenue of $271.4 million, according to estimates from the company and analysts. ESS' closest competitor is Zoran, with a 25% market share, according to Kapadia.
Earlier this year, investors showed how much they like the news coming out of ESS by snapping up shares during the company's secondary offering, when it successfully raised $45 million in a depressed equity market by selling 4.8 million shares at $19.38 each. ESS said it plans to use the proceeds to continue its strategy of buying tech start-ups and smaller companies to gain their technology, much as it did to break into the DVD market.
Already considered the fastest-growing consumer electronics product in history, worldwide DVD player shipments in 2001 grew to more than 28 million units from zero in 1996 and will exceed 60 million units in 2004, according to In-Stat/MDR, Scottsdale, Ariz.
Blair estimates that about 30% of U.S. households have DVD players, compared with a 98% penetration of VCRs.
ESS is devoting all of its R&D, roughly 10% of its annual revenue, to developing chips for home digital entertainment products such as set-top boxes. The company plans to introduce five products within the next year. Its next-generation DVD player controller chip, Vibratto II, expected to be available in the third quarter, will integrate front-end servo-control functionality. An MPEG encoder for PVRs and recordable DVDs is expected to ship by the fourth quarter.
ESS' Digital Home System family, integrating a MIPS 4KC CPU, progressive scan decoder, TV encoder, and PCI and USB buses, supports multiple third-party operating systems and is scheduled for introduction in the fourth quarter. This technology will enable consumers to access Internet features on their DVDs without using a home computer.
Beyond DVDs
In a joint project with Japan's NEC Corp., ESS is developing STB offerings it will introduce in the third quarter. Analysts said these innovations are not only necessary to increase ESS' market share, but are crucial to its survival.
“I think the market forces them to move beyond DVDs. But will the market allow them to evolve?” asked Joseph Tou, an analyst at Pacific Crest Securities, Portland, Ore. “You can't stop at DVDs. There has to be an evolution beyond DVDs for this company to be successful. If they don't innovate, the competition will catch up and there won't be room for innovation.”
Already, several competitors are gearing up to challenge ESS' dominance in the DVD chip market and in other areas. For instance, Mediatek has emerged as the major supplier of servo-control chips and is adding decoder functionality to its silicon. Pricing competition from Taiwanese chipmakers could also affect ESS' bottom line as the average selling price of DVD chips, estimated in December at $8.30, is expected to decline between 10% and 15% this year.
ESS has some aces up its sleeve, however. The company has a dominant presence in China, where about 70% of the DVD players manufactured there contain ESS chips.
Also, year-end holiday designs, many of which analysts said will feature ESS products, will be locked in during the May/June time frame, giving the company an edge over competitors. However, with rivals coming out with new products in the second half of the year and new competitors entering the market, 2003 will bring tremendous pressure for ESS, Tou said. |
