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Technology Stocks : Xilinx (XLNX)
XLNX 194.920.0%Feb 14 4:00 PM EST
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To: Cary Salsberg who wrote (2876)11/13/2002 10:46:15 AM
From: Sam Citron  Read Replies (1) of 3291
 
PLD v ASIC (cont.)

Technology Eats its Own

I remember way back in 2001 when one of the reasons to buy chipmaker Xilinx (XLNX:Nasdaq - news - commentary - research - analysis) was that its programmable logic chips were being increasingly incorporated into products by electronics makers who wanted to cut costs by getting new products to market faster. The logic then was that companies could simply reprogram chips rather than take the time to design and then contract for a new custom chip. Xilinx and competitor Altera (ALTR:Nasdaq - news - commentary - research - analysis) were selling more and more chips to Cisco Systems (CSCO:Nasdaq - news - commentary - research - analysis), for example.


Well, in this technology market, costs can never be low enough, and on Nov. 6 Cisco told Wall Street analysts that it would be increasingly using exactly those custom chips (ASICs) in its product to get costs down even further. It seems that custom chip makers have succeed in cramming enough functions on a single chip so that they've leapfrogged the time-to-market advantages of programmable chips. That's not a minor shift, given that Cisco Systems uses $130 million of programmable logic chips each year, according to estimates by Wachovia Securities.

Is this deflation, though, or just business as usual in the technology industry? Falling prices have been the historical norm -- with improved manufacturing efficiencies enabling companies to make money at lower prices, and a constant flood of new products providing a supply of high-margin new business.

But there are troubling trends that support an argument that something fundamental has changed in the technology industry. New products do seem to have shorter lives as high-margin goods before competitors leap in to send margins falling. The flat-screen controller market and Genesis Microchip (GNSS:Nasdaq - news - commentary - research - analysis) are a case in point. Genesis didn't have much time as the dominant provider before Asian competitors started to drive down prices. And we're witnessing the proliferation of a new kind of business in Asia that specializes not just in commodity production of another company's design but in creating that design, too.

thestreet.com
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