Firms seek edge in communications chip
market
By Wylie Wong
Staff Writer, CNET News.com
February 25, 2000, 12:35 p.m. PT
The race to build a faster and more versatile Internet is heating up a specialized
corner of the microprocessor market.
Three firms--Motorola, Lucent Technologies and Conexant--recently acquired start-up
chipmakers to help them create a new type of networking processor that could offer a huge
improvement in Net bandwidth and increase the variety of services offered online.
The new breed of fast and programmable networking chips serve as the engine powering
new networking equipment from companies like Cisco Systems, Lucent and Nortel
Networks. That new equipment, in turn, will allow Internet service providers and
telecommunications carriers to increase Net bandwidth and offer better security, and new
services such as Internet telephony.
Motorola this week purchased C-Port for
$420 million. Lucent in late January
bought Agere for $415 million, while
Conexant acquired Maker
Communications for $942.8 million in
December.
The moves follow announcements by Intel,
IBM and MMC Networks to enter the
market.
Analysts say the demand for the chips is
fueled by the explosive growth of the
Internet, and the increased competition
among service providers to offer
customers new Internet-based services,
such as voice and video over the Net. The
network processor market is expected to grow to $1.7 billion in sales by 2002, according
to analyst firm Cahners In-Stat Group
"You've got phenomenal growth of the Internet and that's creating demand for equipment by
telecommunications companies throughout the world," said Merrill Lynch analyst Mark
Lipacis. "All that competition is driving all this investment."
So far, most of the established chipmakers have entered the network processor market by
snatching up start-ups. Intel, for example, purchased SoftCom Microsystems in July.
"Intel and IBM really were the first giants to join the network
processor party," said Dataquest analyst Kevin McClure.
"That forced the other big guys in the semiconductor
business--Lucent, Motorola, Conexant--to enter this area,
either by developing it internally or by purchasing."
The chipmakers are all diving into a market now dominated
by in-house chip development.
In the past, networking firms had the tough choice between
two types of chips: custom-made processors that were
fast, but not programmable; and general-purpose
processors, such as Intel Pentiums, that were slow but
flexible enough to add new technology features that service
providers wanted.
Now the chipmakers are developing processors that are
both fast and programmable, allowing networking hardware
makers to add new features at a quicker pace. In the past,
it would take 18 months for a networking company to build a custom-made chip. With the
new generation chips, it will take half the time, chipmakers boast.
Service providers will benefit because their equipment will have a longer life-span and they
can offer new services to customers more quickly, such as security and the merging of
video, voice and data over the Net. The new chips will also help service providers track
quality of service, ensuring their customers' connections are up and running.
MMC Networks is the first chipmaker to ship the programmable network chips, but others
are not far behind, said analyst Steven Byars of Current Analysis. Most networking firms
are testing the chips and should release equipment with the new breed of processors by
early next year, he said.
While the nascent programmable network chip market has consolidated in recent months,
analysts expect even more consolidation to occur.
A few start-ups, including SiTera, T.Sqware and Solidum, remain
independent. And some potential suitors, including chipmakers Texas
Instruments and PMC-Sierra, and networking firms, such as Cisco and
Nortel, might make a bid for them, analysts say.
Byars said SiTera is the most attractive because its technology is fast and is on par with
the recently acquired Agere and C-Port. Despite the heavy competition from giant
chipmakers, SiTera vice president of marketing Wade Appelman said the company
plans to remain solo.
Appelman compares SiTera's situation with high-flying upstart network equipment
firms, such as Juniper Networks and Foundry Networks, who have been
successfully competing against bigger firms, such as Cisco and Nortel.
"We have the venture capital money available today and the management to
compete," he said. "There's a lot of history that says it can absolutely be done. We
can outpace the big guys because of our focus."
Dataquest's McClure said it's not farfetched for Cisco or Nortel to enter the market.
For example, Lucent, with its purchase of Agere, will certainly use Agere's chips in
their networking equipment, he said.
"You had a bunch of start-ups doing something that was just validated by the
industry with semiconductor companies like Motorola and Lucent purchasing these
companies," McClure said. "For a Cisco to look in this direction is not outside the
possibilities."
Related news stories
• IBM unveils communications processors September 2, 1999
• Intel strides into network chips with new products, fund September 1, 1999
• Intel expected to unveil new networking chip August 26, 1999
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