With the decreased investment in foundries from Japan and Korea, Fab space is getting tight. I expect this trend to help stabilize chip prices late in 1998.....................................................
January 05, 1998, Issue: 1090
Section: Technology Focus: Video/Graphics ICs
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Survivors Take Market Share
Carol Rosen
The video/graphics-IC market is not for the faint of heart or the weak of wallet. Price aggression and profitability pressure have grown with the number of vendors, which by some estimates will shrink from more than 30 to fewer than 15 - possibly even fewer than 10 - in the next 12 months.
"There's been major fragmentation as a number of players have come into that market, and now there are too many players with no differentiation in their feature set and basically [a concentration on] lower-cost machines," said Keith Angelo, vice president of marketing at Chips and Technologies Inc., San Jose.
Video/graphics-IC vendors hope to set themselves apart by addressing the shift to higher integration that new, more sophisticated computer, multimedia, and graphics technologies are bringing about. Graphics-chip suppliers also see opportunities in DVD, notebook computers, and sub-$1,000 PCs.
But a few unknowns muddy the outlook for video/graphics ICs.
Intel Corp.'s plan to bring a graphics accelerator to market in February and its acquisition of Chips and Technologies has stirred up industry speculation. Assessments of Intel's actions range from expectations of no change to predictions that the chip giant will garner as much as 40% of the market in about 24 months.
Fab capacity is also a concern. Many video/graphics-IC suppliers rely on foundries; if that capacity becomes tight, some vendors' output could be curtailed, particularly for smaller line geometries.
Pricing competition
Prices of video/graphics ICs have been falling faster than is typical for semiconductors. "The price has declined a lot in the last 12 months, and there's not much room to fall anymore," said Geoff Ballew, an analyst at Dataquest Inc., San Jose. "I attribute this decline to a combination of factors. [Up to now], fab capacity has been relatively loose, allowing other companies without assets to get products made."
Disappointing demand for 3-D graphics and videoconferencing has also contributed to the price plunge.
"The corporate market has no interest in 3-D graphics and, as yet, there are no real applications driving the need for 3-D," said Mark Kirstein, an analyst at In-Stat Inc., Scottsdale, Ariz. "Demand only works if features are desired by the market. If the market doesn't pay for them, then it's difficult to keep prices up.
"The same is true for videoconferencing," he said. "It's become a can of worms. There's not enough wide-area bandwidth [available now] to support videoconferencing. It works well within the company on LAN, but why bother when you can just walk over and talk to someone. Corporate users are very demanding; grainy slow images aren't going to replace airline tickets in the near future," Kirstein said.
The resulting price pressure will be painful for vendors, giving OEMs potentially fewer choices.
"Thirty companies can only compete on price. Consolidation should have happened some time ago," said Jon Peddie, president of Jon Peddie Associates, Tiburon, Calif. "The initial cost of entry [for suppliers] to this market was too low; too many companies could get in with good software, for example, and some were successful. But the cost of entry is now going up because it includes significant marketing costs and marketing savvy."
That will discourage startups, according to Kirstein. "There's at least half a dozen established players and at least a dozen more hopefuls who've been in the market for the last 18 months and continue to stay in the business to fight another day despite never climbing out of startup status," he said.
Once the dust settles, only six or seven major suppliers will remain, Kirstein said. And the battle has already begun. "How long can smaller players hold on until they turn into nonexistent players?" he said.
While only a few companies have dropped out of the market in the past year, a number of participants have teamed up. There is the Nvidia Corp. and SGS-Thomson Microelectronics alliance, the 3Dlabs Inc. and Texas Instruments Inc. partnership, and Intel's acquisition of Chips and Technologies and Real 3D (a former Lockheed Martin Corp. unit)
Integration will be key to staying in the race.
Cirrus Logic Inc., though phasing out some of its less profitable graphics products, will continue to design and develop single-chip graphics systems. Cirrus' current target is mixed-signal technology and very high levels of integration. "We are ideally positioned to deliver these because of our intellectual property and design experience," said Kyle Baker, director of business development for graphics products at Cirrus, Fremont, Calif.
Matrox Graphics Inc. sees integration as key to keeping up its market share, said Nathalie Benoit, marketing manager at the Montreal-based company. "We are able to ingrate more functionality onto a single chip," she said. "We keep adding functionality while the size and cost of the chip doesn't change. The real challenges [in maintaining market share in this business] are based on higher integration and optimizing fabrication, in addition to minimizing the errors and problems in putting these functions onto a single, smaller chip."
Niles Burbank, product manager for desktop graphic components at ATI Technologies Inc., Toronto, agreed. "Companies that offer some sort of tangible differentiation and rise above the level of commodity products will be less susceptible to pricing pressures," he said.
Tighter capacity?
Suppliers with their own fabs or with strong foundry relationships may have a leg up on their competitors. Those relationships become more important with the push toward higher integration.
"Graphics needs advanced process technology. We use 0.35-micron now, and are moving to 0.25-micron geometries," said Yong Yao, vice president of strategic marketing and planning at Trident Microsystems Inc., Mountain View, Calif. Not all fabs and foundries are capable of smaller geometries, and with capacity selling out quickly for such advanced manufacturing techniques, some companies could be hurt.
Capacity for 0.5-micron and 0.8-micron facilities is plentiful, but those larger chips are slower and more expensive, according to Yao.
"From our point of view, we're seeing a change in attitude among suppliers' [foundries], Chips and Technologies' Angelo said. "Six months ago, you could get anything you wanted. We're not seeing a change, but our suppliers are telling us that things are getting tighter and we must plan our business around that and be more careful of that. It's more a case of less flexibility among foundries than we had six months ago."
One company that need not worry about fab capacity is Intel, Santa Clara, Calif. Some analysts say that Intel's manufacturing, technological, and financial prowess will enable it to seize significant market share in the next two years.
Peddie expects that share to be as much as 40% by the end of 1999. "This is a maturing market, with about 1.1 graphics controllers shipped for every processor. Intel can't afford to not be a part of that environment," he said.
But suppliers, including Intel, think that Peddie's estimate of the company's ability to grab so much market share might be a little high, given the market's competitive nature.
"We want to be competitive and successful. Graphics is very competitive and share doesn't necessarily mean success," said Jeff Bader, director of system integration at Intel in Folsom, Calif.
"We're serious about getting into graphics, and we're not underestimating our competitors' strength or overestimating our own abilities," Bader said. "Nobody is going to give us anything because we have the Intel name. We have to prove we have the price/performance value to compete."
OEMs should choose from several suppliers to ensure success from end users, according to graphics-chip vendors, who believe it will be hard for Intel to grab a huge share in a short time.
"OEMs are going to build-to-order programs," Matrox's Benoit said. "They're not choosing just one solution, but instead are relying on more flexible philosophies and methods of doing business. No one wants to be tied to Intel; no one wants to be tied to one manufacturer. OEMs are more concerned with demand from the end user; they are using more than just one board or just one brand."
Most top-tier video/graphics suppliers worked hard to carve out their market positions, ATI's Burbank said. "These companies have competencies in lots of areas, and we're not standing still. Any new entrant will have to work hard to stay in the forefront."
Opportunities
The sub-$1,000 PC is a mixed blessing. The buying base for it is largely the consumer sector, which typically wants high-quality graphics at a low price.
"The sub-$1,000 PC is offering us new opportunities," said Scott Tandy, director of marketing for high-end graphics products at S3 Inc., Santa Clara, Calif. "In the short term, it's allowing us to drive even higher volumes of entry-level products. We can refresh and redo designs and then bring them out for the sub-$1,000 PC market."
This new PC arena will force even low-end suppliers to change, said In-Stat's Kirstein, who expects microprocessor and graphics integration. While this strategy may take market share from stand-alone graphics chips, it may force video/graphics suppliers to target other areas, such as PC and TV integration, or to come up with innovative solutions to sell chips, Kirstein said.
ATI is already marketing a card that captures TV images with closed captioning and compresses them for later playback.
Trident's Yao calls the sub-$1,000 PC the hottest market segment at this time. "We need to offer high graphics integration to reduce cost. Low cost is essential to this market," he said.
Partnerships with CPU makers are necessary to be effective in this low-cost area, Yao said. These relationships reduce costs while maintaining performance. "We formed a unit inside Trident to address this market. Right now, we work with Intel, AMD, and a couple of others to see what we can bring to the party. We also work closely with OEMs to define future systems," Yao said.
Other major video/graphics-IC suppliers will look at opportunities in the sub-$1,000 PC market in the next 12 to 24 months.
Matrox is considering opportunities in motherboard integration and add-ins for the sub-$1,000 PC market, Benoit said.
DVD, though expected to be another driver for graphics demand, has yet to take off. "DVD on the PC isn't going to be as quick as people thought," Benoit said. "There's some content out there, and there already are opportunities for us. We're bringing out a DVD hardware accelerator and add-in cards, but there won't be volume demand this year.
"DVD-drive prices are still way too high, and there aren't a lot of people who watch movies on their PC," she said. "Adding DVD to TV probably will come first, especially those that are backward-compatible with CD-ROMs."
The mobile-computing sector is another avenue for growth and at least a temporary respite from competition and severe price erosion. So far, Chips and Technologies and Neomagic Corp. share most of the market. S3, Trident, and other companies serving the desktop graphics market are also moving in the mobile direction.
"But you can't take a desktop chip and cram it into a notebook form factor," said Rick Calle, senior marketing manager at Neomagic, Santa Clara. "It's not just a case of redesigning an IC to fit into notebooks."
Increased integration is important in notebook computing video/graphics hardware because of size and power requirements.
DVD is likely to be a major factor in notebook graphics, Calle said. Because business users buy most notebooks, 3-D doesn't have as much relevance as in the desktop world; but because DVD can store 10 times more information than a CD-ROM and can be encrypted, demand will be huge, he said.
"Corporate DVD can use full-motion video not just for entertainment, but for important business-related resources such as corporate and interactive training," Calle said. "The key here is interactive training and encryption. But to get there, everything must be integrated onto a single chip."
-Carol Rosen is a freelance writer based in Santa Clara, Calif.
Copyright (c) 1998 CMP Media Inc.
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