7/20/98 Fortune. Forget Wintel: The High Growth in Tech Lies Elsewhere [Minor MRVC reference]
pathfinder.com
As more of us hook into the Net, demand for
special computer chips soars, and businesses you
haven't heard of are already profiting.
Richard A. Shaffer
Of course Microsoft and Intel are monopolies. Together the
two companies are the force that IBM used to be, setting
the computer industry's direction and pace. But they aren't nearly
as dominant as IBM was in its day, and as was true back when
IBM was the target of trustbusters, small companies continue to
spring up and flourish in the shadow of the giants.
Not that long ago, IBM was twice as large as all the rest of the
American computer industry combined. Today Intel's $11 billion in
annual revenues from the U.S. market comprise only a quarter of
all U.S. semiconductor sales, and Microsoft's domestic revenues of
$8.9 billion are less than a tenth of all U.S. sales of packaged
software. Meanwhile, consider just a short list of smaller software
companies that have prospered in recent years--Citrix Systems,
Legato Systems, Network Associates, Siebel Systems, Veritas
Software, and Visio. Add in the burgeoning semiconductor
companies--such as Advanced Technology Materials, C-Cube
Microsystems, MRV Communications, and Qlogic. My point isn't
that the government is somehow wrongheaded in going after
Microsoft and Intel, merely that booming younger companies in
high technology aren't hard to find if you know where to look.
There will be many more of them in the years ahead, whether the
government wins or loses its antitrust cases. One reason is that an
unprecedented amount of money is pouring into new companies.
Last year, according to research by my company, venture
capitalists put $5.8 billion into fledgling technology firms--a fivefold
increase in five years. Corporate capital is also plentiful. Intel, for
example, manages a $500 million fund for new companies, which is
larger than most venture capital partnerships. The coffers of the
public markets are also wide open. To date this year, digital
technology companies have raised $4.1 billion through initial public
offerings. That's up from $2.5 billion in the comparable period last
year and $1.6 billion five years ago. New telecommunications
companies are finding it easy these days to borrow hundreds of
millions of dollars apiece.
What's more, the computer and software industries are changing in
ways that render Intel and Microsoft less important. For example,
as more of us use our personal computers to browse the Internet,
the quality of our overall experience depends less on the speed of
the microprocessor--a market Intel dominates--than on the speed
of the communications network, a market in which Intel is barely a
factor. Because the Internet is indifferent to the processor and the
operating system connected to it, compatibility with
personal-computing industry standards, i.e. Intel and Microsoft
standards, is less vital.
So, where to look for high growth? Let me suggest some answers
by flying at high altitude over one corner of the landscape,
computer chips--specifically those made by a host of smaller
manufacturers with nothing like the brand presence of Intel.
Rising traffic on today's information superhighway--the
Internet--brings corresponding increases on the feeder
routes--local-area networks. That's good not merely for vendors
of networking equipment but also for the integrated-circuit
companies that supply essential parts. The smaller publicly held
suppliers that impress me are Level One Communications, MMC
Networks, and PMC-Sierra.
Level One, in Sacramento, makes chips that allow computers to
exchange data according to the so-called Ethernet standard, which
governs most corporate networks. Those local-area networks are
getting faster, with many moving from zipping data around at ten
megabits per second to a new standard of 100 megabits per
second. Level One's chips, which go into network equipment that
directs this speedy traffic, are in great demand. Revenues and
profits have risen steadily for the past six quarters, and Level One's
profits in the March quarter were twice those in the corresponding
quarter last year.
In the past two years, PMC-Sierra, in Burnaby, British Columbia,
has reinvented itself, abandoning a dwindling modem business to
focus on networking circuitry. Good move. The company now
dominates the market for integrated circuits that enable high-speed
communications according to the so-called ATM and SONET
standards, and it's working closely with such key equipment
vendors as Lucent Technologies. Although revenues and profits
have been flat recently, the company consistently earns more than
25 cents on every dollar of sales, more than double its former
margins and five times the semiconductor-industry average.
MMC Networks, in Sunnyvale, Calif., has been public only since
last October. Since the beginning of last year, revenues have been
rising over 25% from quarter to quarter, and the profit margin is
going up too. The company makes networking chips that are easily
customized. Cisco Systems is a customer. Significantly, MMC's
technology gives data-communications networks the reliability and
predictability of service needed to compete with
telecommunications networks. (I am an investor in Cisco and
MMC.)
There are a number of private chipmakers to watch in this field,
including Advanced Communications Devices of Fremont, Calif.;
I-Cube of Campbell, Calif.; Jato Technologies of Austin, Texas;
Maker Communications of Framingham, Mass.; and XaQti of San
Jose.
Increasing demand for Net access, of course, brings business to
the many service companies trying to connect homes and
corporations to it, such as the telephone companies and those
operating cable TV networks. Whether these companies link up
via cable modems, digital subscriber lines, or television satellites,
integrated circuits manage the connection. The standout is
Broadcom of Irvine, Calif., which enjoyed a blowout initial public
offering in April. Revenues soared in the past two years, as
Broadcom became the technology and shipment-volume leader in
digital circuits for cable set-top boxes, fast local-area networks,
and satellite broadcasting. On the private side, pay attention to
Centillium Technology of Fremont, Calif.; Libit Signal Processing
of Tel Aviv; and Ultracom Communications of Campbell, Calif.
To keep pace with the demand for faster communications,
chipmakers are turning to materials other than silicon. Vitesse
Semiconductor of Camarillo, Calif., for example, uses gallium
arsenide for integrated circuits that enable high-speed networks of
optical fibers to connect with the slower telephone lines that most
businesses use for data traffic. The company is growing 150% a
year, and in its most recent quarter, operating income almost
doubled. As data traffic surpasses voice on the world's
communications networks, only optical technology will be able to
provide the network backbones with enough capacity. Gallium
arsenide should play an increasingly central role in linking the
optical backbones to the electronic networks we already have.
Regrettably, I'm not the first to notice these trends, which is why
the public companies I like are pricey and the private ones
probably will be, too, when their turns come. But all are well
aligned with what I see as the future of computing and
communications--and persuasive evidence that in this forest the
tallest trees aren't blocking all of the sun.
Richard A. Shaffer is founder of Technologic Partners, an
information company focused on emerging technology. Except as
noted, Shaffer has no financial interest in the companies mentioned.
For an expanded version of Watch This Space, visit
www.tpsite.com/tp/fortune/. If you have comments, please send
them to shaffer@technologicp.com.
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