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Techno File/Infotech
Leading the New Chip Revolution Broadcom's chips run high-end communications products. They may be as important to the industry's future as anything made by Intel.
Erick Schonfeld
05/10/1999 Fortune Magazine
Time Inc.
Page 136+
(Copyright 1999)
Three years ago, when communications-chip dynamo Broadcom was a private company, Emery Chang, an employee in the finance department, predicted that when Broadcom went public, its stock would nearly triple within a year. This bold claim offended one engineer colleague's sense of rationality so much that the engineer called Chang crazy and told him that if the stock hit the target, "I'll buy you a Porsche." The promise became a running joke, and when co- founder Henry Samueli heard it, he offered to cover the wager. Broadcom went public last year at $12 a share, and by midsummer it had blasted past Chang's $33 target (it is now near $70). Of course, no one expected Samueli to pay off such a lavish bet. But at the Christmas party Samueli gave Chang a pair of keys to a new Porsche Boxster. He then handed Chang a ticket stub and said, "Sorry, you're going to have to pay for the parking yourself."
This might be just one detail in another typical Silicon Valley success story except for two things: Broadcom is anything but typical, and it is not in Silicon Valley. The company, situated south of Los Angeles in Irvine, Calif., makes semiconductors for high-speed communications products (rather than for computers). Its chips are in more than 80% of all cable modems and digital cable set - top boxes, as well as in other types of modems and local-area-network switches. This focus puts Broadcom at the center of a tectonic shift in the technology landscape. Simply put, the ability to receive and transmit large amounts of information--be it data, voice, or video--is becoming more critical than the ability to process that information. The power of individual PCs is now adequate for most people's needs, so the bottleneck is in the pipes that carry data between PCs and other devices. The pipes can be made up of TV or computer cables, copper phone lines, or even thin air (through the wonders of satellite broadcasting). Broadcom's chips open those pipes into "broadband" conduits that can carry information 20 to 1,000 times faster than a standard 56-kilobit-per-second modem.
Most of Broadcom's chips are or will soon be so-called systems-on- a-chip that integrate the circuitry needed for entire products, such as modems or set - top boxes, onto a single chip. This gives the company some unprecedented advantages and CEO Henry Nicholas the confidence to declare that his company's ambition is to "target every single phone and TV in North America."
The ramifications of Broadcom's technology are enormous. The types of chips it makes are already helping to redraw the boundaries of the telecommunications and media industries. For instance, AT&T's recent purchase of cable giant TCI was fueled by its desire to provide local telephone service over TCI's cables, a neat trick made possible by Broadcom's chips.
Semiconductor analyst Mark Edelstone of Morgan Stanley Dean Witter says, "Broadcom has one of the most spectacular opportunities since Intel pioneered the microprocessor market 20 years ago." Morgan Stanley did underwrite the company's IPO, and Edelstone rates the stock an outperform despite its preposterous price/earnings ratio of 100, based on next year's earnings estimate. Still, he expects the chip markets Broadcom is going after to grow from $1 billion last year to $3 billion in 2002, based on its current products. He also predicts that Broadcom will reach $1 billion in revenues faster than any chip company in history. It's well on its way. Broadcom's 1998 revenues more than quintupled, to $203 million; in fact, 1998's profits of $36 million nearly equaled its 1997 sales.
Broadcom's astounding growth derives from the company's ability to pursue a panoply of markets simultaneously--cable modems, digital set - top boxes, networking gear, high-speed phone modems. The reason it can do so is that the constant doubling of the number of transistors that can fit on a chip every 18 to 24 months, known as Moore's law, is now finally at a point where the circuitry for most of these products can fit on one chip. "The chip," says Samueli, "is no longer a tiny piece of the puzzle. It is now the system." By vacuuming up a lot of valuable intellectual property, Samueli notes, "Broadcom is not just a chip vendor but is becoming a systems vendor as well."
In doing so, says Merrill Lynch analyst Joseph Osha, "Broadcom is gaining a commanding presence in a number of the most important new consumer electronics products." Last year, for instance, Broadcom was able to displace National Semiconductor as a lead supplier of chips to 3Com for its network interface cards (which are basically modems embedded in PCs). Broadcom was able to solve a very tricky problem, combining analog and digital circuits on a single chip. Even National CEO Brian Halla admitted to a roomful of Wall Street analysts last fall, "We stumbled trying to marry analog and digital circuits for the 3Com chip. By the time we figured it out, it was too late."
The 3Com deal was not the first time Broadcom vanquished a larger, better-funded competitor. Back in the early '90s, Broadcom won a contract from Scientific-Atlanta to design chips for the first digital cable set - top box. It beat out more established industry players such as Motorola, Texas Instruments, and STMicroelectronics. Thanks to a subsequent pact with General Instrument--the other dominant maker of set - top boxes--Broadcom now controls that chip market and will profit as the 65 million cable set - top boxes in homes today are converted from old analog technology to digital.
Embedded in the boxes, Broadcom's chips may change the way we watch TV. The most exciting of these is a new 3-D video chip that will be able to generate studio-quality visual effects right from each person's set - top box, thus allowing cable companies to tailor broadcasts for each subscriber. Subscribers could customize their own programming by, say, calling up the recipe of a gourmet meal as it is being prepared on a cooking show or choosing a different camera angle during a ball game. The chip will also be able to intermingle Internet content with standard broadcast media. Viewers could have multiple windows on their TVs, surfing the Web on one while watching Oprah on another. And when Oprah recommends a book, viewers should be able to click on the book, go to Amazon.com's Website, and buy it right from their couches. Nicholas likens the change that is afoot in broadcasting to "the transition from radio to TV."
One of the chip's biggest fans is Gotcha International, a merchandiser of snowboarding and surfing products that also develops extreme-sports programming for Fox Sports Net. Gotcha is collaborating with Broadcom so that it can interact with potential customers who watch its shows. Want to find some stats about your favorite snowboarder or buy some cool Gotcha gear? Click here, and you'll get to its future Website, gotcha.com. Gotcha CEO Marvin Winkler sees a day when TV shows are no longer interrupted by commercials, because "the commercial is the show." Advertisers would be well advised to wipe off the saliva dripping from their mouths-- it's not exactly clear that viewers will put up with such a hard sell.
Fortunately for Broadcom, it should make out well even if this particular application does not fly, given the way it produces chips and the peculiarities of its business model. With the flexibility of its system-on-a-chip model, Broadcom can customize its chips by mixing in intellectual property from different sources. Even if it does not own all the pieces, Broadcom has the upper hand because it is the one that does most of the mixing and integrating of intellectual property. About 80% of Broadcom's products are systems- on-a-chip, compared with half that amount 18 months ago. In addition, products made with a single chip instead of many are cheaper, faster, and smaller, and use less power.
One caveat to all this is that Broadcom's ability to integrate functions may someday put it at odds with its customers. If they depend too heavily on Broadcom to create the heart of their products, they may find themselves in the same position as today's PC makers, which have ceded most of their profit margins to another, more famous chip company--Intel.
The ability to cram more and more onto a single chip can be thought of as the tyranny of Moore's law, and it's a problem for many chip companies as well as product makers. Chip designers have more transistors available than they can handle, which makes design a complex headache. Yet Broadcom is finding a way to ease the pain. "If you had to design all these chips from scratch," says Samueli, "you would never finish. The only way you can design a ten-million- transistor chip is if eight million are reused." By reusing designs, Broadcom can build many complicated chips for many different markets.
Most of the circuit design of a Broadcom chip is spit out by sophisticated software programs that take abstract mathematical equations and turn them into circuit diagrams. Samueli and Nicholas pioneered such electronic design automation software nearly 20 years ago, first at defense contractor TRW, then as professor and student, respectively, at UCLA. Now they've refined the process so that Broadcom can build any particular system-on-a-chip with just 20 engineers instead of 200. About two-thirds of Broadcom's 465 employees are engineers, and they are by many accounts among the world's best. Fifty hold Ph.D.s, five were once tenured professors, and one is a former Bell Labs Fellow. They are Broadcom's surest bulwark against encroaching competition from the likes of Lucent Technologies, LSI Logic, and Texas Instruments.
Nurturing the employees and keeping them in line falls to the good-cop, bad-cop pair of Samueli and Nicholas. Samueli, who is in charge of research and development, is the good cop. He keeps his office open at all times, has a reputation for compassion, and buys his employees Porsches (okay, one Porsche). Nicholas could be the poster child for the hard-charging CEO. Some employees go so far as to call him a "maniac." "He is not afraid to ask for the impossible," says Steve Tsubota, head of the cable business unit. "And if he does not get it, there is hell to pay." Nicholas makes no apologies for his hard-edged style. He thinks of himself as "one of those coaches that were always assholes but who you loved anyway because they made you achieve things you never thought were possible."
To be fair, he says he's an "indentured slave" to his company and his employees, and claims he holds the company record for going without sleep--78 hours. "It's not as bad as you might think," he says. "Once you find your circadian rhythm, you can put your head down for an hour and a half, enter into a deep REM cycle, and get most of the cognitive benefits of sleep. We learned this at the Air Force Academy." Forget about being paranoid. As business enters a new era shaped by communications chips, perhaps only the sleep-deprived will survive.
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INSIDE: Who'll be the king of pet portals?... Cool Company: The latest buzzword in disk drives is "cheap"... The Dreyfuss Report reviews applications for Linux and a digital camera... Alsop: Why I was wrong about PC software
Quote: BROADCOM'S CHIPS ARE HELPING REDRAW THE BOUNDARIES OF THE TELECOM AND MEDIA INDUSTRIES. BROADCOM'S GROWTH COMES FROM ITS ABILITY TO PURSUE A PANOPLY OF MARKETS SIMULTANEOUSLY.
COLOR PHOTO: PHOTOGRAPHS BY LAURIE STEINER Bad cop, good cop: CEO Henry Nicholas places high demands on Broadcom staff, while Henry Samueli, head of R&D, coaxes employees.
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