semiconductors: the changing landscape

Michael Kay

The Changing Landscape For Fabless Semiconductor Business Models

May 20061 Kay Associates

The Fabless Semiconductor Landscape Higher levels of integration and IP licensing are at the heart of many new

semicon company business plans, and to some degree reshaping existing semicon companies in the semiconductor component business.

Existing semicon companies look to higher ASPs as they see “cash cow” component volumes stalling.

Higher ASPs are typically achieved through system level integration both in monolithic (SoC) and package (MCM) form.

Only a few large IDM/MNC companies can address all aspects of system level integration.

New companies and SME players look to collaborative efforts in addressing system level solutions.

Market dynamics are influencing the food-chain, creating new opportunities.

To a large extent, VCs believe the fabless semicon model is broken.


Is The Fabless Semicon Model Broken? VCs perceive the fabless semicon model as “broken”

Used to be $20-35M cash-in with anticipated 5X to 10X return

Now trend is $50-80M cash-in with nominal or negative returns!!

Semiconductor component mentality no longer matches with market system requirements

New companies cannot win tier-1 customers, even if component technology is superior – it takes a full solution to gain any attention.

Design risks are escalating, product development costs are rocketing

New companies must reach global business levels quickly – further stressing a new company’s evolving infrastructure

But is it “broken”

No, but it does need restoration and and to some degree, rethinking

Collaboration and location may well be one of the keys.


Market Dynamics and The Food Chain The Semiconductor foundry model is gaining momentum (even though the

industry is still in the doldrums). Significant capacity available

Multiple processes available

IP brokering is now a key element of foundry business

Interface services still flourish (eSilicon, Cadence etc) Design houses that fulfill the ASIC, COT, package/test requirements

Product development is now well comprehended Capturing IP, design flows, software, reference designs

System integration is evolving Not necessarily at an SoC level – Single package solutions will play a key role.

ODM and contract manufacturing converging

OEM’s becoming pure marketing/sales Rapid product introduction, broad product offering

Working with many ODM and contract manufacturing sources


Customers demand System Solutions For wireless applications (audio/video/data) in the CE market,

system solutions are critical.

Component selection is being superseded by sub-system solutions.

Higher levels of (system) silicon integration require accompanying software. Application Layer, Network layer, MAC, PHY, transceiver

Programmability and versatility

eBOM platform

“Near” Product (minimal requirement to get to final product)


System Solutions do not have to be SoC

Analog does not track digital in terms of process migration

RF and digital are not good bedfellows

System solutions require real world interface and wireless connectivity

An SoC approach plays well into digital solutions

An SoC will typically use several IP sources

Tending to drive fabless semicon companies toward licensing model

Product/technology collaboration and leveraging of new packaging technologies may prove potent.


Developing Working Relationships

Large MNCs have been on acquisition binges but do not necessarily gain all the benefits – this leads to more caution on M&A and more interest in collaboration. Licensing/OEM-in models have been the norm, but the smaller partner may be

loosing out on product revenue and IP control.

New companies need to create strong working relationships with existing companies levering complimentary technology/products. But creating win-win partnerships with major players is not straightforward nor

without risk.

Leverage from partnerships is key. Influences infrastructure, product strategy and sales channels.

Technology-based new companies may be better served by NOT building out a full product sales infrastructure. Base the business model on OEM-in deals.


Geography of Growth Markets Growth markets continue to be in wireless applications and consumer

electronics (CE).

Asia is the heart of CE manufacturing and to some degree, product development. Wireless technology is also rapidly evolving in this region.

Semicon companies need sales, support and operational presence near the customers.

Deriving higher levels of integration (monolithic or package) requires the presence of many engineering disciplines (circuit, hardware, software, system and package design).

New companies (as well as established companies) look for a stable, trustworthy location where talent and technology growth are strong in the ecosystem.

Talent, trust, loyalty and cost will dictated the geographic preference.
