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Embedded chip market to soar

Boring but increasingly utilized, embedded processors should start to gravitate toward center stage.

Embedded processors, the low-cost microchips that serve as the brains behind cellular phones and other non-PC devices and account for $15 billion in annual sales, represent one of the stronger opportunities for semiconductor manufacturers around, according to analysts.

This is especially the case since it's likely no single company will ever be able to dominate the industry.

But unfortunately, they are also boring.

"They constitute 100 percent of the unit volume and zero percent of the sex appeal," deadpanned Jim Turley, senior editor of the Microprocessor Report. Still, he added, "they are growing faster than the PC [processor market]. A lot are going into cell phones?Hubs and [other] networking equipment take a good portion."

Tedium aside, embedded processors should start to gravitate toward center stage in the semiconductor industry. New products will begin to emerge at next week's Embedded Systems Conference in San Jose, California.

Embedded market leader Motorola is expected to unveil details on the M Core processor, said sources. M Core is a new type of embedded processor based on the RISC architecture of the PowerPC. Motorola has said that it will begin to transfer its PowerPC technology to an embedded systems chip, as the market for its mainstream PowerPC processors which go into Apple Macintosh computers begins to become less of a priority.

In addition, Microsoft is expected to show off version 2.0 of Windows CE, which many believe will become a relatively standard operating system for these devices. Here, processors such as Hitachi's SH-3 and upcoming SH-4 and Digital's StrongArm are attracting attention since they begin to impinge on Intel's market--and are at the boundaries of what constitutes an embedded device and what constitutes a computer processor. Each have developed fast, low-powered processors for hand-held devices.

Embedded processors are essentially any microprocessors that don't get inserted into standard computers, such as PCs and mainframes. Counted as the chips that come in everything from greeting cards to oscilloscopes, they dwarf the total annual output of processors for desktops, servers, and workstation, noted Turley.

More narrowly defined, embedded processors generally mean 32-bit processors that control a discreet number of functions and use a limited universe of software, he said. Typically, embedded chips consist of an early generation microprocessor core fused with memory and other functions that allow the unit to be self-sufficient. Embedded processors, of course, generally can't be removed. They are fused in the device that houses them.

Approximately 50 to 75 million of these types of devices get sold annually, according to Turley. Motorola currently leads the entire market with 17 percent, according to Dataquest.

Recent demand has primarily been fueled by the Internet. In the past, communication with smart devices ran one way, from the smart device to the user. Now, more interactive devices have been developed, increasing both the intelligence of these devices and the opportunity to upgrade. Manufacturers thus have been more inclined to put smart technology into their products.

This diversity in turn has benefited chip suppliers. The intricate design demands of each different housing device pretty much ensures that no single company can serve the entire market.

"There is nothing homogenous about it," boomed Tom Starnes, an embedded processor analyst with Dataquest. "The needs for cell phone are different than the needs in the pager business, which are different than the needs in the answering machine business." Handheld computing devices represent another exploding market.

Both Microsoft and Sun are boosting the flexibility of these devices too. With Windows CE 2.0, consumers communicate with these devices using standard desktop browsers and applications, Starnes and others said.

Not to be outdone, Sun has rolled out new hardware and software divisions to ensure Java's presence in this market. Sun will not only make its own branded products, but will license technology to third parties.

Tempering this enthusiasm for processor makers is the price. The chips typically sell for between $2 and $35. A few top the $100 mark. As a result, the market sits at the bottom of the microprocessor hierarchy in per unit profits.

"You're not going to spend $2,000 on a system that controls your oven," said Nathan Brookwood, semiconductor analyst at Dataquest. "You might be willing to pay 100 bucks. By definition these things are cost sensitive. "

Motorola's emphasis on embedded systems, he believes, comes because "PowerPC on desktops is eroding."

While demand for embedded chips is increasing, the economics of the situation will likely keep microchip giant Intel as a second-tier player for a while.

"The margins aren't as good as microprocessors," said Starnes. "You'd have to sell a tremendous amount of embedded processors to get the dollars they get in processors."

Intel will likely follow the strategy it has in the past, he said, which is to come out with new generation of embedded processors whenever a generation of computer microprocessors gets retired. For instance, Intel's premier embedded processor is currently based around a 486 processor core. Intel currently ranks no. 5 in sales with a seven percent market share.

Intel is now in the process of retiring the Pentium processor. Thus, a new generation of embedded processor should come out of the company, according to Starnes and others. When this new generation will come, or how much effort Intel will invest in it, however, remains an open question.