Three firms--Motorola, Lucent Technologies and Conexant--recently acquired start-up chipmakers to help them create a new type of networking processor that could offer a huge improvement in Net bandwidth and increase the variety of services offered online.
The new breed of fast and programmable networking chips serve as the engine powering new networking equipment from companies like Cisco Systems, Lucent and Nortel Networks. That new equipment, in turn, will allow Internet service providers and telecommunications carriers to increase Net bandwidth and offer better security, and new services such as Internet telephony.
Chipmakers are buying start-ups to enter the emerging programmable network processor market.
|Maker Communications||Conexant Systems||$942.8|
Note: Valuations are based on stock prices at the time the deals were announced.
The moves follow announcements by Intel, IBM and MMC Networks to enter the market.
Analysts say the demand for the chips is fueled by the explosive growth of the Internet, and the increased competition among service providers to offer customers new Internet-based services, such as voice and video over the Net. The network processor market is expected to grow to $1.7 billion in sales by 2002, according to analyst firm Cahners In-Stat Group
"You've got phenomenal growth of the Internet and that's creating demand for equipment by telecommunications companies throughout the world," said Merrill Lynch analyst Mark Lipacis. "All that competition is driving all this investment."
So far, most of the established chipmakers have entered the network processor market by snatching up start-ups. Intel, for example, purchased SoftCom Microsystems in July.
"Intel and IBM really were the first giants to join the network processor party," said Dataquest analyst Kevin McClure. "That forced the other big guys in the semiconductor business--Lucent, Motorola, Conexant--to enter this area, either by developing it internally or by purchasing."
The chipmakers are all diving into a market now dominated by in-house chip development.
In the past, networking firms had the tough choice between two types of chips: custom-made processors that were fast, but not programmable; and general-purpose processors, such as Intel Pentiums, that were slow but flexible enough to add new technology features that service providers wanted.
Now the chipmakers are developing processors that are both fast and programmable, allowing networking hardware makers to add new features at a quicker pace. In the past, it would take 18 months for a networking company to build a custom-made chip. With the new generation chips, it will take half the time, chipmakers boast.
Service providers will benefit because their equipment will have a longer life-span and they can offer new services to customers more quickly, such as security and the merging of video, voice and data over the Net. The new chips will also help service providers track quality of service, ensuring their customers' connections are up and running.
MMC Networks is the first chipmaker to ship the programmable network chips, but others are not far behind, said analyst Steven Byars of Current Analysis. Most networking firms are testing the chips and should release equipment with the new breed of processors by early next year, he said.
A few start-ups, including SiTera, T.Sqware and Solidum, remain independent. And some potential suitors, including chipmakers Texas Instruments and PMC-Sierra, and networking firms, such as Cisco and Nortel, might make a bid for them, analysts say.
Byars said SiTera is the most attractive because its technology is fast and is on par with the recently acquired Agere and C-Port. Despite the heavy competition from giant chipmakers, SiTera vice president of marketing Wade Appelman said the company plans to remain solo.
Appelman compares SiTera's situation with high-flying upstart network equipment firms, such as Juniper Networks and Foundry Networks, who have been successfully competing against bigger firms, such as Cisco and Nortel.
"We have the venture capital money available today and the management to compete," he said. "There's a lot of history that says it can absolutely be done. We can outpace the big guys because of our focus."
Dataquest's McClure said it's not farfetched for Cisco or Nortel to enter the market. For example, Lucent, with its purchase of Agere, will certainly use Agere's chips in their networking equipment, he said.
"You had a bunch of start-ups doing something that was just validated by the industry with semiconductor companies like Motorola and Lucent purchasing these companies," McClure said. "For a Cisco to look in this direction is not outside the possibilities."