Integrated chips shrink market

Manufacturers of graphics chips, sound chips, and main processors looking to integration as the path to profits will be waylaid by the low-cost PC phenomenon, according to a new report from Mercury Research.

In response to demand for low-cost PCs, the market

for integrated components is expected to reach $1.6 billion by 2000 as PC vendors such as Compaq try to squeeze cost from every component they can.

But the trend toward combining functions on a single piece of silicon is aggravating the severe price compression that's having a profound affect on all players in the PC arena. Profit margins tend to be higher when manufacturers integrate features into a single chip, but the downside is the whole of the market shrinks.

Pinched by dropping profit margins on chips, major vendors such as National Semiconductor and Intel won't make up lost revenue, said Mike Feibus, principal analyst with Mercury. As for smaller companies, the result is predictable: the number of mergers, acquisitions, and bankruptcies will increase in affected markets.

The market for traditional PC components will decline in 1998 by 4 percent to $21.7 billion, according to Mercury. As more components become integrated into a single piece of silicon, overall revenues will continue to decline by $2.26 million in 1999 (as compared to a market where components weren't integrated.) The losses could reach $16.2 million by the year 2003, the report forecasts.

"When you look at [chip] vendors in a few years...where those functions will be in just a few chips, you are definitely looking at a shakeout down the line," Feibus prognosticated. Graphics and audio are the primary targets of integration, both by chipset suppliers, and by processor suppliers, he noted.

Undaunted, vendors such as National are eyeing this market, targeting development of a "system on a chip" that will consist of a processor and a number of smaller processors with discrete functions, such as 3D graphics acceleration, all on the same piece of silicon. This process of integration could drive down the overall system cost to perhaps around the $500 mark by next year.

Intel, which is feeling the heat from integrated chips, is also planning to integrate more functions into its chips. For instance, chipsets--peripheral chips that work with the main processor--will become more integrated and incorporate graphics and audio functions.

Feibus predicted that the first wave of integration will be for graphics and audio functions to move onto a single chip that is placed directly on the main system board. Currently, most graphics accelerators and sound cards in today's PCs come on two separate cards with numerous chips and are plugged into a slot on the main system board.