Consolidation And Innovation

Consolidation is happening across the semiconductor industry, in ways that are very apparent and others that aren’t so obvious.

On the chipmaker side, NXP’s acquisition of Freescale, Avago’s acquisition of Broadcom and LSI, and Intel’s acquisition of Altera are so big that they require approval by multiple governments. Less obvious are moves such as Apple’s build out of its processor team, and a push by Google, Facebook and Amazon to create their own processors.

On the EDA side the acquisitions are smaller but no less significant. Synopsys’ acquisition of Atrenta, Coverity and Codenomicon; Mentor’s acquisition of Tanner, Nimbic, Flexras and Berkeley Design; Cadence’s purchase of Jasper and Tensilica; and Ansys’ purchase of Apache Design and Gear show a different side of the industry—moves into adjacent markets to position themselves for the future.

So what’s really behind these moves, and why should people care?

To begin with, it’s clear that specialization isn’t providing enough profits for anyone these days. The PC market was down 6.7% in Q1, according to IDC. In the midst of an explosion of cloud services, server growth was up just 2.3% in 2014 compared with 2013. How much of the cloud is actually tied into these numbers is uncertain, but it has to be causing some level of panic in the software as a service market.

It’s no different in automotive, where sales are limited by the number of carmakers and cars being sold—and that number varies greatly. Big carmakers are global, which means they are affected by regional economic trends, including currency fluctuations. A study by PricewaterhouseCoopers said that consumers appear to be losing brand affiliation, expecting top-quality infotainment systems for less money, while market variations are making it hard for carmakers to adjust to demand.

And in the home market, the lack of consistent standards—no one remote control works for every feature of every device—has made it possible for companies such as Apple, Google, Amazon and Samsung to consolidate their positions, squeezing out everyone else.

While consolidation may make investments by companies in these markets more rational and improve economies of scale—not to mention boost stock prices—there are some important trends to watch.

On the negative side, a misstep by any of these players could have colossal implications, and not just for them. Apple and Google are now so big that a failure could cause a downturn in any sector in which they have a stake, with reverberations in many other areas—auto sales, restaurants, real estate, travel, advertising, entertainment. Those ripples would be global, too, with the greatest impacts felt in the most fragile economies.

On the maybe negative, maybe positive side, consolidation is good for allowing the surviving companies to focus on what they do best, but it doesn’t always foster innovation outside of those companies’ needs. As one executive quipped, if Nokia was still the market leader, we’d have smaller cell phones. The amount of innovation that occurred in the smart phone world, and the carry over from that into car infotainment systems, home entertainment and personal data management is almost astounding. Still, the chips made for these devices aren’t necessarily the most cost effective, fastest or most power efficient, which means they don’t move the overall state of technology forward. How that plays out on a broad scale is anyone’s guess.

And on the positive/innovation side, it’s important to remember that consolidation is never all-inclusive when it comes to semiconductors. The maturation of the PC and mobile phone markets and a tightening of the supply chain in automotive are just part of the picture. There are new opportunities developing in health care, security, IoT/E, and data analytics that could be every bit as large as previous markets. It’s easy to lose sight of the big picture, which is a matrix of intersecting horizontal and vertical markets that has to be measured over time and on a global scale.

It’s easy to forget that Apple’s resurgence occurred after the introduction of the iPod in 2001 and Google wasn’t even a public company until 2004. Tesla wasn’t founded until 2003. And Sony was the dominant player in the TV market for decades. There will be many new players as markets evolve and get reshaped by technology, and there are no guarantees that the companies growing through consolidation today will have any part of those new market.

No matter how this plays out, technology design innovation will be required to move the ball forward. And while consolidation may seem all-inclusive now, history shows that wherever companies are making money there will always be new players looking for their own slice of the pie, and the only way to get there is through innovation.