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Wake Up, Semi Industry: System OEMs Might Not Need You

The rules are changing for the semiconductor industry and traditional vendors had better find ways to be more competitive or they will find themselves missing out on some of the most exciting, high-growth markets.

System OEMs in the hottest areas of technology are hiring their own chip designers in droves. It used to be a leverage play for these companies but the evolution is relentless: OEMs are now gearing up to produce their own chips.

The stakes are high and game-changing dynamics are in play. In a bygone era, chip companies used to control the feature definitions of the devices they produced. Now it is consumer mobility OEMs and box vendors that play a bigger role in calling the shots. Companies like Apple, Amazon, Microsoft, Google, Facebook, and others are increasing their leverage in this game by hiring teams of SoC design experts to shape the next category-defining device like the iPhone, iPad, Xbox, or Google Glasses. Even companies such as Lenovo are hiring semiconductor staff to raise their game against the smartphone competition.

Chip design is no longer "magic"

The industry has evolved to the point where chip design has been demystified. The era is dawning where OEMs license semiconductor IP themselves, use their own team to layout the design in RTL and then deliver the GDSII files directly to a leading foundry. The trend has already taken hold in the server space where one industry insider believes that Facebook and Google will eventually bypass traditional chip vendors.

Chip companies that want to play in this market had better learn the new rules quickly and provide the cutting-edge feature sets that define these new markets. That means a greater ability to adapt, turn new designs, and deliver new system-on-chip devices with the specific features that enable OEMs to innovate.

Times have changed dramatically since semiconductor companies ruled the roost. Chip vendors used to control 99 percent of the chip design talent in the industry, but those days are past. In today's world, perhaps 75 percent of the top silicon design engineers work for chip vendors and the remaining 25 percent are being snapped up by OEMs. That's because the SoC design determines competitive advantage now more than ever, and software differentiation is not enough.

Apple, Microsoft, and Google started this trend

This trend raised eyebrows when Apple Inc. acquired P.A. Semi in 2008 and Intrinsity in 2010 which helped them bypass Samsung as a vendor and develop their own ARM-based A5 and A6 application processors. Apple started down this road when it demanded touch screen capability, low-power dissipation and small form factors that the merchant silicon industry would not provide. Instead of waiting around for silicon suppliers to come around, Apple created its own SoCs for iPhone and iPad devices and the OEM-chip vendor relationship was changed forever.

Another example of this trend is when Microsoft dictated the terms of its processor features for its next-generation Xbox gaming system. AMD stepped forward and acquiesced to Microsoft's requirements, producing exactly what the software giant needed.

Google, of course, acquired Motorola Mobility for many of the same reasons. It wanted SoC devices that could execute Android without compromise. It also didn't want silicon vendors to bluff them and say the devices it demanded were not possible. Because it has teams of chip architects on staff, Google has the leverage to tell vendors to deliver the SoCs it wants in the time frame it wants them or else say goodbye to a potential high-volume production chip. This capability will be especially important for Google to be able to meet the new form factor and power dissipation requirements for wearable computing, with Google Glasses being the first announced product.

Any semiconductor company not disturbed by this emerging trend is not paying attention. Now that this trend is firmly established in the consumer mobility market, it will soon take over other markets. OEMs will start making their own chips for the enterprise market because the rules have changed with the emergence of low-power webscale computing. Traditional device makers tuned to data-centric processing haven't adapted to the dynamic workload and power-consumption requirements of the webscale era. Mega datacenter operators like Facebook, Amazon, and Google have to seek out alternatives, and it starts with the devices that go inside every server box they operate.

Semiconductor and labor markets have evolved

The industry has evolved to this point because of a few major factors. The market for semiconductor IP is robust, as is the labor market for chip designers who used to work at the traditional, and sometimes struggling, semiconductor companies. Just about any large company with a big enough stake at the table can design their own chips. That means they either get what they want from established chip vendors or they will develop their own design that meets their needs.

Incumbent chip vendors have advantages, for now

But chip vendors are not out of the picture yet. For years, they have forged closer ties with system OEMs to better anticipate the feature definitions demanded by next-generation systems. However, even greater flexibility and accelerated time to market is required in this new era. Companies that want to compete had better spin a new design in nine to 12 months rather than the 18 to 24 months they used to take.

While advanced silicon IP is now available to just about everyone, chip makers have the advantage of experience. They also need IP that helps them incorporate new feature sets more rapidly than ever before. With this experience and advanced IP, they can turn silicon designs around faster than ever before and incorporate new feature sets at greater speed. With this capability, silicon vendors have all the means at their disposal to meet the most demanding requirements in the new era of OEM-driven, SoC feature definition.

— Kurt Shuler is vice president of marketing at Arteris and has extensive IP, semiconductor, and software marketing experience in the mobile, consumer, and enterprise segments working for Intel, Texas Instruments, and three startups. Prior to his entry into technology, he served in the US Air Force Special Operations Forces.

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Topics: semiconductor industry economics semiconductor industry economics OEM