BUSINESSWEEK ONLINE : JUNE 19, 2000 ISSUE
COVER STORY The Sweet Smell of Semiconductors Silicon chips are driving everything from cell phones to Internet routers, and chipmakers are raking it in They are the molecules of the Internet Economy. Tiny silicon chips power every piece of the Net, from the hefty servers that house its vast repositories of data, to the routers and switches that zip transactions around the globe, to the personal computers, handheld devices, and cell phones used by hundreds of millions of people to get online. That's one reason makers of semiconductors have enjoyed unprecedented prosperity in the past 12 months. Just look at the numbers: A remarkable 26 of the Business Week Info Tech 100 companies this year were chipmakers, up from just four on the 1999 list. Last year, only giant Intel (INTC) was even in the top 50. Now, four of the top 10 are semiconductor companies. Explains Intel Chairman Andrew S. Grove: ''The Internet runs on silicon.'' Of course, it also helps that the chip industry is on the upside of one of its business cycles. Unit demand growth has remained strong for the past decade, but an oversupply of capacity battered prices and even drove some chipmakers into the red from 1996 to 1998. Now the tide has turned, and prices are on the upswing. The Semiconductor Industry Assn. figures worldwide industry revenues shot up 19% in 1999, to a record $149 billion, and should climb an additional 20% this year, to $179 billion. ''It was an exceptional year of growth and productivity,'' says SIA President George A. Scalise. That growth wasn't evenly spread, though, and that's where the Net effect comes in. Although they occupy different niches in the industry, most of the top-ranked chipmakers on the IT 100 list share a common focus on networking and data communications. Take No. 10-ranked Analog Devices Inc. (ADI), a leading maker of so-called digital signal processors (DSPs), or chips used to crunch the vast seas of data produced in cell phones, disk drives, and DVD players. Analog Devices saw its sales climb 52% in the past 12 months, to $1.8 billion, while its stock shot up 208%, to 62, from 20. Shareholders were nearly as giddy about Texas Instruments Inc. (TXN), the leading seller of DSPs, sending its shares up a juicy 160%, to 71, from 27. Both Analog Devices and Texas Instruments are benefiting from the surge in cell phones and other electronic gizmos used to get on the Internet. They aren't the only kind of chips enjoying newfound popularity thanks to the Net. Highfliers such as No. 17, Broadcom (BRCM), and No. 20, STMicroelectronics (STM), are making a mint by selling specialty silicon to such communications equipment makers as Cisco Systems (CSCO) and Nortel Networks Corp (NT). These chips, which process packets of Net data or translate analog signals into digital streams, play a more crucial role in networking gear than do the memory chips and PC processors that propelled the semiconductor industry for most of the 1990s. And networking is growing about 30% per year, far faster than the 8% growth in the traditional PC business ruled by Intel Corp. and Japanese memory-chip makers. ''The future growth in the information business won't be in PCs but in the infrastructure that connects them together,'' says Nathan Brookwood, principle analyst for researcher Insight 64. But PCs aren't totally passe; after all, they're still by far the largest consumers of all types of silicon. Some of the best performers on the IT 100 list, including No. 4-ranked 3D graphics-chip king Nvidia (NVDA) (this page), memory-maker Micron Technology (MU) (No. 14), and Intel competitor Advanced Micro Devices (AMD) (No. 36), have tied their fortunes firmly to the PC. What sets them apart: All these companies are tightly specialized in their corners of the business, rather than trying to be diversified chipmakers. As the world moves to online applications and a connected lifestyle, demand for communications chips will continue to surge--by an estimated 20% this year alone, predicts Merrill Lynch. Sure, there's money to be made elsewhere, but the best bet today is supplying Internet molecules. By Andy Reinhardt in San Mateo, Calif. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Sweet Smell of Semiconductors TABLE: Top of the Chips Nvidia's Invasion INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice