The plan worked. ATI (ATYT
), now with an estimated 19% of the market, and Nvidia (NVDA
), with 32%, are the only major specialized makers of graphics chips to survive. (Intel (INTC
) holds a 28% share of the graphics-chips markets, and two smaller rivals own single-digit bites.) That has given ATI the leeway to make a surprising decision: On Mar. 31, it confirmed that it will lengthen its product cycle to 24 months.
Graphics chips are becoming so complex that ATI would have had to raise its research and development budget by more than the usual 10% a year to maintain its prior pace of innovation, notes Rick Bergman, a senior vice-president. Given that sales of PCs -- ATI's prime market -- have been stagnant for the past two years, delivering a whiz-bang chip every 18 months isn't likely to do more for the chipmaker's bottom line than introducing one every two years.
PROFIT VS. LOSS. After three years in the doldrums, more and more technology companies are starting to wrestle with two options: Should they risk lower returns by pushing new products out the door at the same frenetic speed as when demand was hot? Or should they take it slow to be sure of recouping investments and saving on R&D costs? While most of the biggest names in technology are coy about their product-cycle plans, some, like chipmaker AMD (AMD
) and the world's largest cell-phone manufacturer, Nokia (NOK
), have said they'll scale back R&D in 2003.
There's no doubt, however, that product cycles are growing longer in the software, chip, and telecommunications-equipment industries, which have yet to see the long-awaited rebound. When business stays weak for so long, says Michael McConnell, an analyst with Pacific Crest Securities in Portland, Ore., "at some point, you have to ease up on the pedal."
For companies like ATI, such a move can make the difference between profit and loss. Lengthening its product cycle means it'll be able to hold R&D spending flat in 2003 at $165 million, vs. the $180 million or so it would otherwise have had to lay out. At the least, that will narrow ATI's net loss, which amounted to $8.3 million in the quarter ended Feb. 28, despite a 20% increase in sales, to $318.5 million.
"NECESSARY EVIL." Stretching out product introductions also lets companies focus on firming their relationships with existing customers. Software maker PeopleSoft (PSFT
) now releases new versions of its customer relationship management (CRM) product every 12 months to 15 months, vs. every 9 months as recently as two years ago. Now that budget-conscious CEOs and boards of directors, instead of chief information officers, are making information-technology purchasing decisions, companies "are no longer buying the new, cool stuff," says Ram Gupta, PeopleSoft's executive vice-president for products and technology. Instead, customers want existing products to be easier to integrate and to deliver a faster return on investment.
Tackling those challenges takes longer than developing new features -- and it's more expensive, says Gupta. But proving that a new piece of software can deliver tangible savings is often the only hope of making a sale. Indeed, about 35% of some 152 chief financial officers recently surveyed by Forrester Research complained that the technology their outfits have bought rarely lived up to its promise.
"For the first time in a while, information technology is seen as a necessary evil rather than a liberating force," says Ted Schadler, an analyst with Forrester. "It's a whole different ball game," adds Gupta, who notes that PeopleSoft has steadily increased R&D expenditures while lengthening development cycles.NO CHOICE. Many other tech stalwarts are finding that their surviving customers don't need product introductions to be as frequent. Networking giant Cisco Systems (CSCO
) used to aggressively target so-called greenfield telecom carriers, which were building networks from scratch and generally took less than six months to approve purchases of Cisco routers. Now, most of these companies are in bankruptcy.
And Cisco's regular customers, such as the Bell operating companies, are taking from a year to 18 months to approve new gear, says Jim Slaby, a Forrester analyst. So most equipment suppliers now release new products once a year instead of every quarter, Slaby adds. Cisco "is introducing new products based on the needs of our customers," says a spokesperson, who declined to comment on the product-introduction schedule.
A similar situation seems to be occurring with PCs. Corporations, which account for a large slice of sales, now seem inclined to upgrade every four years to five years, instead of every three years, says Zhen-Hong Fan, a technology strategist at Merrill Lynch, who points out that the trend is leading to longer product cycles for PC component makers. Market leader Dell won't provide specifics on its rollout schedules, but it insists it has made no "strategic decision" to slow them.
A NEW DANGER. Some companies are stretching out product cycles because financial losses have left them with no choice. Telecom gearmaker Alcatel (ALA
) laid off several thousand of its R&D engineers in 2002. Others have had to cut R&D budgets to stay afloat. No. 2 chipmaker AMD slashed R&D by 19%, to $2.1 billion, this year. Still, it has kept development times more or less stable, thanks to a collaboration with IBM (IBM
), which is helping AMD with manufacturing and knowhow, says Fred Weber, chief technology officer for AMD's computations products group.
The longer product cycles that some companies are adopting could be around for some time -- perhaps another year or two, says Merrill Lynch's Zhen-Hong Fan. And even when tech demand recovers, "it's going to be about essential infrastructure, the run-the-business technology needs," rather than new features, adds Arnie Berman, a tech strategist for investment bank SoundView Technology in Old Greenwich, Conn.
Companies that don't pump out products as often as before face a danger: New competitors could enter their markets, or existing rivals could make up ground. ATI is taking a chance that Nvidia, which says it isn't lengthening its product cycle, will forge ahead in graphics-chip innovation. For now, ATI hopes that most customers won't mind the difference in its release schedule, since it'll continue to offer incremental improvements in existing products every six to nine months.
The trick for companies inclined to cut R&D or lengthen product cycles is to not retreat too far and leave themselves unable to hit their old schedules if a strong tech rebound demands faster introductions. Still, companies that have taken the leap think it was the right move. "There's nothing life-changing for us [like the Internet] in the next three to five years," says PeopleSoft's Gupta. Meanwhile, like so many other tech outfits, PeopleSoft will just have to make the best of a bad situation. Kharif covers technology for BusinessWeek Online in Portland, Ore