For several years, many computer-chip makers have enjoyed the status quo. Sure, production glitches could depress sales for a quarter or two, or a new product might lift them, but relative stability was the norm. Now, thanks to an upcoming technological change, the industry may be about to witness sweeping shifts in key players' market share -- particularly where producers of graphics chips are concerned.
At first glance, this new technology -- Peripheral Component Interconnect Express (PCIE) -- may not seem like such a big deal. Due to debut later this year, it will raise the speed at which chips within a PC pass data to each other. As manufacturers move to this technology, they will have to redo their motherboard designs and decide which chips and suppliers mesh best with PCIE's demands and potential. And that means big players could abandon long-time graphics-chip vendors for new ones, says David Hodgson, an analyst with Orion Securities in Toronto. "Whoever executes the best is going to hold market leadership for the next 18 months," he says.
One of those potential beneficiaries is graphics-chip outfit ATI Technologies (~
June will be an eventful month for ATI, since it will see the release of several PCIE-based products and the official installation of new CEO Dave Orton, who previously served as president and COO. One of Orton's priorities will be to shed the taint of scandal from an insider-trading investigation that last year saw former CEO Kwok Yuen Ho, his wife, and four others charged by the Ontario Securities Commission. Orton was named as incoming CEO in March and assumed the position June 1. The outfit he heads expects 2004 revenues to come in at around $2 billion, a marked improvement on last year's $1.4 billion. At $16, the stock is trading 13% below its 52-week high of $18.45 in January.
On May 25, Orton talked to BusinessWeek Online reporter ~Olga Kharif about PCIE's opportunities, what he calls "the Visual Age", and trends affecting the PC and semiconductor markets. Edited excerpts of the interview are below.
Q: What's the impact of PCI Express?
A: What's happening here is that the entire PC platform -- not just hardware but also software -- is taking a leap. The PC has already morphed from being simply a personal-computing device to a platform supporting the use of the Internet. And it's now moving toward what I call the Visual Age. In the next six to eight years, the PC will enable a very rich visual experience. And PCI Express is the underlying fabric to enable this visual age.
Q: What are you doing to make sure the transition to PCI Express turns in your favor?
A: We've been working for the past 18 months to nail this. What's different about this technological transition is the magnitude -- the number of manufacturers -- transitioning to PCI Express simultaneously. So we had to beef up our support, among other things. We are working with motherboards and graphics-cards manufacturers to make sure the new designs work well and can ramp effectively into high volumes.
Q: Some analysts say you might gain share in desktop graphics but lose in notebooks.
A: Notebook platform manufacturers tend to make their decisions much earlier than those making motherboards for desktops because their design and qualifications cycles are longer, since all parts are more integrated. As they prepare to release PCI Express-based notebooks in the fall, these manufacturers have already made decisions over this spring and winter. We are extremely confident that most of the decisions are moving in ATI's favor.
Q: Still, some analysts believe there aren't any new applications on the horizon to warrant mass PC replacements. Do you believe that's the case?
A: No. We've already seen resurgence in PC sales in the past couple of years. And if you look where processors maker Intel and software giant Microsoft (MSFT) are going with their next-generation chips and software, and at the advances in graphics, networking, and wireless, I think users will have to refresh their devices to keep up and enjoy cool new applications.
The latest technological advances in graphics, for instance, offer a real opportunity for us to penetrate more devices in the home -- for instance, to get the TV and the PC working together. One application that could be enabled is watching movies that were first downloaded on the PC from the Web and then transmitted wirelessly to the TV.
Q: Is digital TVs a big growth opportunity for ATI? What are you doing to make headway in that market?
A: What's happening in the TV market is this move to digital television -- and, in North America, the move to high-definition TV (HDTV). As more HDTV content is available, and as more TVs support HD, sales of HDTVs will increase severalfold in the next few years.
We've been focused on this market for several years. Our chips are in Scientific-Atlanta's (SFA) set-top boxes today. We are working with TV maker Sony (SNE). We've been focused on driving the cost down and grabbing market share in the early stages of this market.
Q: Another growth area for you is cell phones. Motorola (MOT) has chosen your chips. Chipmaker Qualcomm (QCOM) has recently licensed your technology. What's your strategy?
A: If you look at cell phones, the demand for color, high-resolution screens, embedded camera capabilities, and multimedia functions is rising -- and volume of such phones will increase severalfold in the next few years. So we continue to strive to produce chips that are low-cost and low-power, which is key in reducing battery drain in a phone.
Q: You've been with ATI for several years before becoming the company's CEO. Do you plan to change the direction in which the company is going?
A: Not really. We continue to focus on the PC market.... As we move into the Visual Age, I think ATI will become more than a PC company: We'll be in cell phones, we'll be in TVs.
Q: As your competition also tries to capture these new markets, are you experiencing more price pressure?
A: We've got a couple of factors working in opposite directions. On one hand, seeing increased demand for their services, contract [chip] manufacturers are raising prices. On the other hand, there's more demand for our chips. These trends actually counter each other and keep our prices stable. So we aren't seeing the classic, 6%-a-quarter price reductions the industry has seen in the past three to five years.
Q: Some analysts believe that rising prices on some chips are indicative of the beginning of the end for the semiconductor cycle. Do you agree?
A: It's hard to see that far out. But general economic trends and demand for our products make us feel optimistic that the industry will enjoy good times for, perhaps, another 12 months.
Edited by Beth Belton