) knocked mighty Intel Corp. (INTC
) on its rear. Rather, 2004 was a milestone because, according to the Semiconductor Industry Assn. (SIA), sales of chips for consumer devices were greater than sales for corporate gear for the first time in industry history. Yes, in 2004, the consumer became king in chipland. And the regime change presents many challenges.
Look around and it's easy to see the consumer influence. Digital cameras, DVD players, and digital music players like Apple Computer Inc.'s (AAPL
) hot-hot-hot iPod are all wildly popular consumer gadgets that didn't even exist until a few years ago. What's more, longtime necessities such as your car and relatively new ones like your cell phone continue to sprout features requiring additional semiconductor smarts. The rise of the consumer as the driver of chips -- and the tech industry overall -- will only accelerate as gadgets proliferate like mushrooms in wet grass and a few billion Asian consumers use their fattening wallets to purchase PCs, cell phones, and a host of other digital doo-dads. "The consumer is really driving the semiconductor market," says Gary Grandbois, analyst with El Segundo (Calif.) research firm iSuppli Corp.
The trend has important implications. It means the health of the chip sector will be tied more to macroeconomic forces such as oil prices and interest rates than to the state of corporate capital spending. It's also the latest sign that the industry's balance of power continues to shift to Asia as Chinese and Indians become major consumers of technology.
The rise of the consumer is also disrupting the competitive dynamics of the tech sector as electronics titans revamp their strategies to chase growth in the consumer market. Witness Hewlett-Packard Co. (HPQ
) partnering with Apple to sell digital music players and rivals Sony (SNE
) and Samsung Electronics teaming up to produce digital TV chips. Expect more unusual consumer-driven partnerships. And don't be surprised if PC makers such as HP and Dell (DELL
) sell more consumer products such as cell phones. Mario Morales, vice-president at research firm IDC, says the success of many technology companies in the future will hinge on their ability to jump on the consumer bandwagon. "Companies that don't have the scale to build a supply chain around consumer products will be killed," he says.
For all the hubbub, the industry is expected to slow somewhat in 2005. That's partly because millions of consumers have already upgraded their phones and PCs in the past two years, and because the price of chip power is falling. Forecasts for chip industry revenue in the new year range from modest growth to a decline of 5% to $207 billion, according to Semico Research Corp. in Phoenix, Ariz.
A cooling year means slower sales growth and even lower profit growth for the industry's leaders. Intel's sales are expected to grow 7% this year, down from 13% in 2004, while the chip giant's net income is projected to tick up just 2% after a 43% surge last year. Texas Instruments Inc. (TXN
), a specialist in cell-phone and media chips, is expected to boost sales by 6%, down from a torrid 28% spurt last year.
Amid the pullback, a few consumer markets will continue to shine. Chip sales for digital cameras are expected to surge 38%, while digital TV chips are forecast to swell 27%. Later this year, some PC users will also spring for PCs with "dual core" chips -- two separate processors on a single chip -- that are more powerful but require less power than traditional computer chips.
The convergence of different technologies also forces manufacturers to think more about ordinary users. Video will spread on cell phones. New game consoles from Sony and Microsoft Corp. (MSFT
) will include wireless networking capabilities. And a new wireless technology called near field communication will transform your cell phone into a credit card. All these applications will vindicate chipmakers who took a step back from the corporate market and placed their bets on consumers. By Spencer E. Ante