the analyst’s perspective

by Will Strauss, President & Principal Analyst, Forward Concepts

Forward Concepts is an independent market research provider, principally focusing on the semiconductor industry. Will Strauss is an internationally-recognised authority on markets driven by digital signal processing technology.

The semiconductor industry has changed radically over the past two decades. In the 1980s the semiconductor manufacturing process was the key to success, with each company claiming to have a superior process. Today, with world-class chip facilities costing $3 billion or more, specialist foundries have become the source of much semiconductor manufacturing and “fabless” chip companies abound. In 2008, the chip design is the key to success.

A new computer era is now upon us, with continuous access to the internet, video, graphics and rich audio becoming increasingly important to the user. This new era has been enabled by changes in the way that computer chips are designed and built. Forty years ago, engineers designed chips one transistor at a time, limiting the complexity and capability of the chip. Gradually chip design evolved to employing more integrated circuits and then to incorporating advanced microprocessors.

Today’s chip designers create complex integrated systems-on-chip (SoCs) incorporating multiple processors, graphics and analog components. These SoCs enable the growing markets of mobile communications and digital multimedia. This market trend strongly favours ARM technology, especially for consumer products that require long battery life for portability.

Designing everything internally limited the scope of products a chip company could make. By licensing complete microprocessors, like those from ARM, chip companies found that they could leverage the work of others and bring their products to market faster. Licensing its processors has enabled ARM to become a major force in the semiconductor industry.

ARM was not the first company to license processor IP, but from the beginning the company distinguished itself by offering lower-power and smaller technology, making its processors ideal for handheld and portable products. ARM quickly found a solid home in personal communications and multimedia products.

ARM processors soon became the brains in a variety of devices, but the company’s market breakout was in digital cellphones. With its compact size and energy-conserving design, by the late 1990s the ARM7 family had become the de facto standard processor in cellphones. The ARM7 family was originally paired with wireless modems by major cellular chip suppliers and handled the human interface by controlling the keypad, the display, and the address book and calendar. As the ARM processor families evolved through successively more advanced ARM9 and ARM11 family processors, cellphones gained increased capabilities and began to handle multimedia functions such as audio and video, evolving into the smartphones of today’s cellular market.

With the ARM9 family, the company became a powerhouse in the embedded market of hard disk drive controllers – the second-highest unit processor market (after cellphones), with hard disk shipments now more than 500 million annually. Chip companies also began to employ ARM processors at the heart of their own microcontrollers. This engendered competing chip companies, since each could take advantage of the extensive ARM software tools and libraries, but by adding their own peripherals and additional software they are able to differentiate their product from their competitors’. This enabled OEMs to have multiple microcontroller suppliers (and the lower prices that competition brings) but with a commonality that made it easier for software engineers to move from one chip to the other. Now, the semiconductor industry has thousands of software programmers who are trained on ARM processors.

The improvements in ARM processors were the result of new designs, also advances in chip manufacturing capabilities that allowed ARM processors to become faster and lower-power as their physical sizes became smaller. ARM’s ability to provide both low-cost and power-efficient solutions has continued.

By 2008, the demand for increasingly sophisticated smartphones, with better video, richer graphics, touchscreen displays and increased connectivity to 3G, Wi-Fi, GPS, BlueTooth and even digital TV, has resulted in cellphones that incorporate five or more ARM technology-based chips. This is clearly a trend that will continue as fourth-generation cellular networks enable increased data speeds, even richer video experiences over the wireless internet, including new location-based services, video-conferencing and better access to popular social websites like YouTube and Facebook.

The recent introduction of the powerful ARM Cortex-A processors also brought signal processing and richer graphics to the market. Companies making chips for cellphones and other portable devices, like personal media players, Mobile Internet Devices (MIDs) and so-called netbooks, were quick to incorporate the Cortex-A processor into their roadmaps. These chips have evolved PC-like functionality. Personal media players based on the Cortex-A processor began shipping in 2008 and cellphones, MIDs and netbooks employing the architecture have been announced by several licensees for volume production in 2009.

The company is also improving the low end with the fastgrowing Cortex-R and Cortex-M processors that serve market segments made popular by the earlier ARM products, but as smaller, more power-efficient processor designs.

With a continuing focus on reducing development cost, chip companies are looking at outsourcing beyond processor design, enabling more complex designs without growing development costs. To serve this growing demand, ARM has expanded into the “physical IP” market, providing libraries of licensable elements that are the basic building blocks used in every chip design. This is a new and evolving market, and there are competitive alternatives to ARM technology. Time will tell the extent to which chip companies choose to outsource physical IP and whether ARM will be the successful supplier.

In 2009 the semiconductor industry will be a challenging business environment. As well as uncertainty in the world economy, the semiconductor industry is characterised by rapid technology change and business model innovation. ARM is well positioned to succeed in an industry that continues to outsource technology design as complexity and costs increase, and has demonstrated it is an effective innovator of both technology and business model.

Will Strauss
February 2009