Charting a New Course for Semiconductors

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Chapter 1

An Industry in TransitionRising development costs, decreasing margins and consolidation

Chapter 2

The Economics of Open-Source InnovationIs RISC-V the new Linux?

Chapter 3

Reprogrammable ChipsBetween ASICs and FPGAs

Chapter 4

New Monetization ModelsMonetizing chips with Features as Service (FaaS)

Charting a New Course for Semiconductors

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Executive SummaryAfter half a century of sustained expansion and innovation, semiconductor sales and profits are noticeably slowing amid shifts in consumer trends, market forces and the pace of innovation. The resulting slew of consolidations has left many wondering if the industry is losing its mojo. Although no stranger to boom and bust cycles, semiconductor companies are eager for a quick return to stability.

As we explore what is next for the semiconductor industry, we see powerful, macro forces at work that are pushing chips into the center of new global markets. The growing importance, specialization and scale of semiconductors are leapfrogging the traditional PC and mobile markets and shaping new verticals from multiple industries, from the automotive and medical sectors to industrial operations and security.

The rapidly evolving Internet of Things (IoT) could very well be the ‘next big thing’ to revive industry growth. Indeed, the IoT is expected to usher in a plethora of new technologies and business models – helping to steer industry growth back into the fast lane. These include open-source processors, reconfigurable silicon and fresh sources of downstream electronic systems revenue.

Join us as we outline potential ways of creating a viable future for the semiconductor industry and beyond.

Charting a New Course for Semiconductors

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An Industry in TransitionSince its beginning in the early 1960s, the semiconductor industry has helped enable many remarkable technological advances. From space exploration and personal computers to mobile phones and today’s increasingly ubiquitous Internet connectivity, generations of ever-more powerful, efficient and cost-effective integrated circuits (ICs) have paved the way for a host of products and services responsible for dramatically altering how much of the world lives and works.

The industry, although frequently volatile and prone to periodic corrections, has managed to continue a long-term trajectory of revenue growth for more than half a century. Worldwide chip sales increased by nearly 50 percent during the past decade, with industry revenue peaking at $340 billion1 in 2014. Yet even as semiconductors continue to contribute to a wide array of revolutionary, potentially transformative technological advances – such as “smart” homes and cities, self-driving cars and mobile devices for real-time health monitoring – long-time industry watchers have begun to suggest the industry is moving into a new era of slower growth, increasingly commoditized products, diminishing profits and, inevitably, fewer competitors.

Recent industry trends and data lend support to this view. Worldwide chip sales decreased by 1.9 percent during 2015 to $333.7 billion, according to Gartner, with the World Semiconductor Trade Statistics (WSTS) organization forecasting a slim 1.4 percent sales rebound in 2016 to $341 billion.2 Meanwhile, Morgan Stanley notes that chip-industry initial public offerings (IPOs) accounted for just 5% of all U.S. technology IPOs in 2015, compared with 25% a decade earlier. In addition, semiconductor companies’ overall post-IPO return on investment for shareholders has been disappointing. According to the Global Semiconductor Alliance (GSA), just 37% of the companies’ shares listed during the five years (through November30, 2015) increased in price compared to their original offering price. As well, overall semiconductor CAGR for the period from 2004 - 2014 was 4.4% compared to worldwide GDP for the same time period was 6.0%.3

An Industry in Transition

Chapter 1

5An Industry in Transition

Chart by eSilicon based on Gartner data

• Design costs rising with each new process generation, margins under increasing pressure• Large markets needed to justify new silicon development• Industry consolidation seeks to reduce costs and jumpstart EPS growth

Rising Design Costs Impacting Margins, Driving Industry Transition

Rising Chip Design and Manufacturing Costs Several factors are contributing to the apparent industry slowdown, including the rising cost of designing and manufacturing new chips. For the past five decades the industry’s growth has been driven by its ability to squeeze an increasing number of circuits onto chips at a fairly predictable rate. This phenomenon, which followed the Moore’s Law4 observation that the number of transistors in an integrated circuit was doubling roughly every two years, resulted in a virtuous circle of declining costs per transistor, which in turn has enabled engineers to build increasingly powerful, as well as affordable, chips.However, the growth in chip complexity enabled by Moore’s Law has brought significant challenges. As the time required to develop new generations of chips stretches from two years to 2½ years or longer

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and the cost of new chip manufacturing plants soars to new heights, the fundamental economics of the industry are changing. Chip design projects that once cost a few tens of millions of dollars a decade ago have climbed to as much as $200 million.5 Growth in the number of IP blocks, use cases, and fuse configurations also create complex schedule risks and logistics challenges for chipmakers.

Semiconductor Consolidation Accelerates

In this context, merger and acquisition activity has surged across a wide range of markets during 2015, fueled in part by historically cheap financing that enabled more than $4 trillion6 of worldwide corporate deal making. Semiconductor M&A also reached unprecedented levels last year, with chip-sector M&A deals worth a combined $117.1 billion announced. According to the GSA, this figure is more than five times the $19.9 billion total value of transactions in 2014.

Research firm IC Insights noted in a recent report7 that the current wave of semiconductor M&A is being driven – in part – by chip companies eyeing growth as a means to offset the rising costs of product development and advanced manufacturing technologies. Another motivating factor is reportedly “China’s ambitious goal to become self-sufficient in semiconductors,” which has spurred aggressive bidding for overseas industry assets by Chinese investors such as Tsinghua Unigroup.

An Industry in Transition

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New Models for Growth

Regardless of what’s feeding the frenzy of semiconductor deals, the net effect is widespread industry consolidation with a shrinking number of major chip manufacturers competing for shares of an increasingly slow-growing market. In the past, chipmakers responded to increasing competition and diminishing financial returns by adopting a variety of new business models and revenue streams. The most notable of those new business models was the rise of fabless and fab-lite chip companies starting in the 1990s.

This innovative approach has dramatically lowered the barriers to entering the semiconductor industry by enabling design-oriented companies to outsource most or all of their chip production needs to contract suppliers, which can spread the high cost of building and operating chip fabrication, assembly and test facilities across numerous customers. To be sure, fabless chipmakers now account for nearly 40 percent8 of all semiconductor revenue. Other companies – including ARM, Synopsys and Imagination Technologies – have created fresh revenue streams by adopting new business models designed to further disaggregate the chip-making process by focusing solely on developing and selling intellectual property (IP) blocks that can be incorporated into other companies’ chip designs.

The question now, as the semiconductor sector faces the prospect of a new era of slower revenue growth and narrower profit margins, is whether chipmakers will be able to respond to these latest challenges by once again developing new business models and fresh revenue streams to reignite growth, as well as new ways of monetizing unique skills and assets.

An Industry in Transition

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Will the Internet of Things be

‘The Next Big Thing?’

The so-called Internet of Things (IoT) may very well be the industry’s long-awaited blockbuster technology platform capable of driving yet another generation of explosive semiconductor growth. Indeed, a recent report on the future of the semiconductor industry by Morgan Stanley analyst Mark Edelstone describes the IoT as “the next big thing in computing.” More specifically, Edelstone predicts the IoT will “drive semiconductor demand for years” as it evolves through multiple stages, starting with networked consumer electronics products, progressing to networked industries and ultimately, achieving a third stage of “networked everything” in which trillions of interconnected devices will help monitor and manage virtually every aspect of our lives.

Gartner researchers expressed similar sentiments, forecasting that 6.4 billion connected “things”9 will be in use worldwide by the end of 2016, with more than 20 billion expected by the year 2020. At this early stage, however, the IoT may still be more of a buzz-generating marketing concept than an actual platform with the proven ability to drive significant product sales.

Bob O’Donnell, founder and chief analyst at Silicon Valley-based TECHnalysis Research, says that expectations for the IoT have become somewhat unrealistic. “Right now it’s way overhyped, and I think we’re going to see it come crashing to earth,” he says. O’Donnell also contends that what some people see as a huge, multi-billion-dollar IoT market opportunity will more likely develop into a multitude of smaller, niche-oriented markets.

The burgeoning IoT cannot reach its full potential based on the current paradigm of rising development costs and ever-decreasing margins. To do so, companies will have to seriously explore changes to their business models, including the notion of embracing open-source hardware for commodity IP, working with reprogrammable chips to help avoid mask costs, and augmenting chip sales with potentially lucrative downstream revenue.

An Industry in Transition

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Chapter 2 The Economics of Open-Source Innovation One possible solution to the semiconductor industry’s growth predicament may be found in the software industry where the growing popularity of open-source10 development has already altered the economics of innovation. Indeed, more than 95 percent of today’s web servers run on variants of the Linux operating system,11 while approximately 85 percent of smartphones sold worldwide use the open-source Android12 mobile operating system (OS). In addition, Red Hat recently became the first open-source company to reach the $2 billion run-rate13 in annual sales.

Open-Source Semiconductors –

the Final Frontier?

Eric Weddington, an open-source architect for GPS technology vendor Trimble, suggested in a recent LinkedIn Pulse14 article that while there are numerous obstacles to be overcome, it’s possible that “integrated circuits could be the final frontier of open source.”

He suggests that small groups or individuals, perhaps university teams, might be able to inexpensively obtain and improve some older chip-making equipment for use in micro-fab environments, “with those optimizations ultimately released as open-source hardware.” Open-source IC design tools and libraries would also have to be created and made compatible with the re-purposed manufacturing equipment.

The Economics of Open-Source Innovation

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In all likelihood, Weddington concedes, the resulting technology “will never be as good as what is commercially available.” But perhaps it could be made good enough “to bring the power and ability to design your own IC, or microprocessor, to smaller and smaller groups of people and drive down the enormous capital requirements of an entrenched, dinosaur industry.”

Similarly, Michael Cooney of Network World15 describes the state of open-source hardware today as roughly where open-source software was during the mid-1990s – waiting for commercial suppliers to provide higher levels of support. “What made open-source software acceptable for many businesses was the arrival of support for it, such as Red Hat,” he says, adding, “Something similar may take place with the hardware.”

• Rapid growth in the adoption and number of open source software projects • More than 95% of web servers run Linux variants, approximately 85% of smartphones run Android variants• Will open source hardware ignite the semiconductor industry? Is RISC-V the hardware industry’s Linux?

The Rise of Open Source Software: Will Hardware Follow Suit?

The Economics of Open-Source Innovation

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Several hardware initiatives inspired by the open source concept have launched in recent years, primarily for students, hobbyists and independent developers, or “makers.” The most popular of these “Maker Movement” favorites, with millions of units of each sold to date, are Arduino,16 a platform for developing microcontroller-based prototypes, and Raspberry Pi,17 a credit card-size single-board computer development kit. With one Raspberry Pi model costing as little as $5,18 these devices give users a low-cost way to design simple computers, robots, thermostats and other devices – including IoT systems – by adding software, sensors, actuators and various peripheral devices. Additional open-source hardware platforms include Intel’s MinnowBoard,19 a compact single-board computer running Linux, Android and Windows applications on a 64-bit Atom processor, and the TinkerForge,20 a collection of stackable microcontroller building blocks (dubbed “bricks”) designed to enable a variety of sensor, input-output and other functions.

These moves toward reducing the cost to enter the developer space indicate broader acknowledgment of the need for more economical innovation models. Although still at a relatively nascent stage, open-source hardware has already managed to positively disrupt the semiconductor industry by encouraging innovation, reducing development costs and accelerating time-to-market.

Reducing Costs With RISC-V

Another way in which open-source methods could potentially help revive semiconductor industry growth is via the development of new instruction set architectures (ISAs). Commercial chip vendors typically pay hefty, multi-million-dollar license fees to use proprietary ISAs. However, such prices are often too high for academia and many small companies, critics say,21 leading to stifled competition and innovation, as well as more expensive chips.

This is precisely why computer science researchers at the University of California, Berkeley developed an open-source ISA alternative, dubbed RISC-V, which allows ultra-efficient processor designs with up to 128-bit memory addressing. RISC-V was designed to scale for everything from mobile phones and low-power embedded systems to high-performance computer servers. It is freely available under a Berkeley Software Distribution (BSD) license for all types of use, allowing anyone to design, manufacture and sell RISC-V chips and software.

The Economics of Open-Source Innovation

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UC Berkeley’s Krste Asanoviç and David Patterson outlined their case for RISC-V in a 2014 EE Times article,22 noting the industry would benefit from “viable, freely open ISAs just as it has benefited from freely open versions of the software stack.” They contend widespread RISC-V adoption would lead not only to greater innovation and accelerated product development, but also to fewer design errors and security issues, thanks to scrutiny the ISA would receive from a broad developer community. All this, they say, should contribute to lower product costs, including the prospect of IoT devices costing as little as $1.

RISC-V is gaining momentum,23 with Google, Hewlett Packard Enterprise, Lattice Semiconductor, Microsemi and Oracle joining the 15 companies that recently signed up as initial members of a new RISC-V trade group. In addition, an R&D division of the Indian government is slated to receive approximately $45 million to fund the development of its first 64-bit microprocessor based on the RISC-V instruction set.24 Meanwhile, a separate team of designers at IIT Madras has been working for more than two years on a family of 32- and 64-bit open source processors based on RISC-V, called Shakti. According to EE Times,25 the Shakti project now includes plans for at least six microprocessor designs along with fabrics and an accelerator chip.

The success of open-source software – as opposed to a closed, walled-garden approach – has set an important precedent for the semiconductor industry. Faced with prohibitively expensive development costs, companies may opt to avoid unnecessary toll collectors while placing more of an emphasis on open-source architecture as they create new service-centric revenue streams.

The Economics of Open-Source Innovation

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Reprogrammable Chips Reprogrammable chips may also offer the semiconductor industry an opportunity to reduce development and manufacturing costs and, ultimately, create new sources of revenue. To be sure, manufacturers typically configure application-specific integrated circuits (ASICs) for targeted use cases. In contrast, a field-programmable gate array – or FPGA – is an integrated circuit with custom logic that is configured by a customer or designer after manufacturing of the underlying FPGA microchip.

FPGAs offer a number of advantages, including low, non-recurring engineering costs and rapid time-to-market. However, these chips typically use die area less efficiently so they tend to carry a higher unit cost than their ASIC counterparts. Nevertheless, advances in field-programmable gate arrays – fueled by Moore’s Law and growing mask costs for conventional ASICs – will increase the range of applications serviceable by FPGA. As well, Flash-based FPGAs may gradually become viable alternatives to conventional ASIC manufacturing for applications with lower unit volumes, gate counts and performance requirements. These FPGAs are also of potential interest for security applications as sensitive IP can be added after silicon fabrication.

For other, more complex system-on-chip (SoC) devices and higher-volume applications, FPGAs and other programmable logic devices (PLDs) will likely remain cost-prohibitive. Nevertheless, reconfiguration can still play an important role by allowing ASIC and ASSP SoCs to be fabbed with highly secure configurable features and/or services within a single-chip design. These SoCs would subsequently be configured via in-field provisioning of sensitive data and feature configurations – capabilities typically associated with higher-cost FPGAs.

SoCs that can be securely configured downstream may very well represent the next step in the evolution of silicon, offering the potential to redefine the current semiconductor paradigm by unlocking the true − or full − value of the intellectual property present in chip designs. Simply put, reprogrammable chips can replace a one-size fits all strategy for a ‘Features as a Service’ (FaaS) approach.

Reprogrammable Chips

Chapter 3

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As such, reprogrammable silicon will undoubtedly play a major part in building the IoT, which spans a broad range of applications and environments with varying requirements. Rather than producing and inventorying models (e.g. fuse configurations) for each scenario, chipmakers can sell a single ‘minimum-functionality’ configuration, thereby allowing OEMs (or end customers) to pay for the enablement of additional capabilities.

• Reprogrammable silicon improves security and flexibility, enables downstream configuration • Features as a Service (FaaS): Features and Services can be enabled and disabled in-field, opening up a wide range of new usage model

Reconfigurability is also important for another critical IoT requirement: security. The success of the IoT is clearly contingent upon the benefits of connectivity outweighing the added costs and security risks. More specifically, chips will need to address a growing range of third-party security requirements, necessitating the ability to store and protect cryptographic keys and parameters that will vary by application and end customer.

Reprogrammable chips, enabling FaaS, will allow system architects to significantly extend the range of markets they can address per chip design while exceeding customer requirements. In addition, reprogrammablity reduces development and inventory management costs and can create new opportunities for downstream revenue.

Benefits of Programmable Silicon

Reprogrammable Chips

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New Monetization Models For decades, chipmakers have settled for a model that creates trillions of dollars in downstream benefits for the companies and consumers who use their chips. Yet, chipmakers themselves haven’t managed to fully tap the potential of this evolving ecosystem. McKinsey & Co.26 consultants called attention to this discrepancy in a 2012 article, highlighting the industry’s puzzling inability to profit from much of the amazing technological progress facilitated by its chips.

“If the auto industry had evolved its technology as rapidly as the semiconductor industry has with microprocessors, the top speed of a sports car would be approaching 4 million miles per hour,” they noted. Yet even as microprocessor sales grew by about 16 percent annually during the period it reviewed, McKinsey calculated that only 1.5 percent of the resulting value created was captured by the chip industry. The rest went to others in the value chain and consumers, mostly in the form of price declines.

Besides their historic lack of pricing power, chip companies are further challenged by what McKinsey describes as their “inability to monetize the increasing value of the software bundled into their chips.” To be sure, the industry has traditionally focused more of its innovation efforts on hardware than on software development. As a result, there is additional value and monetization in a FaaS framework where features are enabled dynamically at multiple points in the semiconductor value chain, ranging from manufacturing to in-field use.

New Monetization Models

Chapter 4

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• Create new monetization models with a ‘pay as you enable’ approach• Expand software and service support to generate fresh revenue streams• Add value by providing meaningful data extracted from the IoT

Software and Service Strategies

Mike Chadwick, sales director for software-as-a-service (SaaS) provider Tensoft, sees semiconductor companies’ business and monetization models evolving “from pure play integrated circuit sales to various complex products and services.”27 Single-function IoT chips, for example, are morphing into multi-chip modules and SoCs to support multiple sensing functions. Chipmakers have also been increasing their vertical integration28 by buying software companies and other assets to broaden their technology capabilities, allowing the expansion of offerings beyond the industry’s traditional product categories.

New Monetization Models Enabled by Programmable Silicon

Anil Telikepalli, executive director and general manager for analog chipmaker Maxim Integrated Products, predicts the chip industry will eventually turn to software industry pricing models,29 such as annual service fees, tiered monthly subscription fees entitling buyers to pre-determined quantities of chips, and micro-payment arrangements in

which customers pay a small fee to unlock new on-demand features. “While seemingly uncommon today,” he says, “these models can provide value to customers while also bringing [a] consistent revenue stream to [chip] manufacturers.”

New Monetization Models

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Much of the current discussion about the IoT focuses on putting chips into billions of refrigerators, cars, light switches and a host of other products and locations. Even if the IoT lives up to those optimistic projections, however, designing and building $1 sensor chips to monitor fridge temperatures or the availability of urban parking spaces is unlikely to produce much profit. As IoT capabilities become increasingly ubiquitous and commoditized, the real upside potential will most likely be found in the data that comes from having sensors everywhere, from moving, storing, analyzing and securing that data and, ultimately, in using it to deliver services.

Chipmakers are starting to add optional services that can be activated and paid for only when needed. There may also be a market for extra computing performance that can be switched on and off during and after periods of peak use. IBM already provides this capability at the system level with its Capacity on Demand30 services, which allow mainframe computer customers to access additional processing and bandwidth by purchasing encrypted codes to activate inactive processors and memory.

This approach represents a disruptive, albeit positive shift, with semiconductor companies assuming a more active role in the customer-facing service ecosystem. In this model, programmable chipmakers may be able to generate additional revenue by enabling their chips to be activated, programmed and personalized after they arrive at customers’ factories − or in end-users’ offices, homes and point-of-sale locations.

Undoubtedly, there will be numerous ways of implementing this new model. However, gaining access to more of the industry’s downstream revenue will clearly be the start of a truly transformative change for many chipmakers.

New Monetization Models

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ConclusionThe semiconductor industry is currently facing a set of challenges, including rising development costs, shrinking margins, market saturation and rapid consolidation. Although no stranger to boom and bust cycles, semiconductor companies are actively seeking a return to stability via a viable and collaborative business paradigm.

It is difficult to predict the future of any industry with certainty, particularly amid the fundamental economic shifts now underway globally. Nevertheless, the semiconductor industry, which is now firmly at the core of so many sectors, from medical to automotive, is evolving to meet the challenges explored here. To be sure, companies are beginning to acknowledge the potential of new markets that tap into the inherent value of semiconductor feature management via the ‘Features as a Service’ and open source models. Specific strategies to unlocking their full potential will undoubtedly vary, which is why it is important to explore a future in which semiconductor companies play an open and collaborative role in helping to chart a new course for the industry and beyond.

Conclusion

http://www.rambus.com/future-of-semiconductors

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