When you go up against the electronics industry version of King Kong, you can get bruised badly, as Broadcom Corp. and its ServerWorks unit are finding out after engaging Intel Corp. in a struggle for dominance in the server I/O chipset market.
Although it remains for the moment the chief supplier of I/O ICs to server manufacturers with a market share estimated at between 80% and 85%, Broadcom is retreating rapidly in that sector. But Alan Ross, the company's president and chief executive, said during an analysts conference call last week that Broadcom "is not dependent on Serverworks and I hope we have punched that message through clearly. Our history has been and our future will continue to be dominated by a continuous stream of diversified broadband communication products that will be difficult, if not impossible, to match by any competitor."
Sales at ServerWorks are forecast to stall at $300 million this year, unchanged from 2002, and decline in a worst-case scenario by as much as one-third to $200 million in 2004, once Intel ramps production of its competing products, according to Broadcom's management.
But Broadcom, as Ross contends, is far from dependent on ServerWorks, the server-IC purveyor it acquired for $957 million in January 2001. While ServerWorks' contribution to sales continues to shrink, the remainder of Broadcom's operations is growing rapidly.
Last week, the company raised its revenue estimate for the September quarter to a sequential increase of 10%, vs. its earlier estimate of a 6% to 8% increase, and representing revenue in the range of $400 million to $410 million.
The problem for Broadcom, based in Irvine, Calif., is that competitors like Intel believe they can break into its core markets. Intel, for one, wants to pinch off ServerWorks' I/O server IC revenue by offering highly competitive products. As a result, Intel is no longer proving as cooperative in providing the debugging specs ServerWorks needs to test its I/O chips, a Broadcom spokesman said.
"The information flow from Intel has slowed dramatically," the spokesman said. "We don't need Intel specs to produce the chips, but we need a close relationship with Intel to test them."
Intel, Santa Clara, Calif., did not respond to requests for comments, but analysts said the competition for market share with Intel will fundamentally change the nature of ServerWorks' operation and perhaps its future.
Though ServerWorks is already sampling its latest 800MHz frontside bus (FSB) chipset--ahead of an Intel chip--and could get it ready for volume production by the end of the year, the company can't really proceed without adequate cooperation from Intel, they said.
Broadcom's 800MHZ FSB chipset "is a low-end chipset that was designed without the bus specs from Intel," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray, Minneapolis, in a research report. "Our checks also indicate that the competitive product to Intel's Lindenhurst, the GC-LE, has been canceled. The net effect is that ServerWorks, as we know it, will not exist by 2005."
Even Broadcom admits it is difficult to come up with a timetable for volume production without assistance from Intel. A spokesman for the company conceded that it is possible ServerWorks may have to change its focus, although Broadcom won't exit the server market. Instead, it is developing new I/O bridge chips for the emerging PCI Express public bus standard, a rather direct challenge to Intel, which currently has proprietary ownership of the language that MPU and I/O chipsets use to communicate.
ServerWorks said it will also target other silicon in the server market and expand its line of storage chips for serial ATA.
"We are also developing chips for the serial-attached SCSI market and are addressing the RAID technologies used in storage networks," said Broadcom's Ross. "These and other products, which we cannot announce yet for competitive reasons, are geared to provide a new long-term revenue base building on the technology expertise embedded in our ServerWorks business unit, which are quite extensive."
Broadcom had greater dreams for ServerWorks. When it bought the company in 2001, Broadcom touted ServerWorks as strategic to its future, noting that the acquired business had secured IC design wins with "almost every leading manufacturer of Intel-architecture-based servers worldwide."
Broadcom now says ServerWorks is not and had never been seen as a "crown jewel." William Ruehle, Broadcom's chief financial officer, said ServerWorks "does not contribute all or a majority of our profit, [and] its gross profit margin remains below the corporate average."
Still, with ServerWorks' sales declining in the face of pressures from Intel, the Broadcom unit may never live up to the expectations former president and chief executive Henry Nicholas had for it, according to analysts.
"Our biggest concern is simply the stability of the revenue stream that will have to be counted on to replace the ServerWorks decline," said Cody Acree, an analyst with Legg Mason Inc., Baltimore.
"The emerging market opportunities of WLAN, DSL, DBS, Bluetooth, and wireless handsets all offer significant growth, but also are inherently more competitive markets, with a higher degree of commoditization, pricing pressure, and revenue volatility," Acree said.