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highlander_ns
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Re: Broken Model
highlander_ns   4/5/2014 4:46:37 PM
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Chips are commodity ingredients. Flour, eggs, and sugar are low-priced commodities. Once someone correctly mixes them together, they can get a branded cookie in nice packaging that tastes great and is ready to eat! No one is going to pay more than bottom dollar for the cookie ingredients but the cookies are another story.


If chips had a low cost of invention, all that would do is bring the cost down. Competition would rapidly destroy the extra margin that could have been realized by a low development cost.

highlander_ns
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Re: Broken Model
highlander_ns   4/5/2014 4:40:32 PM
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The smartwatch will be the calculator watch for modern times. Phones aren't going anywhere and they have clocks. Watches themselves are endangered or at least not very necessary.

alex_m1
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Re: Broken Model
alex_m1   4/5/2014 3:58:17 PM
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@scott

I'm not sure it's even about systems. Look at pebble , the smartwatch company. Yes it'll make some money , but in short while ,archos is going to offer a $50 smartwatch and suck out a lot of the money from that market, unless pebble has unique value that's hard to copy. Maybe its micro-apps will be that, maybe not.

On the other hand, it's not rocket science to build/invent a smart watch(they build the prototypes using arduino), and they did made some money(and had a potential chance for ackuisition) , so it could be a  good return on investment. Not VC like return(they got spoiled by app companies), but still good.

So maybe those are the right expectations for a system company ?And a chip company ?

And the missing piece(for chips) is low cost of invention ?

 

Scott Elder
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Re: Broken Model
Scott Elder   4/5/2014 2:46:21 PM
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@alex_m1

Absolutely Wall Street is working correctly.  If you sell a complex product whose price is based upon the cost of goods rather than the perceived value, you are selling something anyone can do.  That's the problem that needs to be solved.
 A company can ride out the innovations of the original entrepreneurial team only so far.  But in the semiconductor business, most of those guys have left the building (like Elvis).  Even Sanghi, according to this article, is planning on leaving soon.  What is left is generally people who keep that "stone wheel" turning, but that only lasts so long before a new generation of entrepreneurs further up the food chain take over.
 
The semiconductor companies are exactly where the module companies were in the 1980s when higher performance was available on an IC, many times for less money.  And the module companies displaced the discrete component companies before them.  Now we are at the point in technology evolution where it is all about systems.  
 
Today, most systems are unique, so it is not generally possible to define a system level IC that is used by many—a conflicting requirement for successful semiconductor products.  But that too will eventually change much like the world of mobile computing where only a few companies provide sufficiently adequate solutions.  And as you point out, if one has a successful system definition, one can go out and do the IC design themselves for less money using readily available resources.  So where does that leave the generalists?  The semiconductor companies.  Well, if you don't have a secret sauce, you either go mix up a new sauce or plan on obsolescence.  Just like the discrete guys and module guys before them.


highlander_ns
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Re: Why is Google making their own chips?
highlander_ns   4/5/2014 2:22:42 PM
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The secret sauce is the same as it ever was: a unique value. Unique value is hard to come by nowadays. A PC is a PC. A phone is a phone. A microcontroller is a microcontroller.

highlander_ns
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Re: Broken Model
highlander_ns   4/5/2014 2:20:42 PM
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Hi Alex, you're right. The prices are set by supply and demand. When parts all do roughly the same thing, they are a commodity. You're not going to buy the $1 part when you can get a $0.50 one for the same price. It seems like the parts should sell for a lot more. Once upon a time a transistor was pricey. As soon as one competitor figures out how to drive the cost down, it's offered at a lower price and it's a race to the bottom.

It's very hard to add value to products if the spec is all that matters. One purse that holds 1 L doesn't sell for the same price as other purses that hold 1 L because there is a great difference in perceived value. In electronics this difference is largely zero... trust that the part will work as advertised may still be worth something.


The only way a chip is going to command top dollar is if it can do something important that no other chip/solution can do.

highlander_ns
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Re: Broken Model
highlander_ns   4/5/2014 2:10:20 PM
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Hi Scott, the economics of the industry work as they should. I know it feels like all that sweat and blood should yield more than a 50 cent part. You're struggling with the notion of value. Surely a microcontroller is worth more than a candy bar that requires zero risk or R&D, right? Well... not according to the machinations of the market.

alex_m1
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Re: Broken Model
alex_m1   4/5/2014 10:58:12 AM
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Scott:I don't get something. There must be some reason companies don't just price their components higher, and it's not wall street , becaue wall street wouldn't mind higher profits.

Maybe the microcontrollers and bluetooth devices are mostly commodities and are mostly built into commodity products. If you won't sell cheap, some ther guy will.

Heck , i if i want i can just go get a bluetooth core to build my bluetooth design on. There are 42 such cores availble at [1]. Imagine what that must do to prices.

But you as an MCU seller, says: not true. I just added this great peripherials for this expensive chip. I am not a commodity. So the board designer buys a cheaper chip and uses software, a 50 cents FPGA or a million other tricks to solve his problem for cheaper. Yes maybe that won't be the most optimal design but still, it'll be cheapr and most designs are cost constrained. And anyway , in a minute and half a competitor will rise.

As for your comparison with software: the marginal price of most software is ZERO. most of the price in those billion dollar software companies is in community and network effects. The x86 companies have managed to create those effects into their chips and hence their value, but most chip companies can't.

Some other business models for apps are the free-to-play model , which manipulates users psychologically into paying for virtual goods. I trully hope there won't be such model applicable for chips.

 [1]http://www.design-reuse.com/sip/bluetooth-c-192/

Scott Elder
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Broken Model
Scott Elder   4/4/2014 11:14:16 PM
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Sanghi says that the model is broken.  Here is an example why.
 A 19 year-old person can go on the internet, buy a bunch of 50 cent parts overnight, build a prototype system with Bluetooth, Wifi, Arm processors, etc. and test the product interest on Kickstarter.  If he's lucky, he'll sell $50,000 worth of product, pull in another $300,000 from keen investors who monitor those sites, and build a sustaining business in less than two years selling a few million dollars in hardware.  And the semiconductor companies that enable this--the ones that get 50 cents--well they get a whopping $10,000 only if and only when the young person's company makes a few million.
 
The economics of this broken model don't make sense.  Intensive research and development with multiple PhDs on the staff, sophisticated multi-million dollar tools, and complex supply chains have little value anymore.  It is all reduced to 50 cent parts.
 
Now that it is back to basics for the old-school semiconductor companies, selling pieces parts, one $70,000 purchase order at a time, it's time to rethink how those 50 cent parts are sold.  The idea that the price of a semiconductor device should be based upon the cost of goods is out-dated.  What's the cost of goods sold for software downloaded on the internet?  Music downloaded?  Who knows.  Who cares.  But somehow Wall Street establishes billion dollar valuations for those IP companies without worrying about COGS.  But in the semiconductor space it is all about gross margin; the multiple on cost of goods sold--a business model that died in the middle of the dot-com revolution.


Scott Elder
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Re: Why is Google making their own chips?
Scott Elder   4/4/2014 11:10:33 PM
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@daleste

<<Just throw a few software guys together and have them design the chip we need>>

Your prognosis is not how it is being done.  Those system companies hire the same design engineers previously employed in the semiconductor companies that are now laying off engineers, they buy their wafers from TSMC, buy their tools from Cadence, and license their ARM cores just like the semiconductor companies do.  There is no secret sauce anymore.  It's all available off the street.  Don't kid yourself.

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