In this environment, word on the street is Maxim, Linear, Xilinx, Altera and even industry icon National Semiconductor may consider going private in 2007, following the lead of NXP (Philips Semi) and Freescale this year, said Lewis. The analog and FPGA companies are attractive because they tend to generate cash and, as generally fabless companies, have relatively low capital expenditures, he added.

Whether these companies or others become the target of private equity capital or mergers, expect more consolidation in the tighter conditions ahead, said Lewis. In its November forecast, Gartner Dataquest said the chip sector will grow just 9.2 percent in 2007, down from 10.4 percent this year, and 7.8 percent on a compound basis from 2005 to 2010.

The slow growth comes from more modest expansion in core chip markets such as cellphones and PCs as well as inventory corrections and falling average selling prices.

"The up-and-down business cycles are not gone in semiconductors," Lewis said. "We will see another down cycle in 2009, but we think the cycles will be more moderate," he added.

The PC and cellphone markets still dominate chip sales, but increasingly a fragmented variety of consumer electronics markets are diversifying the mix. In addition, this year application-specific standard products (ASSPs) became a larger portion of the mix than DRAMs which traditionally face wild market fluctuations that dominate chips sales.

Memory will continue to decline as a dominant factor in chip sales. ASSPs will grow 11.1 percent over the next several years compared to just 4.9 percent for all memory. Nevertheless, Gartner Dataquest projects a one percent contraction in the chip market in 2009, based largely on a decline of 20.1 percent that year in memory sales—mainly DRAM—after a 21.5 percent surge in memory sales this year.

Closer executive attention on inventory levels will also help moderate the intensity of up and down cycles, Lewis said.

Traditional consumer markets hold no panacea for electronics because they are cost sensitive and diverse, lacking any big killer product. "We don't expect to see the mobile phone of consumer," said Jon Erensen, a consumer analyst for Gartner Dataquest.

Overall markets for digital cameras, media players, LCD TVs and game consoles will grow about ten percent a year for the next two years before cooling down, the market watcher projects. Across those markets, Bluetooth, Wi-Fi, digital music chips and flash memory could see strongest growth.

Bluetooth is in about a third of the 800 million cellphones this year, rising to some 72 percent by 2010, the company said. Flash-based MP3 players will grow from about 150 million to about 250 million units over the same period while hard-disk-based players remain flat, the company forecasted.

In addition, MP2-capable cellphones will rival MP3 players. Apple could set a standard here if it rolls out a rumored iPhone in 2007, Erensen said.