It's profits that matter, and high prices will not lead to high profits if costs are too high. That is why the technique of branding, discussed in my last column, does not always pay off as a means of driving excess profits in the semiconductor industry. Companies need to recoup the costs of the pricing mechanisms they employ.
With the profit caveat in mind, what are some other ways that semiconductor vendors can maintain average selling prices? Well, one way is to simply pack more functionality and performance into a chip. Unfortunately, since higher integration and performance are the rule rather than the exception for the semiconductor industry, this practice will not drive excess profits. A second, and more effective, practice is offering a suite of services with semiconductor products.
Services come in many forms. When thinking about the services vendors can bundle with their chips, start by separating services into tangibles and intangibles the way that traditional services firms do. It is critical to identify those services that are intangible. The more intangible the service, the harder it is for competitors to copy. The harder the service is for competitors to copy, the more likely the service will remain differentiated. The more differentiated the service, the more likely it is to allow vendors to charge more than it costs to provide the service.
Prominent examples of tangible services include design services, intellectual-property libraries, and packaging and test services. Unfortunately, it seems that foundries, FPGA vendors and ASIC houses continue to brainstorm new
tangible services. This leads to an endless cycle of innovate-copy, innovate-copy, with no vendor reaping any profits from the endeavor. Tangible services are table stakes.
Instead, vendors should concentrate on developing intangible services. For a foundry or ASIC vendor, an intangible service would be qualifying a product on two geographically isolated fabs to reduce supply risk. This falls into a broader group of intangible services for risk management. For FPGA vendors, a good example would be co-locating application engineers at the customer's site. Generally, the more human the interaction is between customer and vendor, the more intangible the service.
With semiconductors becoming increasingly commoditized, there will likely come a day when all profits are derived from services.
Jeremey Donovan (jeremey.donovan@gartner.com) is chief analyst at gartner dataquest.
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