The programmable DSP chip market is driven by the communications market, and the wireless market is responsible for 53 percent of unit shipments. Cellular handsets, of course, constitute the largest single sink for DSP silicon and some 416 million cell phones shipped last year. But at least half of those were replacement sets-and therein lies one of the industry's problems. Although new subscriber growth is close to being on track, this year people are hanging on to the old cell phones longer, and it is the replacement market that has taken the biggest hit.

Forward Concepts predicts barely 10 percent unit growth to 450 million cell phones to be shipped in 2001, while the average selling prices for DSPs in those phones will remain steady to down no more than about 5 percent. Part of the ASP stability is brought on by more on-chip memory and increased functionality.

Next year should be brighter as everybody tosses the old units to get new cell phones that will take advantage of 2.5-generation Internet access features (and new third-generation, or 3G, features in Japan).

In contrast to the cell phone doldrums, cellular infrastructure buildouts have only slowed slightly. Basestations are being modified for General Packet Radio Service in both Europe and the United States, and basestations based on Qualcomm's 1XRTT technology are being installed in the United States, Korea and soon, Japan. NTT has already begun installing its W-CDMA 3G basestations in Japan, too. However, there will be delays. We believe that wide-scale 2.5G and initial 3G activation will be pushed out at least a quarter or more beyond present expectations.

The wireline communications market is certainly in the dumps, too. All the major telecom system houses, like Cisco, CommWorks, Lucent and Nortel have seen an incredibly bad first half 2001. In addition, those companies are major purchasers of DSP chips-or at least were until this year. About the only telecom market segment that is exhibiting positive (almost triple-digit) growth this year is the one for Internet Protocol PBX and IP phone equipment based on voice-over-Internet Protocol. The bigger market, for remote access concentrators, access routers and media gateways, was decidedly down in the first half.

The good news is that digital subscriber lines (DSLs) and cable modems based on DSP technology are proliferating, but they still have a way to go to take up the shortfall in analog modem revenues. On the Internet Service Provider side of the phone line, multiline "universal" modems (that can handle T1 streams from the phone company, originating variously from a telephone, a V.90 or V.92 modem, a fax machine or an ISDN connection) are more lucrative opportunities for chip houses.

While the major DSP chip players have all had layoffs and expense cutbacks, much like the rest of the semiconductor houses they continue to invest in R&D and launch new products. The most anticipated product launch this year was for Analog Devices Inc.'s introduction of its Blackfin family of DSP chips based on the Frio DSP core jointly developed with Intel Corp. As the No. 4 supplier of DSP chips and the No. 1 supplier of (DSP-based) DSL chips to the merchant market, Analog Devices' future is closely tied to the recovery of the overall communications market.

Agere Systems is the new name in the DSP market this year. Formerly Lucent's Microelectronics Division, Agere needed to do some belt-tightening shortly after its initial public offering. However, Agere is still the No. 2 supplier to the DSP chip market and the No. 1 supplier of DSP chips for cellular infrastructure, a market that is still exhibiting moderate growth.

Motorola Inc.'s Semiconductor Products Sector seems to have finally got it right with the new leadership in place. It has been organized in a more logical and leaner manner, effectively cutting out a middle layer of management. When the semiconductor market rebounds, we expect Motorola, the No. 3 chip supplier, to perform better in the merchant DSP market than it has in the past.

Texas Instruments Inc., as the No. 1 supplier of DSP chips as well as the top supplier of DSP chips to the cell phone market, will be taking it on the chin this year, perhaps losing another point or so in DSP market share. However, as the cellular market heads for a healthier level in 2002, TI should see substantially higher growth than its competitors, regaining any share shaved this year.

Unfortunately, DSP growth is almost in lock step with the overall semiconductor market train crash, so Forward Concepts forecasts a 25 percent drop in revenue growth in 2001 to $4.6 billion. Overall DSP ASP declined less than 6 percent for the first half of 2001 compared with last year's decline of 9 percent, as overall DSP revenues increased by 40 percent. That indicates that the current DSP market slump has not led to price erosion, usually the case for the DRAM market.

Part of this sad market performance is due to the drop in the U.S economy as measured by the gross domestic product, which grew only 1.5 percent in the first quarter of this year. Second-quarter growth dropped to less than half that figure. Assuming the U.S. economy doesn't drop into a recession later this year, we predict a relatively strong DSP chip growth of 35 percent in 2002.

Will Strauss is President of Forward Concepts, a Market Research Firm specializing in DSPs (Tempe, Ariz.).

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