Disruptive Changes in Consumer Electronics: A new opportunity for Semi growth


ceThe wider disruptive trend of device streamlining is embodied in the class of smart wireless devices (SWD), particularly smart phones and tablets. The phenomenal adoption is changing our entire industry and spurring new growth.



Why is this year's hottest device, the tablet, any different from any other year's 'disruptive technology'?  After all, the semiconductor industry is built upon the certainty of change. In fact, disruptive change in technology is essential.  Dramatic innovative changes open our industry to new design creativity, competition, demand drivers, and the new components that make cutting edge devices possible.  What we have been experiencing this year, and what all indicators point to, is that a truly significant disruption is upon us, impacting both the semiconductor and the electronics industry. 

A positively disruptive opportunity
For the semiconductor supply chain, what is truly interesting is not another possible turf war between OEMs or devices.  What is interesting is the wider disruptive trend of device streamlining that is embodied in the class of smart wireless devices (SWD), particularly smart phones and tablets, and how their adoption is already changing our entire industry.  The device streamlining and disruptive change arose out of the interesting switch in design focus to favor the user's experience and user interface (UI).  Apple's iPad tablet has been successful for many reasons.  From the perspective of the semiconductor industry, the critical, user-based, design decision lead to incorporating the most desired and preferred features and capabilities from smart phones and extending that experience into the tablet device, rather than the opposite direction; a direction that had not seen the success once anticipated of early versions.

ICs: The future of MPUs, GPUs and traditional CPUs
The news that Intel and AMD cut third quarter (3Q10) guidance for revenue and profitability caused many to question whether there was a correlation between this downgrade and the success of Apple's iPad.  Was this evidence that tablets would cannibalize the netbook and notebook segments?  This is one of the more important questions to be asked, simply because it looks at why users are adopting devices and how those devices and their supporting components will trend. 

Despite AMD and Intel’s downgraded guidance, both companies still maintained their global market positions and significant year-over-year (YoY) MPU revenue growth, and more recently Intel announced healthy 3Q10 earning (cf. iSuppli's analysis here, and Intel's announcement here as reported by WSJ.com).

The real impact of tablets on these giants is one of product design direction.  For example, Intel has been promoting improvements in the second generation of its Core processors: Sandy Bridge for notebooks and PCs and Oak Trail for tablets and mobile CE (cf. this recent statement by Intel CEO, Paul Otellini, in Bloomberg).  What these improvements entail is the addition of graphics engines in addition to increased processor performance to make the device more responsive while enhancing the user experience through improved graphics.  These new ICs have combined MPU+GPU processors into a single chipset.  Importantly, these two processors are designed to support the array of smart wireless devices (SWDs), from laptops to netbooks and tablets and on to smart phones, across a variety of OEM and different OS platforms (i.e., Windows 7, Android, and MeeGo).  These new processors will launch in devices during 4Q10 through 1H11, as part of the wave of SWDs set to compete in the rapidly growing tablet and smart phone markets.

As mentioned above, there is the question as to whether the traditional IC houses might find their market share 'cannibalized' by various types of SWD processors, particularly those powered by ARM licensed designs or Apple's own A4.  But more important is the point that giants like Intel are responding to this potential challenge aggressively (cf. this commentary in Forbes recently). 

The timing and release of Intel's newer processors underscores the viability of the challenge to the market while simultaneously giving further momentum to the SWD success through wider component support.  More specifically, the processor coalescing of MPU+GPU is targeted to meet the designs of the new SWDs to compete in the market beginning in 4Q10 and 1Q11.  What is unique to the present set of SWDs is that they are built on smart phone processors and designed around the UI first, rather than traditional netbook or notebook processors and/or designs.

Displays show a clear trend
Focusing on the displays, a critical feature component for the SWDs, we find that size and UI matter.  Looking at the class of displays geared to smart phones and tablets, it is obvious that focusing on the user's experience, needs, and behaviors has paid off for the early leaders.  We see line dedication responding to these successful trends and gearing production to support these segments and devices.

Forecasts call for a continued, rapid expansion for the small- and medium-sized panel and display sector, i.e., thin film transistor (TFT) LCDs.  According to iSuppli’s research here, global shipments of these smaller sized TFT LCDs "are set to rise by 28.1 percent in 2010 to reach 2.3 billion units, up 28.1 percent from 1.8 billion in 2009."  The UI experience that people have come to expect from smart phones and tablets provide high quality images based on TFT-LCD displays.  Smart phones and tablets are forecasted to move well into the double digits for this year and continue to see high double-digit growth through 2014. 

The display standards set by Apple's iPhone and iPad will continue to define the viewing quality expectations of consumers for all devices in the smart phone and tablet sectors.  With the competition in the tablet sector set to heat up during 4Q10 and 1Q11, as new devices by other OEMs are launched, those display manufacturers offering in-plane switching (IPS) TFT-LCD panels, popular with Apple devices, and active matrix organic (AMO) LEDs, popular with Google's Android-based devices, will see the highest demand from suppliers, according to the same iSuppli report.   The watershed effect already occurring in the smart phone sector (cf. below for more on this topic), heralded by LG's recent $49 smart phone pricing, will ensure that inventory of the full range of smart phone displays will have an opportunity to be fleshed out.

Touch screens
For small- to medium-sized devices (primarily tablets, netbooks and mini-notebooks), i.e., 5.0-10.2 inches, total shipments "[…] of touch screens are projected to reach 19.5M in 2010 and 122M in 2016", according to DisplaySearch here. The current demand spikes for tablets, which fall into this 5.0-10.2" range, and demand for the smart phone segment in the 3.0-4.9" range, is causing related ASPs of those sized touch screens to spike as inventory levels tighten.  Balancing this effect is the forecast of additional suppliers moving into this market sector coupled with yield increases; variables that will push ASPs down.

While many are debating the impact of tablets based on concerns of 'cannibalization' of netbooks and notebooks due to tablet popularity, the visibility for touch screens in additional sizes, namely, medium- and large-size devices, is favorable.  Touch screens are primary to the UI, and are being adopted into an array of devices beyond SWDs, notably the application of touch screens in teaching, manufacturing and other industry sectors. 

The technology for touch screens continues to evolve and is projected to progress quickly based on consumer demand for high-quality imaging and UI features.  In other words, although the end market devices may change and vary, for manufacturers of touch screen displays, the forecasts continue to be strong for a diverse array of market sectors. 

Smart phones' watershed moment
So what about smart phones' penetration and forecasts?  The mobile sector is by far the most essential sector to the sizable growth and momentum seen across the semiconductor industry this year.  Smart phones are behind a significant share of the growth.  An important reason for this growth is that smart phones have become an integral part of users' daily life.  Smart phones have become what's been termed a 'commoditized necessity', moving into the 'need-to-have' rather than the 'nice-to-have' category of purchases.

The integration of ICs onto a single chip can easily find its roots in the success of the smart phone segment.  The migration of the smart phone chipset into Apple's iPad, as a result of the design around the UI, is essential to understanding what has made this tablet such a wildly successful device.  As offered above, the switch in design to focus on the user's experience rather than looking at how to revamp netbooks/notebooks again, is critical to the overall success of tablets.  Apple was also already working from the initial iPhone success of having integrating the capabilities of micro-electromechanical systems (MEMS) into the UI; a design move that pushed iPhones, and smart phones more broadly, to a new level (cf. this article from EETimes.com). With MEMS supported UIs, users are now able to experience a new set of features and engage their devices in exciting new ways. 

Taking the MEMS-based UI experience to the tablet device category created an initial watershed phenomenon.  No longer the sole domain of smart phones, the feature- and graphics-rich UI has opened a new set of technological designs and innovation pathways to be explored for devices other than smart phones (i.e., what was called 'Slate PCs', now 'Tablets', and therewith challenge the viability of netbooks for higher-end CE devices).  Along with these innovative technology requirements, the opportunity for new companies to challenge even the giants has opened (e.g., this article from WSJ.com)

The end product design changes reverberate into changes to chipsets, batteries, displays, and on to service providers and operating systems.  Taken together, this is the disruptive change that is breathing new, exciting opportunity into the semiconductor industry.  Intel, the bellwether for chip design, fully recognizes the importance of designing for the user's experience, as reiterated by Justin Rattner, Intel's Chief Technology Officer, in this interview with ComputerWorld: "It was our work on smart TV; emerging markets and the Classmate, and our work in digital health.... All three are driven by how people relate to the technology. […] Instead of putting a PC down in front of them and saying, 'Look, it's Windows 7.' We wanted to see what they need."

Semi's new opportunity: Device streamlining and IC design
As we've considered throughout this article, the new device category of tablets present a positive, disruptive change to the semiconductor industry.  In response to the dramatic adoption rate of Apple's iPad, in particular, there are significant changes rippling through the industry, some quietly, some abruptly.  What is important is the dynamic nature of technological innovation, i.e., disruptive change that is being spurred by the smart phone and tablet devices, and the resulting demands on next generation devices now being made by consumers.

The success of the tablet sector can be directly linked to the success of a variety of OEMs, from chip manufacturers to end market device designers that recognized and fronted the importance of the UI and the user experience.  Apple's innovative design of its tablet based on its popular smart phone was a critical, disruptive moment that has changed the direction of the semiconductor and electronics industries.  Whether or not Apple holds onto the leader position in tablets in general or in particular market sectors, is not as important as the ripple effect that the immense success of their devices is having on our industries (and on consumers, more generally). 

Already we have seen Intel's support of competing tablet and smart phone OEMs with their dedicated and improved Core processors for these device segments (cf. also this statement by Intel's CEO, Paul Otellini, here from Bloomberg).  Intel also recognized the importance of the user in designing their chipsets.  Similarly, in panels we have seen that IPS TFT LCDs and AMOLED technologies that support the high-resolution graphics for touch screens are leading, guiding investments and manufacturing forecasts.  Demand for these sizes and types of displays is strong and forecasts are for high growth based on demand from the SWD sector, from high- to low-end. 

Additionally, in the financial analyses of the semiconductor and electronics industries, we are seeing a downgrading in value of those companies not in a market position and/or not able to diversify to support the components necessary for the forecasted wave of SWD growth (e.g., keyboards, hinges, and even some encroachment to DRAM, to name just a couple).

What is going on and why is it important?
Although Apple's iPad is not the first tablet device, it is by far the most successful.  With the iPad, Apple successfully leveraged a suite of MEMS and the touch screen UI with the Apps model and dedicated OS.  As a result, a host of new user experiences were adopted by millions of consumers which have lead to a positive disruption for components and devices in the semiconductor and electronics industries, from OEMs to chip manufacturers and IC design houses.

The success of this new design approach is evidenced in the penetration into all sectors of the semiconductor industry, and is further etched in the historical numbers around its adoption rate:

iPad sold three million units in the first 80 days after its April release and its current sales rate is about 4.5 million units per quarter, according to Bernstein Research. This sales rate is blowing past the one million units the iPhone sold in its first quarter and the 350,000 units sold in the first year by the DVD player, the most quickly adopted non-phone electronic product. (as cited in this report from CNBC)

Finally, the pervasiveness of the changes brought to the semiconductor and electronics industries by these new designs are moving equally quickly to the above adoption rates.  Smart phones are already at a watershed point.  Over the next two quarters, we will have a proliferation of numerous OEMs' tablets available in the CE space and moving into other market sectors, such as corporate and healthcare, most notably. 

As this device cross-over permeates various end market sectors, from CE to corporate and industry, additional functionality will also arise.  These added functions and features will be the result of the innovative designs and technologies being presently worked upon and will provide a new set of opportunities for growth and expansion for the semiconductor industry and supply chain.

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