Chips on the Cloud

Semiconductor majors have never before been as quickly commoditized as what has happened in the cloud arena. Though the market space is massive - for instance, NVIDIA wants to clock $1 billion in revenue (in the next two years) from cloud alone, the positioning from most semi majors is not very clear. Why would you pick one from the other, except for pricing?

Consolidation in this sector underscores this aspect. The $37 billion acquisition of Broadcom by Avago and the ~$15 billion courting of Altera by Intel, enunciates the power of scale in commodity play. Contrast this with what happened in the Communication, PC or Wireless markets, where the focus of acquisitions was IP based differentiation such as computing to power ratios, or protocol specific applications. Avago CEO Hock Tan has actually stated that Avago and Broadcom may not have the best strategic fit but have cost-cutting potential to build value.

At this point it’s probably fair to speculate that real differentiation will be at the software or SDK level with very little at the core processor level itself, except for custom chip development that Intel, for instance, is driving with its eASIC partnership. Focus therefore for all the semi majors seems to be to improve their profit margins through operational efficiencies.

This still leaves one question open – where will the next big innovation drive in the semi industry come from?