Chip Makers Seek Less Costly Options To Chasing Moore's Law

A guiding principle of chip-industry innovation - improving the speed of new semiconductors by altering the way they are built - may be ceding ground to less costly alternatives.

Over the past few years, semiconductor companies like Intel Corp. (INTC) have started pouring time and money into software, which can often improve the performance of chips more cheaply than adding transistors to their circuitry. Others, like SanDisk Corp. (SNDK), are focusing on redesigning chips, rather than just the manufacturing process.

The approaches suggest that sometime soon conventional practice will be turned on its head. For four decades, the chip industry has tried to make ever-smaller chips with more processing power. That resulted in roughly a doubling of performance every two years, a phenomenon known as "Moore's Law."

The reasons for the change have less to do with technology than with economics. The equipment needed to make smaller chips is becoming too expensive for many companies to use and still turn profits. At the same time, many new devices using semiconductors, everything from washing machines to toaster ovens, don't require chips that are upgraded at the rapid speed seen in one generation of computers to the next.

"People are looking for the most cost-efficient way to increase performance," said Gartner analyst Bob Johnson. "It is not automatically by adding more transistors."

The changing dynamics of the industry could require semiconductor companies to adjust their business models, which have been driven by a two-year product cycle. Those changes could include: putting more emphasis on revenues from older generations of chips, building software businesses and focusing on chip design instead of manufacturing prowess.

Already some companies have started. Advanced Micro Devices Inc. (AMD) is focusing on creating software to help program designers get more performance out of its chips. So is rival Nvidia Corp. (NVDA). Roughly half of networking chip maker LSI Corp.'s (LSI) engineers work in software.

Even chip giant Intel, which has the size to continue pursuing Moore's Law, is diversifying. On June 4, Intel said it was spending $884 million to buy software maker Wind River Systems Inc. (WIND).

Software isn't the only strategy chip companies are pursuing. SanDisk is planning to add memory to its chips by stacking individual bits of memory on top of each other, rather than trying to continue shrinking memory cells.

Of course, Moore's Law - the observation originally made by Intel co-founder Gordon Moore that the number of transistors on a single piece of silicon will double roughly every two years - has outlived prophesies of its demise. Innovations in materials and manufacturing processes have allowed chip makers to continue to economically shrink the size of chips, leading to better performance and lower costs.

And the practice is alive with companies that focus on manufacturing, as many companies have decided to specialize in one element of the industry.

Meanwhile, industry giant Intel has pushed forward with both design and manufacturing. In 2008, Intel spent about a sixth of its $37.6 billion in revenues on research and development. In May, Intel Chief Administrative Officer Andy Bryant told investors Moore's Law continued to make sense.

"Moore's Law has shaped and driven this industry for decades," Bryant said. "It's going to continue."

Still, evidence is mounting that the power of the principle is beginning to wane. A new study by research firm iSuppli suggests the pace set by Moore is due to slow. By 2014, the rising costs of manufacturing equipment will make advancements too expensive for volume production, said iSuppli analyst Len Jelinek in his report, "relegating Moore's Law to the laboratory and altering the fundamental economics of the industry."

One result of this realization is chip makers sticking with older chip sizes longer, particularly for less-sophisticated products like refrigerators and other home appliances. It used to be that a new, smaller chip would quickly end the revenue streams from an older, larger chip. But iSuppli said that chips today are generating more revenue for longer periods, even as new designs emerge.

That has made it important for chip makers to offer ways to run existing chips more efficiently through software.

"We are creating an opportunity where innovation goes on top of the silicon, not into the silicon," said Gene Frantz, a research fellow at chip maker Texas Instruments Inc. (TXN).

-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; [e-mail]