Black Holes Disrupt PC Biz

Electronic News, May 17, 1999 by Hugh G. Willett

A week after unceremoniously dropping its PC microprocessor business into the "been there, done that" file, National Semiconductor still has some explaining to do.

National did say that its PC-on-a-chip technology had been selected for use in a set-top-box being designed by America Online. The design win lends credibility to the market for such integrated solutions, assuming the supplier can meet the low-cost, low- power, fast time-to- market rules of the consumer world, but it still doesn't answer the tough questions. Questions like: How, in the world did you guys screw this one up? How, armed with some of the most valuable intellectual property ever put into silicon; IP that you purchased for hundreds of millions of dollars just a few years ago, did you guys miss the boat on one of the biggest opportunities that has ever come down the pike?

Consider that we have a huge, growing market for microprocessors that are selling, even under extreme pressure, for ten times the price of an average chip. There has been practically no competition for a decade, and the barriers to entry are so high that only two or three suppliers can bring the technology to a market that is looking for alternative suppliers. National is being forced out of a market almost any other chipmaker would give anything to break into, and its getting out at a huge loss. Something is wrong here and there has to be somebody to blame.

I've been accused of looking for any excuse to jump all over Intel for just about any problem in the PC market. Not this time. This time I tried to blame National, but it wasn't that easy.

PC OEMs are losing money too, that's one of the reasons they put so much margin pressure on their suppliers; on some of their suppliers that is. At least one supplier of microprocessors is doing just fine. Intel Corp. is posting tremendous profits each quarter as if it were immune to the market forces that buffet its competitors and even its customers.

Out in space, astronomers theorize, black holes exist in which time and space are twisted and distorted by unseen forces. We can't see these forces but we know they exist because we see their effects on other objects in our universe.

Competitors with good technology that can't compete effectively? A market where a supplier can make huge profits year after year even while its customers are posting losses? None of this makes sense. It's almost as if, just down the road from National, there exists a black hole where the laws of supply and demand don't work and the rules of free market economics have been turned upside down.

The FTC has not yet found anything about Intel's business practices that are non-competitive. I can't say that I have really discovered any smoking guns myself. It's hard to figure out exactly what's going on in the PC market or why Intel is able to break so many basic rules of business and thrive while its competition and its customers go out of business trying to give the market what it wants.

You don't have to see black holes to believe in them, so I guess I don't have to know what kind of unseen forces are disrupting free competition in the PC market to be sure that it's happening. I'm going to keep looking for more evidence and I hope the FTC does too.