Mask ROMs will face game fizzle

Electronic News, July 17, 1995 by Anthony Cataldo

MOUNTAIN VIEW, CALIF. - As the home video game industry moves toward CD-ROM-based machines, mask ROM suppliers are expected to face their first year of flattening sales as their steady diet of cartridge game consoles starts to fizzle.

The changing market landscape - marked by plummeting average selling prices - has prompted suppliers to look for new uses for the non-volatile memory products as they wean themselves from their mainstay application.

Between 60 and 70 percent of the $1.9 billion in mask ROMs sold annually are used to store code for video game cartridges, according to research and consulting house In-Stat of Scottsdale, Ariz. Being so closely coupled to the games market is making suppliers vulnerable to the changing games market, expected to shift from cartridge games to CD-ROM-based games with the onset of next-generation 32- and 64-bit systems.

To be sure, the mask ROM business grew last year from 410 million units to 417 million units shipped. But the strong demand for semiconductors "may be masking some underlying problems in the mask ROM market," said Mike Griffith, In-Stat's senior analyst for non-volatile memory products.

"The real problem for mask ROMs is that their primary market is largely going to go away," Mr. Griffith said. "There's going to be a paradigm shift away from cartridge-based games to CD-ROM-based games which is in progress right now."

This year already the number of mask ROMs consumed in Japan, the hotbed of cartridge manufacturing, has declined more than 40 percent, falling from $112 million worth of units in February to $65 million in March, Mr. Griffith said.

Game makers are under pressure to keep pace with PCs, which has taken on more of a role as a game platform now that CD-ROM drives are considered a standard peripheral, Mr. Griffith said. But at the same time, the game industry is hesitant to rapidly convert to CD-ROM systems to avoid alienating the large installed base of cartridge systems, sources said.

"There's a large base of units that still need software," said Karen Hawkinson, product marketing manager for mask ROMs at Sharp Electronics. "There will always be an existing base until these people switch to CD-ROM."

Still, she said that "a couple of accounts" in the U.S. have already indicated they will convert to CD-ROM this year. Sharp, which last year expanded its mask ROM business 22 percent, expects to grow the mask ROM business between 10 and 15 percent in 1995. "This year our quantities will have to go down because of the switch to CD-ROM and next year it should decrease even more," she said.

Sharp last year was the top supplier of mask ROMs worldwide, with $426 million in sales, 22 percent more than in 1993. NEC, whose sales fell 2.4 percent over the same period, remained the number two supplier with $283 million in revenue. Samsung, meanwhile, was ranked third with $268 million, a 17 percent jump from the previous year, according to In-Stat.

Today, volume mask ROMs are produced in 4-, 16- and 32-bit densities, with 16-Mbit devices taking the lion's share of the games market, Mr. Griffith said. "One would see a softening in demand for the 16-Mbit densities," he said.

Japanese memory suppliers, already beleaguered this year by a strengthening yen, are even more at risk of losing sales because of their strong ties to Japan-based Nintendo and Sega, the top two game box makers, sources said.

But observers noted that the shift to CD-ROM-based will happen gradually, giving mask ROM suppliers enough of a time cushion to revamp their product line and mine for new markets.

Also, the cost of CD-ROM-based game boxes, which average around $399, is still considered too expensive for consumers. The boxes will have to be priced below $200 to stimulate a crossover to systems that use CD-ROMs, which may not happen until 1997. "Pricing is really the key to the transitional period," Mr. Griffith said.

But game software developers have another motivation to convert to CD-ROM - lower production costs. The cost of making a cartridge is between $18 and $20 today, whereas a CD-ROM title costs between $3 and $4 to manufacture, Mr. Griffith said.

In light of the shrinking games market, many mask ROM suppliers are trying to stay ahead by looking toward new markets and continuing to develop the technology. Suppliers hope to exploit the inherently lower prices of mask ROMs to gain a toehold in expanding markets.

Office automation equipment is the second leading application for mask ROMs, and suppliers are betting that set-top boxes, cellular phones and personal digital assistants will start snapping up the one-time programmable devices.

Samsung, which sells 30 percent of its mask ROMs to the games market, said office automation equipment accounted for most of its mask ROM growth in 1994. Because many non-volatile memory vendors are shifting away from EPROMs to hone their flash technology, there is now a gap in low-cost one-time programmable memories that mask ROMs have helped fill, said Zareh Samurkashian, senior product marketing manager for Samsung.