Fabless firms outpace IDMs in costs, gross margins

In the market for core silicon — of which iSuppli (El Segundo) defines as consisting of application specific integrated circuits (ASICs), application specific standard products (ASSPs) and programmable logic devices (PLDs) — fab ownership no longer appears to be a prerequisite for success.

"In fact, with the transition to 90-nm silicon built on 300-mm wafers, fabless core-logic suppliers will enjoy some added benefits that will propagate throughout their financial results, from increased sales to higher margins," according to iSuppli. "Integrated device manufacturers (IDMs) and foundries will benefit as well, but likely to a somewhat lesser extent."

iSuppli compared the gross margin performance by four fabless core-silicon providers — Altera, Broadcom, Qualcomm and nVidia — with two IDMs, STMicroelectronics and LSI Logic. Taiwan Semiconductor Manufacturing Co. Ltd., the leading foundry, is also included for comparison purposes.

In general, the fabless companies show substantially higher gross margins than the IDMs. This margin gap reflects the fact that a finished semiconductor product is really the sum of many smaller products, including the intellectual property (IP).

"The value of this IP is usually much higher in core silicon applications than the chip itself and other physical components such as packaging and test, and consequently commands a higher margin," according to iSuppli.