Rambling On… Chip Acquisitions and Software Differentiation

When I started Sensory over 20 years ago, I knew how difficult it would be to sell software to cost sensitive consumer electronic OEMs that would know my cost of goods. A chip based method of packaging up the technology made a lot of sense as a turnkey solution that could maintain a floor price by adding the features of a microcontroller or DSP with the added benefit of providing speech I/O. The idea was “buy Sensory’s micro or DSP and get speech I/O thrown in for free”.

After about 10 years it was becoming clear that Sensory’s value add in the market was really in technology development, and particularly in developing technologies that could run on low cost chips and with smaller footprints, less power, and superior accuracy than other solutions. Our strategy of using trailing IC technologies to get the best price point was becoming useless because we lacked the scale to negotiate the best pricing, and more cutting edge technologies were becoming further out of reach; even getting the supply commitments we needed was difficult in a world of continuing flux between over and under capacity.

So Sensory began porting our speech technologies onto other people’s chips. Last year about 10% of our sales came from our internal IC’s! Sensory’s DSP, IP, and platform partners have turned into the most strategic of our partnerships.

Today in the semiconductor industry there is a consolidation that is occurring that somewhat mirrors Sensory’s thinking over the past 10 years, albeit at a much larger scale. Avago pays $37 billion dollars for Broadcom, Intel pays $16.7B for Altera, and NXP pays $12B for Freescale, and the list goes on, dwarfing acquisitions of earlier time periods.

It used to be the multi-billion dollar chip companies gobbled up the smaller fabless companies, but now even the multibillion-dollar chip companies are being gobbled up. There’s a lot of reasons for this but economies of scale is probably #1. As chips get smaller and smaller, there are increasing costs for design tools, tape outs, prototyping, and although the actual variable per chip cost drops, the fixed costs are skyrocketing, making consolidation and scale more attractive.

That sort of consolidation strategy is very much a hardware centered philosophy. I think the real value will come to these chip giants through in house technology differentiation. It’s that differentiation that will add value to their chips, enabling better margins and/or more sales.

I expect that over time the chip giants will realize what Sensory concluded 10 years ago…that machine learning, algorithmic differentiation, and software skills, are where the majority of the value added equation on “smart” chips needs to come from, and that improving the user experience on devices can be a pot of gold! In fact, we have already seen Intel, Qualcomm and many other chip giants investing in speech recognition, biometrics, and other user experience technologies, so the change is underway!