Data Centers Suck In Chip Makers

The data center business is becoming so massive it is bending the technology market around it like a blue star warps space-time. Companies are merging and colliding as they hurtle to find stable orbits circling the market. Consolidation activity in just the last few weeks involves EZChip, IDT, PMC-Sierra, Mellanox, Microsemi, Skyworks and ZMDI.

Even the largest IC and component companies in the cosmic neighborhood are no match for the data center market's pull, including Qualcomm and Avago/Broadcom.

But none bigger than Intel Corp. (Nasdaq: INTC).

Intel already thoroughly dominates the market for server processors. Now it's looking to expand its reach deeper into the data centers with storage and memory products.

Intel got out of the memory market in 1985 when DRAMs became commoditized. But every once in a while a new application comes along with performance requirements that can best be satisfied by new memory and storage technologies. These are custom opportunities that are often able to sustain the large profit margins Intel typically pursues.

Data center equipment represents one such opportunity, and Intel is jumping on it.

Intel last week announced it plans to spend up to $5.5 billion to convert its aging Fab 68 microprocessor plant in Dalian, China, to make NAND chips -- non-volatile memories particularly suited for "any device, application or service that benefits from fast access to large sets of data," as Intel phrased it.

The chips are going to be based on the company's 3D XPoint memory cell technology, and will likely also incorporate another recent Intel innovation, FinFET transistor technology. These chips could be used both as cache in servers and to replace disk drives for storage.

Intel's acquisition of Altera Corp. (Nasdaq: ALTR) serves a complementary purpose. Altera's FPGAs are popular for use as controllers for SSDs (solid state drives).

Memory ICs all tend to eventually get commoditized, but if Intel keeps innovating with these memories and/or with the process technology required to make them, there are very, very few companies that have both the technical prowess and the economic resources to keep up.

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Which brings us to Avago/Broadcom and Qualcomm, the next two biggest semiconductor companies after Intel.

Avago Technologies Pte. is currently supplying the data center market with SSDs and SSD-based storage, along with optical interconnect and other products.

Avago purchase of Broadcom Corp. (Nasdaq: BRCM) will beef up its presence in the data center market. The maneuver gets Avago Broadcom's popular 10G Ethernet switches. Broadcom's new 25G Tomahawk is currently sampling with key cloud service providers and communication equipment OEMs, CEO Scott McGregor said on Tuesday during the company's Q3 analyst conference. It will take about a year for products based on the Tomahawk to hit the market, he said.

Broadcom is also developing a new "Vulcan" line of 64-bit ARM server processors, with which it hopes to chip away at Intel's hegemony in the server market. There's been little news of Vulcan, however, since the merger was announced.

Qualcomm Inc. (Nasdaq: QCOM) also thinks that Intel has server silicon market share to lose, and recently introduced its first ARM processor aimed at the server market. The company recently allied itself with Xilinx and Mellanox; the three have complementary products for data center applications. (See Qualcomm Takes on Intel With Server SoC.)

Integrated Device Technology Inc. (IDT) (Nasdaq: IDTI) on Monday bought privately held ZMDI (Zentrum Mikroelektronik Dresden AG) for $310 million in cash. ZMDI's strength is in one of the few other growth areas for semiconductors -- automotive, but IDT also gets ZMDI's line of digital power products for data center applications.

Three weeks ago, Mellanox Technologies Ltd. (Nasdaq: MLNX) announced its intent to buy EZchip Technologies Ltd. (Nasdaq: EZCH) for $811 million (see Mellanox to Buy EZchip). Mellanox said the acquisition furthers its strategy to become the leading broad-line supplier of intelligent interconnect solutions for the software-defined data center. EZchip brings expertise in security, deep packet inspection, video, and storage processing, which Mellanox said will complement its portfolio of components for 10, 25, 40, 50, and 100G interconnect.

One of the biggest reasons that Skyworks Solutions Inc. (Nasdaq: SWKS) is buying PMC-Sierra Inc. (Nasdaq: PMCS) is a desire to gain a slice of the data center market. PMC-Sierra's portfolio includes controllers for a range of memory and storage devices used in data centers, along with some switches and drivers relevant in the market.

Microsemi Corp. clearly feels the same need to target the data center market, and put a bid -- a somewhat higher bid -- on the same company that Skyworks did. Other than more money upfront, it's unclear what would be in it for PMC-Sierra. If as expected PMC-Sierra accepts Skyworks' original offer, Microsemi may find that it has put itself into play.

Some companies aren't trying to get big to compete, true. Instead, they are going after niche where they intend to excel. Cavium Inc. (Nasdaq: CAVM), for example, is getting notice for its ThunderX ARM processors. On the other hand, Cavium's approach is inspiring speculation that it is -- or should be -- a takeover target.

— Brian Santo, Senior Editor, Components, T&M, Light Reading