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Cirrus' digital entertainment bet may pay off

Posted: 20 Mar 2002 ?? ?Print Version ?Bookmark and Share

Keywords:digital entertainment? PC? consumer electronic? decoder? optical-drive controller?

It may be too soon to tell whether venerable Cirrus Logic Inc., founded in 1984 as a pioneer in the fabless movement on the strength of its PC graphics chipsets, can ride the digital consumer wave to another crest of prosperity. But early reviews of CEO David French's bold move appear for the most part to favor Cirrus' chances.

Last May, Cirrus announced it was withdrawing from the magnetic-storage IC market. That market, in the second quarter of 2001, had accounted for a hefty 62 percent of Cirrus' revenue. But French decided to bet everything on networked digital entertainment, outlining a vision of consumers using wireless networks to move digital content around their homes.

Analysts said the move from a largely PC-centric product mix to a consumer electronics focus is nearly unparalleled.

"Rarely have I seen somebody in the history of the U.S. semiconductor industry make such a 1800 shift," said Mike Paxton, chief multimedia analyst at Cahners In-Stat Group. "Most companies just stick with what they know and almost have to be driven out of business before they are willing to make a change. But Cirrus has started what appears to be a fairly successful strategic shift."

The opportunity for Cirrus derives from the seismic shift to digital audio and video technologies. Earlier consumer electronics products were based largely on analog components and mechanical subsystems. Today's DVD and MP3 players, as well as surround-sound audio products, rely mainly on the digital semiconductor content: decoders, optical-drive controllers, DSPs and microcontrollers, as well as DACs and other mixed-signal technologies.

Protecting margins

Those are all areas where Cirrus can protect margins by fostering system-on-chip-type integration, "with Moore's Law as a following wind at your back," said Eric Ross, a securities analyst at Thomas Weisel Partners.

Ross recalled a Cirrus product mix that "five years ago was a real mishmash, with HDD [hard-disk drive] devices, PC graphics, sensors?a hodgepodge of legacy products that, until French arrived, had absolutely no synergy."

Will Strauss, president of market research firm Forward Concepts, said French, who earlier ran the DSP operations at Analog Devices Inc., "has always been gutsy, and it took real guts to make the decision to get out of the magnetic-storage IC business."

On arriving at Cirrus in 1998, French faced an earlier challenge: how to extract the company from partial ownership of fabs operated by Lucent and IBM. Although today it has $150 million in cash, "Cirrus was damn near bankrupted" by a management effort to secure its own fab capacity, Strauss said. By striking deals with Lucent and IBM to own parts of respective fabs in Orlando, Florida, and Fishkill, New York, then-CEO Mike Hackworth had "created financial obligations that, when the market turned south, amounted to hundreds of millions of dollars," Strauss said. "And Cirrus didn't have it."

French got out from under those deals and then turned his attention to product strategy. By melding Cirrus' expertise in delta-sigma converters with its proprietary DSPs, disk controllers and other pieces of the digital consumer puzzle, French struck upon digital entertainment as the focus.

Since then its numbers have been improving, noted In-Stat's Paxton. Cirrus recently said its revenue from "ongoing operations" (excluding hard-disk-drive chipsets) would be at or slightly above its $81 million to $83 million guidance range for the current quarter, with gross margins approaching 46 percent.

Ross said he believes Cirrus will be able to protect its margins in digital consumer far more successfully than in storage chips. "We think digital entertainment will be the fastest-growing semiconductor market over the next five years," Ross said.

Strauss pointed to World Semiconductor Trade Statistics numbers that show the consumer IC sector has fared relatively well amid the downturn.

French acknowledged that Cirrus faces plenty of competition in the digital entertainment sector, ranging from STMicroelectronics to smaller companies with a digital consumer focus.

"In this industry, you can't shy away from competition. But compared with the smaller, more narrowly focused companies, we have more resources to bring to the challenges. And we are not just going to roll over in the face of competition."

A major issue going forward is the integration of the Cirrus engineering team with those of the three companies it acquired late last year: DVD decoder specialist LuxSonor Semiconductor Inc., encoder expert Stream Machine Co. and wireless home-networking specialist ShareWave Inc. Earlier in 2001, Cirrus acquired Peak Audio Inc., an audio-networking startup.

Common environment

Jason Carlson, now a general manager at Cirrus' Crystal Semiconductor division, joined Cirrus after it acquired a company Carlson had headed: Audio Logic Corp., a Boulder-based pioneer in digital, or Class D, amplifier circuits. Carlson said the four engineering teams have used different cores, including Cirrus' proprietary DSPs as well as controllers from MIPS Technologies, ARM and ARC Cores.

Further, engineers from ShareWave, LuxSonor and Stream Machine have used different design tools. A committee of engineering managers is working to come up with a common design environment that will support Cirrus' SoC integration strategy.

"Hopefully a year from now we'll have everyone using the same tools," Carlson said. "We are looking at all the different cores and will choose what works best for the application; we don't want to have a not-invented-here mentality."

The three acquired companies gain some benefits from being part of Cirrus, which puts its head count at about 1,200 after an October layoff of several hundred people. "There are advantages to being midsize," Carlson said. "We have a dedicated team working on process issues with the foundries, and as a larger buyer we get better terms when buying CAD tools or IP [intellectual-property] libraries. And the employees at the companies we acquired all felt good when we explained that there are 600 sales reps for Cirrus silicon around the world."

Cirrus, in turn, got a major boost when it discovered, during the acquisition of LuxSonor, that many of LuxSonor's employees were based in China. In total, Cirrus now employs about 70 people in Shenzhen province and 30 in Beijing. That's important, Carlson said, "because China is key to the future of the consumer electronics business, and DVD absolutely is a market that China is going after."

Many of the lower-cost DVD players sold at retailers such as WalMart or Best Buy are designed and manufactured in China. The Chinese market itself accounted for DVD shipments of 4.5 million units last year, according to Cahners In-Stat. That compares with 12.8 million units shipped in the U.S. market last year.

Integration at the chip level is another challenge. STMicroelectronics early this year unveiled a single-chip solution for DVD players that integrates the controller and the read-channel circuit. Carlson said Cirrus engineers based in Fremont are working on an integrated MCU-plus-read-channel device, and other design teams are tackling audio integration. "When you consider multichannel audio, multiprocessor chips with two or three processing cores on the same chip?in some cases with memory sharing?are an obvious solution. It's just a matter of timing and product partitioning."

With Cirrus' strength in D/A, Carlson said, customers can expect to see more of the digital-to-analog function integrated with the digital controller, in part so the D/A circuitry can "leverage a much more powerful compute engine on the decoder. That is being worked on."

Boost from Bose

Cirrus gained an important design win at the high end when Bose Corp. used its DVD chip set for Bose's 1-2-3, an integrated DVD player and audio/video receiver (AVR) that is Bose's first DVD-based product.

Before this year, Cirrus had little presence in the DVD video IC market, which is dominated by Zoran, ESS, STMicroelectronics and two major Japanese vendors: Sony, which supplies its internal demand, and Matsushita Electric. Ross of Thomas Weisel said he expects Cirrus to gain about a 10 percent share of the DVD video decoder market eventually but "at the higher-performance end, where margins are somewhat protected."

Cirrus gained key knowledge of the DVD market by working on the servo motor and drive controller silicon for the Microsoft Xbox game machine. LuxSonor added a proven line of video decoders that had achieved several design wins before the Cirrus acquisition last October.

"Legacy audio has been our advantage, and we have design wins at 10 out of the top 11 AVR makers," Carlson said. "We got the Bose design win based on our audio capability and our development environment, combined with what we can now do in video, the ability to handle single-stepping frames and the GUI navigator. We expect that a year from now, video and audio will be equal pieces of our DVD business."

Increasingly, the market will switch to the integrated DVD player with AVR, where Cirrus' strength in audio positions the company well. About 30 percent of purchasers of DVD players go on to buy surround-sound audio systems.

As the integrated DVD-AVR market takes off this year, Carlson said Cirrus' goal is to bring "the latest and greatest audio from the leading edge down to new price points."

That strategy requires backup from innovative products, and here marketing vice president Lew Paceley points to the Cirrus line of Class D (digital) amplifier circuits, which are smaller and less power-hungry than their analog forebears. The Class D amps enable audio system designers to remove "a really mondo heat sink" and create much "lighter and sleeker" AVR units, Paceley said.

Analysts seem to agree that with the DVD market booming, Cirrus will experience healthy revenue growth over the next few years. Further out, the company's success depends in part on whether people are attracted to home networks.

Future plans

In the ShareWave acquisition, Cirrus gained perhaps the only company focused entirely on wireless networking in the home, based on the 802.11 standards. A user could pop a DVD into a player or, alternatively, use a broadband pipe such as a cable modem to download audio and video files to a "fat" set-top box or a home media center with a magnetic or DVD-RW storage media on board. Those files could be compressed, using the Stream Machine encoding technology, and sent via the wireless network to "thin" consumer systems (based on LuxSonor decoders) in different parts of the home.

One attraction is that consumers could avoid the tangle of wires that many find both unsightly and difficult to install.

Cirrus claims that the ShareWave 802.11b approach does not disrupt a cordless phone operating in the nearby 2.4-GHz band. It "can recover from the cordless phone by channel shifting," Paceley said.

At last January's Consumer Electronics Show, Cirrus demonstrated simultaneous transmission of two compressed video streams over a wireless network.

But Paxton at Cahners In-Stat said the home networking strategy presents risks. "The industry as a whole is not convinced that consumers will want to move content around in the home," he said. It will be some time before Cirrus profits from its position in home networking, Paxton said, partly because of many consumers' ease-of-installation concerns. Paxton also cited the "pile-on factor, as big companies such as Intel enter new markets, including wireless networking."

Clark Jernigan, a former Cirrus executive who now works as a venture capitalist at Austin Ventures, said wireless home networking involves a host of quality-of-service challenges. "It's a non-trivial task," he said. "Handling dropped packets and out-of-order packets requires buffering; it's a difficult problem, and ShareWave has done a fantastic job."

The unanswered question, Jernigan said, is when consumers will be ready to pay for it.

? David Lammers

EE Times

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