Silicon Insider: Happy Days Are Here Again

— Autumn's here. The kids went back to school, caught the first bug and are now downstairs sniffling and watching Princess Mononoke. And gridlock is again growing on the freeways of Silicon Valley.

Time to make some predictions…

I've had the unusual opportunity over the last two weeks to hang around at the very heart of high tech: the semiconductor industry, the chemical wellspring from which the entire digital world flows. If you want to know the future, this is where you have to be, in the hallways of Intel, AMD and Motorola, and deeper yet, in the offices of semiconductor equipment manufacturers, such as Applied Materials.

These are keepers of Moore's Law, and that Law remains, for good or bad, the metronome of modern life. When the Law clicks over to the next generation of chips, as it is doing right now, you can anticipate an explosion of new products and industries across the face of tech, and sometimes across society as well. And when chip sales slump you can assume the rest of the economy will soon be in trouble as well.

So, what are the chip guys saying these days?

A few weeks ago I found myself on stage interviewing one of the semiconductor industry's greatest legends, Jerry Sanders, founder and chairman of Advanced Micro Devices. One can make the somewhat cynical argument that AMD is the world's most important company, if only because its very presence forces Intel to be honest (and thus has probably saved the world billions of dollars), and Intel in turn forces Microsoft to actually move its technology forward (which it would never do otherwise). That, in turn, makes the world a better place.

Sanders himself is an extraordinary larger-than-life figure: the kid from Chicago who goes to Hollywood to become a movie star and instead becomes a supersalesman, the most outrageous character in a company, Fairchild, filled with outrageous characters. He founds AMD on a shoestring, challenges Intel, the most successful company on the planet, watches his company almost die nine times, and ends up beating his adversary to at least a technical draw.

Meanwhile, Jerry lives in Bel Air, hangs with his old Hollywood crowd and commutes up to the Valley when needed. More than even Jobs or Ellison, Sanders is the Silicon Valley's greatest showman, and beneath the flamboyant veneer, one of high tech's best minds.

What Jerry is saying these days is that the next boom is right on front step. All of the economic factors — tax cuts, low interest rates, healthy capital markets — are in place. Meanwhile, in the chip world, the big semiconductors bit the bullet, spending most of their retaining earnings over the last two years on upgrading their operations and increasing capacity for the next generation of chips. They are ready to rock 'n' roll.

A New Boom Ahead

Leading the charge, says Sanders — not without a little self-promotion for AMD — will be the new 64-bit microprocessors. These processors will be so powerful, and yet so cost competitive, that in short order they will ignite revolutionary changes first in the industrial markets and then in consumer products.

For the latter, these new chips, combined with broadband, will make possible on-demand movies, a new generation of interactive games, powerful modeling programs and all of the other applications eagerly anticipated with the emerging second-generation Internet.

In making these predictions, Sanders quoted his former employee and occasional competitor, the fiery T.J. Rodgers, chairman and CEO of Cypress Semiconductor. Said Rodgers, "The expansion of 2003 is the prelude to the Boom of 2004."

Sitting in the audience, nodding in agreement was another chip pioneer, Wilf Corrigan, now chairman of LSI Logic. On stage, Sanders predicted 10 percent growth for the semiconductor industry over the next 12 months. Corrigan has predicted 20 percent. One evening I ran into George Scalise, head of the Semiconductor Industry Association, who has publicly predicted similar growth.

So what does this mean? Good news. By the end of this year, the semiconductor industry will be thrumming along, bringing new capacity on-stream.

This will have two effects. It will drive down chip costs across the board, reducing in turn system costs — i.e., cheaper Gameboys and PCs. It will also propel both the creation of whole new products and the upgrading of existing machines. And that will have a multiplier effect across high tech and the rest of the economy.

This will be followed by the arrival of a new generation of more powerful processors. These devices are already being designed into not a whole new generation of electronic systems, but, given their extraordinary power to process gigabytes of data in real time, they will kick off a land rush of new applications in the defense, industry and perhaps most of all, consumer arenas.

The various media have been awaiting this revolution with both excitement and terror for five years now. It was the impetus behind all of those Silicon Valley/Hollywood joint ventures of recent years, as well as the RIAA assault on downloaders. And now it is here. Brace yourself for an entertainment revolution; as well as hundreds of new products to play them. All of that unused fiber capacity out there is going to quickly filled up and as Sanders predicted, wireless may become the hottest market of all.

Fun, at Last!

Somewhere in all of this, the capital markets will finally become receptive to the next big IPO. I'm guessing December 2003. When that happens, all hell will break loose as many good but undercapitalized companies waiting in the wings file their prospectuses. That will burst the logjam of money at venture capital firms. The VCs will finally rediscover their lost courage and begin funding early stage start-ups. That will cause a massive hemorrhage of talent from the big tech companies that have only held onto their abused employees because those people have had no place else to go. Now they will.

The new boom will be full-throated roar by June 2004. Will it be as big as the dot-com bubble? In terms of dollars, yes. But not in terms of new companies or market capitalizations. Bubbles like the last one only come along once per generation (thank God). Except in software and content, where the sky is the limit, this is likely to be a much more measured boom with fewer, more veteran players.

Fewer new companies will also likely be created, but they will be better run. There will be a few newly minted billionaires, but this time around the wealth will likely be spread amongst employees and loyal shareholders.

Having said that, I should add that there is, as always in tech, the X Factor. It is impossible to know if there is a Steve Wozniak or Nolan Bushnell out there who will take all of these emerging factors and graft them together into the killer app or product that changes the world. I'm willing to bet he or she is out there, but I have no idea how to quantify their presence.

But even without that icing on the cake, I still predict a very good couple of years for high tech — and thus the U.S. economy.

When will it end? Enter another chip industry legend, Morris Chang, CEO of Taiwan Semiconductor Manufacturing Co., the man who transformed tech with the creation of the chip "foundry." Nobody knows chip mass production better than Chang. Last week, he predicted that China's arrival as a major semiconductor manufacturer will, like the arrival of Japan, Taiwan and Korea in the market over the last 20 years, cause a glut of overcapacity and trigger the next chip industry recession.

When? Chang predicts 2005. I think, given human nature, 2006. But in the essentials, I would never dispute Chang's wisdom on these matters.

So, put that into the equation as well: As chips are a leading indicator, they will likely slump about 6 months before the rest of electronics industry, 9 months before the economy as a whole. From that, I would predict a good finish to 2003, a great 2004, an overheated 2005, a scary and slightly insane 2006 and a recession in 2007 … just in time for the next presidential election.

In the meantime, it's going to be fun. At last!

Michael S. Malone, once called “the Boswell of Silicon Valley,” most recently was editor-at-large of Forbes ASAP magazine. His work as the nation’s first daily high-tech reporter at the San Jose Mercury-News sparked the writing of his critically acclaimed The Big Score: The Billion Dollar Story of Silicon Valley, which went on to become a public TV series. He has written several other highly praised business books and a novel about Silicon Valley, where he was raised.