Silicon Insider: Inside the Tech Turnaround

Nov. 20, 2003 -- Armies are on the march…

They are shielded by forests and hills, but sometimes you can hear hoofbeats, or catch a flash of polished steel or see a moving cloud of dust.

Most people who operate outside high tech — and many who work inside — don't full understand how a tech boom actually works. The most popular myth is that one morning the digital world arrives at the office, discovers a pile of new orders in the lobby, and the good times are on once again.

A second, more subtle, myth is that once every dozen years, overlaying the natural four-year boom/bust cycle of tech, a revolutionary new technology comes along — the integrated circuit, the PC, the Web — that gooses an interval of good growth into hyper-expansion. The resulting bubble makes a few people super-rich, a bunch of people quite rich, and millions of people furious because they thought they were going to get rich too.

A third, financially oriented, myth argues that what actually occurs is that a key tech company, combining a hot new business with good market timing, goes public. Investors, enamored with a cool new technology in a brand new market of indefinite size, sends the stock through the roof.

This explosive creation of wealth sends shock waves out through both the financial and tech communities. Investors embark on a frenzied search for the next hot offering; venture capitalists see an exit for their existing investments and begin lining them up to go public; and entrepreneurs, seeing the coffers of the VCs finally open again, quick gather teams and prepare business plans to make their own dreams a reality.

Three myths about high tech booms. All are true, yet none is definitive. In truth, all are merely descriptions of the outward manifestations of a tech turnaround. They are not the underlying process. And anyone who waits for these secondary signs to join the game are already arriving too late to make the big score.

Watching the Semis for Signs

What is crucial to understand is the underlying engine that drives all of these visible consequences. That engine is semiconductors and the equipment that builds them.

You don't hear much about chips, beyond the occasional Intel or AMD microprocessor story, mostly because reporters don't like doing semiconductor stories. That's because chips are complicated, based on esoteric technologies and their manufacture is closer to chemical processing than assembly line manufacture. Chips are impressive, but they are not sexy — not like, say, the latest computer game or PC application.

And if chips are only understood by a few reporters, none understands the semiconductor manufacturing industry. It's understandable: when you write about Larry Ellison and Steve Jobs, why would you devote a second to learning the intricacies of wafer sorters, steppers and epitaxy?

But that's a shame, and also a disservice to readers. Because, the truth is that the high-tech industry never enters a boom along a united front, but in a cascade of one industry after another down the value-added chain. And the first snowflake of the avalanche is semiconductor manufacturing. If you keep your eye on that first step you can watch the process from the beginning and see it pick up speed as the months go on.

That's why in this column I predicted the current ramp-up over a year ago. Because that's when I saw the very first, tentative signs of good news at equipment companies such as Applied Materials.

The Real Story

The chain reaction goes like this: Working with the semiconductor industry, the semiconductor equipment companies perpetually push forward the capabilities of their equipment in order to achieve the ever-smaller chip geometries predicted by Moore's Law.

This equipment makes possible the next generation of chips — processors, memory, communications, analog — from the semiconductor companies.

Those new chips in turn have multiple effects. For one thing, they drive the creation of the next, more powerful, generation of existing products, such as PCs, servers and cell phones. They also drive down the price of existing chips — and in doing so embed those older, less-powerful devices into all sorts of new applications, from toys to smart appliances.

Finally, by resetting the price/performance matrix on all chips, these new devices fire the imaginations of designers and entrepreneurs, who identify whole new product and market opportunities ripe for exploitation. And that, in turn, produces the larger, mythical features of a boom described above — new markets with apparently unlimited potential, exciting new technologies and companies, revitalized older companies, a fired-up public and, ultimately, a stock market buoyed by success stories, exciting new offerings and a general optimism about the future.

So what does all of this mean? It means that most of the high-tech headlines you're reading these days — Sun cutting a deal for servers in China, the new large screen iMac, HP's move into television, Oracle's endless pursuit of PeopleSoft, even the pending Google IPO — are, while anecdotally important to investors and employees of those companies, essentially flashy sideshows. The real story right now is further up the food chain. If the chip and chip maker companies are already well into a turn-around, everything else is of secondary consequence.

Luckily, the news is good, which is why I've remained optimistic over the last 18 months, even as many of my peers have played Cassandra. The crucial factor in the current rebound is that both semiconductor and semiconductor equipment companies — in the face of collapsed stock prices, shrinking revenues and profits, and devastating lay-offs — have refused to compromise their R&D investments.

The result is that the equipment companies have stayed the course, kept up with the industry's Technology Roadmap, and brought the new, larger-diameter wafers, the smaller geometry processing equipment and copper interfacing technology on-stream on-time. And that has made it possible for the chip companies, from Intel and AMD to Motorola and the custom shops, to click Moore's Law yet one more time — and announce to the world in the last few months the next chip generation.

Eyes on the Google IPO

That, more than any other factor, is the reason the tech industry is beginning to awaken, why tech stocks have been on the rise for the last six months, and why the semiconductor industry is predicted to grow as much as 20 percent this quarter. It is also why Applied Material's earnings announcement this week is as important as Google's IPO several months from now.

Why is that? Because for the Google IPO to achieve its full potential — and I think that could be as great as the Netscape IPO of a decade ago — it must occur against a backdrop of a new generation of chips, a venture capital industry already placing bets on hundreds of new start-ups and the vanguard of a new generation of entrepreneurs already founding exciting new companies. So far, so good. But we've got a ways to go. Still, the semiconductor and semiconductor equipment companies are on the move. Keep on eye on them between now and the end of the year. If anything impedes their march, the Google IPO will become only an impressive, but momentary, business spike.

On the other hand, if they can continue gathering momentum over the next two months, if VC investments (already picking up speed) kick into overdrive, and you start noticing a lot of executives quitting established companies to "pursue other business interests," the Google IPO will be a watershed event.

And next spring, when the great armies of tech emerge glittering into the bright sunlight, they will be an awesome sight indeed.

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.