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Does the Price of Precision Analog Matter?

The analog semiconductor industry is subdivided into essentially four segments: power (54 percent), amplifiers (17 percent), data converters (17 percent), and interface (13 percent).

Of all these segments, the data converter segment includes the most expensive and most profitable analog products sold. Those facts would seem to portend an area ripe for price competition, but lately I've been wondering if price matters when specifying precision analog devices such as data converters.

If one listens to the leadership inside Texas Instruments, Analog Devices, and other high-performance manufacturers of precision analog, they claim their products are sold on performance, not price. But something an old semiconductor sales colleague told me, years ago, suggests this logic is flawed.

According to my friend, if a company can lower the sales price of a product by 50 percent while maintaining the same quality, the sales volume would increase ten-fold. While I have to admit that this logic is a bit hard to believe, it does seem to apply in power management analog.

Earlier this year I wrote about The Race From Power Management to Data Converters . In the blog I showed that Dialog Semiconductor went from less than $100 million in sales to $750 million in only five years selling power management devices at about 60 percent of the price of comparable analog manufacturers. During that same period of time, the other high performance analog companies had sales that were flat to down.

So what about precision analog, an even higher margin analog business? Is it next in line on the price chopping block?

For now it doesn't appear so. I wonder why.

It certainly can't be that the market is too small. Analog Devices alone, the leader in precision amplifiers and data converters, has annual sales of over $2.7 billion. Linear Technology, another precision analog manufacturer sells annually about $1.3 billion of semiconductors. Both of these companies sell their products for three to four times the manufacturing cost so there would appear to be room for a Dialog-type competitor.

As an example of the gold-valued nature of the precision analog business, consider the recent introduction of a 20-bit successive approximation register (SAR) converter by Linear Technology. Whereas the current generation of 18-bit SAR converters is sold for roughly $25 — a handsome price for a 16-pin piece of plastic and silicon — this new 20-bit industrial grade SAR costs over $40 when purchased on a reel of 2,500 parts. Think for a moment about what that means.

A single reel of that 16-pin SAR converter costs over $100,000. If taken off the reel, that $100,000 of product would fit inside the space of a single, slightly melted, ice cube.

Actually, what may be more surprising to a lot of people is that these types of products are built with perhaps 30 cents worth of materials. Consequently, the price must be based upon the cost to test and trim the precision — and the profit of course — lots of profit.

So if a competitor decided to go in like Dialog did for power and sell an equivalent 20-bit converter for $20, would the volume increase 10-fold? Would the customers buying 18-bit converters migrate to 20-bits to increase precision for less money? And if they did, would their products benefit from the higher precision?

I recall once reading a quote by Jim Williams, formerly of Linear Technology, stating that very few things need 18 or more bits of precision. Now this was written a long time ago, and humans aren't necessarily accurate at predicting the future requirements of technology, so who knows?

I suppose there is one big difference between power management and precision analog devices. The former is sold primarily to consumers (i.e., smartphones, tablet computers, TVs, etc.) whereas high precision analog is sold primarily to industrial, medical and test customers. But is this situation a result of price or limited applications where price is irrelevant?

Certainly one would have been hard pressed to accept that 32-bit processors would become necessary in a toy. But now they can be purchased for less than 80 cents in volume. If one could buy a 20-bit SAR converter for 80 cents, would the volume requirements for 20-bits go way up? Would consumer applications start to appear where they were once rendered price prohibitive? Would anybody really care?

I don't know the answers to these questions, but they are interesting questions to ponder. What are your thoughts? Is there any reason to continue to innovate in precision analog for the sake of a lower price?

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12 comments on “Does the Price of Precision Analog Matter?

  1. eafpres
    September 9, 2013

    Hi Scott–I'm not an expert on semicondutor pricing but there may be a few more things that factor in to the price:

    Yield–is the yield of precision parts a lot lower than mass market silicon?

    Capital depreciation–the volumes into instrumentation, for instance, are pretty low.  Factories are expensive, and every process takes up stations and time.  

    Measurement overhead–I think you covered this one in the “test/trim” part, but there could be some more expensive people involved in these precision parts whose salaries must be paid.

    Depending upon your accounting practices, some of the above are above or below the gross margin line.  So even with healthy markups there might be some overhead added later that brings actual profit down.

  2. samicksha
    September 10, 2013

    Market share for most analog players has remained relatively constant over the last decade. Pricing needs a discussion here, i guess higher cost are due to limitations of designers, you need around 7-10 Yrs of exp to design or devolop, , the value of analog and mixed-signal content in the Apple iPhone 4 is 50 percent higher than that of the logic content.

  3. Scott Elder
    September 10, 2013

    Hi Blaine, Re: Yield – I have seen where a design is graded down based upon how the part holds up over test.  But some material is probably still pitched.

    thanks for commenting.

  4. Scott Elder
    September 10, 2013

    @samicksha – < < the value of analog and mixed-signal content in the Apple iPhone 4 is 50 percent higher than that of the logic content.>>

    That's an interesting observation.  Can you share with me where you learned this information?

    thanks for reading.

  5. samicksha
    September 11, 2013
  6. Netcrawl
    September 11, 2013

    @Samicksha its now over I mean the great price erosion, today's vendor are now relisient and preparing for the next cycle, vendors are developing high performance integrated devices base o next generation process technologies, we're seeing sign of life because component sectors continue to provide some good revenue flow.   

  7. Netcrawl
    September 11, 2013

    Yes @Samicksha good to know that! Can you share us some good link about this, @Scott if you take a closer look at some of our analog and mixed signal vendors, they're moving to China setting up plants, its a whole new market out there.

    Its a market that required a higly specialized manufacturing process technologies we could expect something big from third world countries like China and India to take a lead in this market, the timing is good the market is currently taking some massive shakeup. China is hungry they're eating everything.  

  8. Scott Elder
    September 11, 2013

    @samicksha – The link doesn't work.  The text overlaps and I can't cut/paste.  Do you have a search term list instead? (i.e. title of the article?)

  9. samicksha
    September 13, 2013

    Try searching with this “Will analog be as good tomorrow as it was yesterday?” on google ….also this report is from mckinsey…incase above formula do not work..please share your mail id..i will mail the pdf doc.

  10. Scott Elder
    September 13, 2013

    @samicksha –  That did it!  Thanks.  This is an interesting article.  It is about 4 years old, but nevertheless some good data in here.

    Here is a link to the PDF for others interested.  See if my cut and paste works better.

    http://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Semiconductors/PDFs/MOSC_1_Analog.ashx

     

  11. Scott Elder
    September 13, 2013

    @ Netcrawl – I hear you. But analog semiconductors is a near 60-year-old business and still the major players are all US (TXN, Maxim, Linear, Analog Devices).  That's not to say that no one will pop up in the future (i.e. like automobiles/consumer electronics in the 1970s in the US with Japan), but it seems less and less likely.  One big differentiator is the business is just not that big (i.e. ~$20B compared against cars $1,000B ), but very hard to get into.

    I think there is perhaps a greater chance that the standard analog business will slowly morph into specialized analog SOCs, designed by tool providers (Cadence, Synopsys), sold by wafer fabs (TSMC, Global Foundries)., using IP provided by third parties , as the ability to differentiate products at the transistor level becomes more and more difficult.  But this is a +20 year process.  Lots can happen in between.

  12. Brad_Albing
    September 22, 2013

    @Scott – thanks Scott for te additional searching and supplying the link.

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