Rambus Faces Fundamental Threat
K.C. Swanson
02/20/04 - 11:02 AM EST
Rambus
often acts like a
court case in the guise of a company. Earlier this
week, shares skyrocketed when a judge recommended that the
Federal Trade Commission
drop its antitrust suit.
A week earlier, shares slumped when European regulators
revoked one of
the company's patents.
But investors might want to take a peek at the
company's actual business for a change. Overshadowed
by the FTC ruling was an
announcement from chip giant
Intel
in the past week that could conceivably undermine
Rambus' core business of licensing intellectual
property for memory chips.
In a white paper presented Tuesday at the
International Solid State Circuits Conference in San
Francisco, Intel gave details of a new interface
standard for memory. Using test chips from
memory-makers
Samsung and
Infineon, the standard appears to rely on a technology
different that that offered by Rambus. If that's the
case, the new standard could further marginalize
Rambus, which has already alienated most of its
potential memory maker customers after years of
assiduous litigating.
Some say that's Rambus' reward for trying to browbeat the industry into paying expensive
royalties for its intellectual property.
"It's too onerous; it's very costly," Fred Ramberg
of M.S. Howells & Co., an independent research and
brokerage firm, said of Rambus' royalties. "Under the current
conditions, they've boxed themselves into a corner, and
people have tried to design around them for some time.
Now they've shown they've done it."
Rambus' proprietary architecture was "conspicuously absent"
from Intel's technology road map at the giant
chipmaker's developers conference earlier this week, he noted.
"This [Intel announcement] virtually devalues Rambus intellectual property as it relates to Intel
processors moving forward," Ramberg predicted in a
research note earlier this week. "Rambus will have a legacy
market and smaller niche markets to support, but if
Intel moves this new interface standard, a large part
of the marketplace will have passed them by." (M.S. Howells doesn't have any investment banking relationship with
Rambus.)
While it's not 100% clear that Intel's new
standard will ultimately exclude Rambus technology,
it's notable that Rambus declined to comment on
whether any forthcoming memory interface from Intel
would incorporate its technology. "It's a test chip, so
I can't speculate on a potential product or what it
would or would not incorporate," said Laura Stark,
vice president of the company's memory interface
division.
Intel currently uses a memory interface from
Rambus known as RDRAM in its network processing units.
Rambus is still reaping the benefits of a $200 million
deal signed by Intel in 2001. At the time, the
chipmaker agreed to shell out $10 million a quarter in
royalty payments through September 2006, in exchange
for access to intellectual property from Rambus.
To put that $40 million a year Intel payout in
perspective, Rambus posted annual sales of $118
million in calendar year 2003.
Rambus argues that it continues to offer an edge on the
technology front. Intel's proof-of-concept test chips
that were discussed at the conference earlier this week show
"similar if not lagging performance to what we are
showing this week on silicon in production later this
year," Stark said.
Toshiba and
Samsung have already said
they will include Rambus' next generation memory
interface, known as XDR, in their DRAM (dynamic random
access memory) chips.
Despite those wins, Ramberg argued that Rambus needs to make a
strategic shift and dramatically lower license fees if it wants to avoid being
increasingly pushed to the fringes of computing.
"If they become a kinder, gentler Rambus, they
could reinvent themselves," he mused. "But it
would take a real sea change in how Rambus has done
business to regain their position in the mainstream
marketplace. That's not to say they won't, it's just to
say they won't the way they currently operate."
To be sure, other analysts think concerns about Intel's
announcement are overblown. "This is not something
that I think people should get worked up over, because
details are so scant. It does not necessarily preclude
any Rambus [intellectual property]," said Mike
Crawford, an analyst who covers Rambus at B. Riley &
Co. He owns shares in Rambus.
"We'll have to see how [the Intel memory
interface] plays out for cost -- which is always very
important for memory -- as well as see how quickly
it's adopted," added Steve Allen, an analyst for
Sierra Tech Research.
Still, the news from Intel bears
close watching for Rambus investors. Given that Intel's
licensing fees accounted for one third of Rambus
revenue last year, it would be a mistake to underestimate the
potential fallout for Rambus if Intel should
eventually decide to go in another direction.
In recent trading, Rambus shares were down 28
cents, or 0.8%, to $33.79.
