Rambus Faces Fundamental Threat

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.