Hangin' with the Semiconductor Homies

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SAN JOSE, Calif. -- You can measure the excitement here at the

Microprocessor Forum

at the Fairmont Hotel by the number of bulky acronyms and jargony phrases tossed about -- phrases like vector permutes, bit manipulation and protocol levels.

You'd think the stereotype of the computer geek was getting dated, but it's in full force here. Attendees wear short-sleeved shirts and

Gap

(GPS) - Get Report

jeans. They walk around like automatons until you ask them about chip configurations and then they come to life -- to describe in detail circuit design techniques with an eagerness that borders on spooky.

Just listen hard and try not to yawn.

Because embedded in all the technobabble are gems of information. What's unveiled at this annual weeklong chipfest can dramatically change how your PC or any chip-driven device you own will work in the next few years. For instance, last year

Intel

(INTC) - Get Report

unveiled its Merced chip in a bid to revolutionize the server-chip market.

These are the engineers that the companies generally keep away from talking to the press and hide from stock analysts. Easy to see why.

Toshiba

has in the works a new sub-$500 computer for consumers that could be announced this year. The source of this news? A guy on the team that developed the chip. Toshiba declined to officially confirm any such plans. Its lowest-priced computer to date is a mininotebook selling around $700.

This year, a lot of the buzz centers around two new chips: The new K-7 chip from

Advanced Micro Devices

(AMD) - Get Report

, which could give Intel a run for its money on the high-performance -- and high-margin -- chip sector, and Intel's 64-bit Merced, which could bury

Sun Microsystems'

(SUNW) - Get Report

SPARC for workstations.

Engineers love to talk. After all, it's really bragging rights that bring archrivals like Intel and AMD and

Compaq's

(CPQ)

Digital Equipment

unit and Sun together in the same room to share their latest designs with each other and the world.

But don't get too excited. Here, engineers brag in a

Bill Gates

-like monotone that makes it hard to sense how desperate they are to persuade the world in general, and

Dell Computer

(DELL) - Get Report

in particular, that they have the best designs for the next generation of computers. Yet persuade they must, because outside their cubicles is a shaky semiconductor market that is clawing its way out of a two-year slump.

"What I'm amazed at is how fast the market has changed," said Mario Morales, a microprocessor analyst with technology research firm

International Data

. At last year's forum, he said, the sub-$1,000 computer market was just beginning to grow, and Intel had just jumped into it. A year later the sub-$1,000s have radically changed the chip market, AMD has emerged as the market leader for PC chips (with a 48% share of the consumer PC market), and the next wave -- the sub-$500 computer -- is starting to swell offshore.

For specialty chip makers, the future can be bleak. An engineer with graphics chip maker

3Dfx Interactive

(TDFX)

said he knows that most of the companies in his sector will likely be out of business in three years, and he has no idea which ones will take the hit. 3Dfx has seen its stock fall 63% while competitors

S3

(SIII)

and

3D Labs

(TDDDF)

have fallen 65% and 83%, respectively, in the same period.

The reason? Intel, which has been integrating 3D graphics capability onto its chips, has muscled into the market. In the next year, 3Dfx has a choice to partner with Sun Microsystems or

National Semiconductor

(NSM)

, or crash and burn.

Behind all the talk of bending the laws of physics at this conference lie the unshakable old-fashioned laws of economics. In the next few years a shakeout is coming throughout the chip market. Panelists here discuss what's more important: Memory or processing speed. But at the lunch table they are talking about how the cost of making complex designs is rising and how much pressure they face to create greater efficiency of production. The box makers don't just want the best chips. They want the best chips at the lowest costs.

Even the engineers know what's most important: Market share and profitability. For now, the bets are on Intel's Merced -- geared for the server market -- and its super high-end cousin McKinley. But Merced won't be for sale until mid 2000, and as this crowd can tell you, an awful lot can happen in two years.

For more info on institutional holders of these stocks, as on well as financial statements and earforumnings estimates, please see the

Thomson Company Reports.