The results for Sigma Designs slipped past us last week, showing a sales shortfall against predictions, of something like 20%. Actually it delivered 20% less chips when measured by value than the previous quarter, at $46.5 million. Analysts were hoping for something more like $59 million, and that’s a very big miss for a company that is one of the mainstays of all HD chipsets for DVD and IPTV set tops.
While we know that the DVD market is flagging, and that Blu-ray is yet to take off, much of the Sigma margin has come of late from supporting HD set tops, a business it only got into on the back of a decision by Microsoft Mediaroom to use Sigma to drive down the price of IPTV set top chips.
That decision, made some years ago, around 2004, was either brave or desperate by Microsoft. It wanted to introduce more complexity into traditional IPTV, and to do that it risked driving set top pricing up to the $600 mark, something that was economical suicide. What it needed was a chip company that it could manipulate with offers of huge future orders. The mission was to design a chip which could a) support that new Microsoft Mediaroom complexity which relied on switching between unicast channel changes and a multicast stream b) put all the logic on a single chip c) include hardware support for the Microsoft DRM system d) be upgradeable to HD.
There were many things that were said about the Microsoft approach to IPTV since 2004, when it swept up all the key tier 1 Telcos in the US and Europe as customers. They varied from decrying it as a proprietary system, to claiming it was all a plot to force AT&T to deploy thousands of servers. It was a slightly different design, but the key was always in the ability to shift the price point of the set top to a target $55 price (which we don’t think has yet been reached). Sigma was the pivotal part of that plan and despite delays, it finally delivered. ST Micro was the only other chip maker that supported Mediaroom at the time and it always ran behind Sigma in delivery.
Almost every other set top company became dependent upon the same chipset, or a similar one from ST Micro, to get into HD set tops over the past few years. And yet Sigma talked about weakness in the IPTV market when its number came out.
So there is a nagging feeling at the back of our minds which asks how can IPTV sign ups be going along smoothly, and yet Sigma revenues are plummeting ‘ you would expect the two to go hand in hand.
We can offer several explanations, though we’re not sure which of them is entirely right. It could be that Sigma is no longer getting the lion’s share of these orders and ST is getting more and more. But ST has always been a step of two behind on bringing new function to market, so that doesn’t fit.
It could be that telcos are deliberately lowering their inventory of HD set tops? But why, if they are shipping at a constant rate measured in AT&T’s case in 1000s of devices a month. Of course it could be that all the hype is wrong and that the next quarter figures from AT&T, BT and Deutsche Telekom and others who rely on Mediaroom are all going to show that business has stalled. But we would have expected some clue in their recent figures and the opposite was true.
It could be that the DVD business of Sigma has collapsed and actually the set top business is doing well ‘ but we could find no supporting evidence in its filings. Certainly Broadcom has taken up much of the high value ground here with Blu-ray wins at large consumer electronics businesses such as LG and Samsung.
And that’s perhaps the most likely explanation. Sigma’s day has come and gone and new set top designs that are coming to market have suddenly switched, just as the DVD player market did, from tiny $200 million Sigma to giant $5 billion US chip conglomerate Broadcom, which has a habit of taking over chip markets as they hit volume, using advanced design and strong foundry relationships in China.
A month ago Broadcom showed that the recession has not touched its figures, with rises of 8% over the previous quarter and almost 37% over this quarter last year with net income up by around 25%.
Sigma also made a big play of saying that currency fluctuations had hurt its numbers, but while we know there has been a rush to the dollar, and that means that components and supplies, even from China, are quoting prices in dollars, so this hits both sides of the equation, income and purchases, but this hasn’t dented Broadcom’s numbers or the numbers of any of the set top companies that rely on these chips, so again is sounds like a lame excuse.
In September Broadcom added two new system on a chip devices for decoding HD video the BCM3548 and BCM3549 and these are now in sampling. When they hit volume and are priced for volume, they will cause even more damage to Sigma.
Either Sigma is right and there is about to be an almighty slow down in IPTV, or Sigma, far from hitting the big time by supporting Mediaroom, created a market big enough to interest a bigger predator in Broadcom. And the shark that Broadcom is, is halfway through the process of chewing up the video chip upstart.