The microprocessor market will grow a modest 4% for the year, but will post double-digit growth in 2003 as demand for computers picks up next year. Buyers can expect prices to continue to fall as Intel and AMD battle over market share.

Processor shipments in the first half were weak, but will be stronger in the second half as many computers are sold during the Christmas season. For the year, the processor market will grow 4% to $24.3 billion. Unit shipments will increase 11%, but the average price of a processor will decline about 6%, according to market researcher IC Insights.

Many analysts and semiconductor suppliers to the computer industry had predicted that PC orders would increase dramatically in the second half of 2002. They expected Christmas sales to be strong and more businesses to upgrade their computers because many had not done so since they had upgraded in 1999 in anticipation of Y2K concerns. "That scenario does not appear to be unfolding with much momentum," says Brian Matas, an IC Insight analyst. "Large institutional buyers such as banks and corporations have held back on major purchases," he says.

Despite that, unit shipments for processors will increase 11% this year, but revenues will rise only 4% because more lower-end microprocessors will ship. In addition, prices eroded especially in the summer when demand weakened. For instance a 2.2 GHz Pentium 4 processor fell from $382 in May to $234 in July on the spot market, according to Converge, an independent distributor.

But the microprocessor market will see stronger growth in 2003 when computer sales pick up. The processor market is expected to grow 13% to $27.7 billion in 2003 and then to $32.1 billion in 2004.

Price erosion is not new to microprocessors. Intel, AMD and other processor manufacturers typically cut prices of processors, then release high-end, higher-priced MPUs and rely on those components to generate revenue growth. However, this year, buyers don't seem to feel the need to upgrade to the highest performing processors so revenue growth is suffering although unit shipments are healthy.

For the rest of the year, buyers can expect the Pentium 4 2.0 GHz chip to be the most in-demand processor. Intel should ship a 3.0 GHz version of the Pentium 4 by the end of the year and a 3.5 GHz version next year.

Despite the weak processor market, processor manufacturers are investing in 0.13-micron process technology. The smaller geometries result in a small die size, lower voltage, faster clock speeds and less heat dissipation, says Matas.

Intel has transitioned all of its microprocessor production to 0.13-micron and AMD has moved some of its production to the leading edge manufacturing process.

AMD's Opteron processor for servers and workstations will be built on 0.13-micron process technology. The chip will ship in the first half of the year. AMD will also make its "Clawhammer" Athlon processor for desktops and laptops on 0.13-micron technology. Those chips will also ship the first half.

Whether AMD's shift to 0.13-micron process technology helps it be competitive with Intel and gain market share remains to be seen. AMD shipped a record eight million processors in the first quarter, but only six million in the second as demand eased. Expect AMD shipments to be weak for the rest of the year, says Matas.

While demand for microprocessors for the computer industry has been sluggish in recent years, demand for network processors for the telecommunications industry have been stellar. The networking processor market grew from $215 million in 2001 to $540 million in 2002 and will post a whopping 175% grow rate in 2003 when it will reach $1.5 billion. By 2006 the market will reach $7.2 billion, says IC Insights.

Network processors are specialized, programmable chips that integrate packet-processing functions into silicon. They can be programmed from different applications and are seen as off-the-shelf alternatives to custom application-specific integrated circuits in routers, switches and other access devices.

The chips can be used to speed development of new products because they are programmable and use simple programming methods and provide a high level of system integration, which reduces part count and system complexity. The good news for buyers is there are about 22 network processor suppliers including Intel, AMCC, Motorola and Vitesse.