The transition from analog to digital technology in consumer electronics is welcome news to semiconductor and other electronic component suppliers.

The proliferation of DVD and MP3 players, digital still cameras and camcorders, digital cable and satellite set-top boxes and video game consoles will mean healthy demand for a variety of semiconductors, passives and interconnect components.

In addition, a government mandate calling for digital tuners inside televisions beginning next year and the growth of personal video recorders and DVD recorders will result in a mini-boom for semiconductor suppliers of consumer electronics equipment manufacturers.

The growth in the consumer electronics market will be good news for all electronics buyers because consumer electronics is all about high volumes and low prices. To succeed in supplying to the CE equipment manufacturers, suppliers have to manufacture large volumes of parts and reduce prices. Electronics buyers in all industries will benefit from the downward price pressure on parts that are sold to multiple industries.

Because of price pressure, consumer electronics semiconductor revenue growth will be solid—but not stellar—although unit growth for chips used in CE equipment may skyrocket over the next three years.

Consumer electronics semiconductor revenue will increase about 10% in 2003 to $29.4 billion and an impressive 23% in 2004 when sales will reach $36.2 billion, according to market researcher Gartner Inc. By 2007, CE chip revenue will reach $47.3 billion.

That is decent growth, but it will be similar to the overall semiconductor growth rate during that time. In fact, the share of consumer electronics semiconductors measured in revenue against the total semiconductor revenue will be more or less stable between now and 2007.

In 1993, consumer electronics semiconductors represented about 20% of the overall semiconductor market. In 2007, it will be 19% of the semiconductor total.

Paul O'Donovan, principal analyst for Gartner, says the reason the percentage is about flat is because of the "massive growth" in the communications sector. Communications ICs increased from about 16% of total semiconductors in 1993 to 26% in 2007.

"Some people think consumer will pick up the slack that the PC industry is leaving behind," says O'Donovan. "I don't believe that. It is a case of the PC industry having a little bit of a check in growth."

In fact while the consumer electronics chip sector will grow, so will the computer chip segment because of an increase in PC unit shipments. While consumer electronics semiconductor revenue will grow 23% in 2004, computer chip revenue will rise 21% in 2003, according to Gartner.

"PC growth will continue, but not as fast as it has been," says O'Donovan. "The consumer area is transitioning from analog to digital and there will be healthy growth. The problem is this is not a high profit area."

He says consumer electronics business is different than the PC industry. With consumer electronics, prices have to be low from the get-go, but still decline as time passes.

"Intel brings out a processor for the PC industry at a high price and the price goes down over time," says O' Donovan. "With consumer, consumer manufacturers will go to a semiconductor company and say 'I want to design in your chip, but show me the roadmap as to how much this is going to cost me in five years.'"

Semiconductor manufacturers must show roadmaps that cite die shrinks or the addition of some intellectual property (IP) to the chip. At the same time, the CE OEM wants the chip price to fall although it is getting more sophisticated because of die shrinks and additional IP. In other words buyers expect more bang for fewer bucks.

"This is a real issue for the semiconductor suppliers who play in the consumer area," says O'Donovan.

While suppliers will have to reduce cost of chips over the next few years despite growing unit demand, there will still be healthy growth in revenue.

"Actually growth is starting this quarter (third quarter)," says O'Donovan. "Growth will gradually accelerate. There will be hockey stick growth toward the second half of next year and that is where the 23% comes from," he says.

"What is driving that growth is digital video products especially DVDs," says O'Donovan. This will be a mixture of products such as high definition DVD players, high definition TVs, set-top boxes and game machines. They are the drivers for that 23% increase," he says.

Michelle Abraham, an analyst for market researcher In-Stat MDR says digital TVs will post solid growth.

"That is based on the assumption that manufacturers are going to meet the FCC mandate that says there must be digital tuners inside televisions beginning in July 2004 for 36-inch and bigger TVs." By 2007 all TVs with screens 13 inches and larger must have digital tuners in them.

In the U.S., about 30 million TV sets are shipped each year which is why growth will be positive, says Abraham. "Digital TVs use a variety of chips. There are tuner ICs, demodulation chips, controller and memory chips including DRAM and flash. About 16 megabytes of DRAM and 8 megabytes of flash are used," says Abraham.

An HDTV this year has about $130 worth of semiconductors, boards and license fees for MPEG technology.

"DVD players have had a good run of growth, but growth will be slower. They will be overtaken by DVD recorders," says Abraham. DVD recorders allow users to record on a DVD disk rather than tape as a VCR does or on a hard drive which a personal video recorder does.

O'Donovan says consumer electronics equipment will drive sales of application specific standard products (ASSPS).

"The trend in the consumer semiconductor market is ASSPs are becoming commoditized more and more quickly," says O'Donovan. ASSPs include multimedia chips that handle encoding and decoding for PVRs and DVD recorders.

"ASSPs are becoming commodity chips, but these are the main drivers and the main area of growth in consumer semiconductor areas. The other area is in front-end tuner chips—low cost CMOS silicon tuner chips."

O'Donovan adds that the growth of consumer electronics equipment will mean more demand for memory ICs, both DRAM and flash.

Digital still cameras use flash as do MP3 players. "Digital TVs coming onto the market will have slots for multimedia cards, flash cards so you can view pictures directly from your still cameras on your TV. There is a good opportunity there," says O'Donovan.

Digital TV and set-top boxes will also use more DRAM. "The amount of memory is growing in terms of megabytes per application," says O Donovan. He says digital TVs shipped this year will be equipped with an average 45.9 megabytes of DRAM. By 2007 that average will increase to 88.7. Average DRAM content in set-top boxes will increase from 34.7 megabytes in 2003 to 95.1 megabytes in 2007.

That of course is good news to DRAM suppliers because it means more demand for their chips. But it is also good news for buyers, especially those who aren't buying leading-edge 256 Mb 400 MHz DDR DRAMs. CE equipment manufacturers, in many cases, require trailing-edge memory chips such as 64 megabit synchronous parts. Often manufacturers limit production of older parts because they have fewer customers for them. The more customers they have for a part, the more likely they will continue to manufacture it in volume.

Digital TVs won't be the only equipment that will drive DRAM demand. DRAM manufacturers are closely watching the emergence of home media servers being championed by SONY and Microsoft among others. The device could have an impact on DRAM demand.

Ivan Greenberg director of strategic marketing for Samsung Semiconductor, is bullish about the device which will basically be a central repository for video and audio files such as movies, music and video games. The media server would transmit the files to displays or other CE equipment around the house over an ethernet or wireless network.

The media server uses a disk drive to store video and audio. "The media server is more about the disk drive and not necessarily about the memory," says Greenberg. "However, when you look at personal video recording functionality on the media server or set-top box, the DRAM usage explodes. If you want a rich user experience when you're recording, fast forwarding or rewinding, you want a huge amount of working RAM on your platform so you can buffer everything up," he says.

Greenberg says the devices used with the media server will require large amounts of memory. Set-top boxes and TVs with the media server may have 250 and 300 megabytes of memory two or five years from now, he says.

That's a lot of DRAM considering in 2006 about 30 million digital TVs and 60 million digital set-top boxes will ship, according to Greenberg.

In addition next generation plasma and LCD displays, which can be hooked up to media servers and the Internet, will require memory to handle streaming video.

O'Donovan says media severs are rich in semiconductor content, but he doesn't consider them to be consumer electronics equipment.

"They are a computing product," he says. "Many people say this is the next big thing. I am skeptical. If you have a PC and it is running XP home or something like that, you can pretty much do what they say you can do with a media server. Who is going to buy this? It is marketed for college kids. They may want a PC with all their stuff on it, video and audio. It is a good product for them to use. But most consumers don't necessarily want all this media stuffed on a server in a corner," says O'Donovan.

While media servers may or may not win the hearts of consumers, consumer electronics semiconductor suppliers such as Toshiba, Hitachi, Philips and STMicroelectronics are optimistic that digital consumer equipment will drive sales for the next five years.

"We are bullish," says Tim Chambers, marketing director of consumer microelectronics group for STMicroelectronics. "About once every 30 years there is a significant shift in technology and in our case it is shift from analog to digital for consumer equipment. The shift has been going on for about four years and probably has another six or seven years to go," he says.

STMicroelectronics supplies many of the encoding and decoding chips for satellite and cable set-top boxes.

"Our products are in about 65% of all set-top satellite boxes. We also have a good position in analog TV and what we call digitized TVs," says Chambers.

In digitized TV, an analog signal is received by the TV and is converted to digital for filtering, color correction and other enhancements. With digital TV the signal being received is a compressed digitally encoded signal, and is decompressed inside the TV set.

STMicroelectronics makes chips for both, but in the next few years expects digital TVs to drive growth.

"We are poised for the rapid growth of the purely digital TV market," says Chambers. Growth is based on the notion that U.S. and other governments worldwide have timetables for TVs to be equipped with digital tuners.

"There is something like 1.4 billion TVs worldwide. To have those replaced from analog to digital in the next seven to eight years in every country, creates significant market opportunity for us," says Chambers.

Another area of growth in the next several years for STMicroelectronics and other manufacturers is DVD players and digital imaging.

While some analysts say the DVD demand will be sluggish because of near market saturation, manufacturers and suppliers say there is plenty of growth left for DVDs.

"When we look at DVDs in combination with our set-top box business we see some interesting appliances being considered and developed for the next several years," says Chambers. STMicroelectronics supplies decoding and front-end chips for DVD players and set-top boxes.

STMicroelectronics also expects to see growth in mobile imaging. It makes sensors for digital cameras and cell phones with imaging.

"People are using imaging capabilities of cell phones in a different way than digital still cameras," says Chambers. "The image in a cell phone is like an instant message. It is transient. This fits naturally to how people interact and communicate. There is no limitation to the pervasion of imaging capability in digital cell phones and portable communications devices," he says.