Post a CommentThe Next Big Things
By Ed Sperling and Suzanne Deffree -- Electronic News, 11/18/2005
Scott McGregor, president and CEO of Broadcom, sat down with Electronic News to talk about growth at his company, hot new technologies that will drive growth and where relationships need to be built. What follows are excerpts of that conversation.
Electronic News: How’s your business doing these days?
McGregor: It’s going incredibly well.
Electronic News: Broadcom’s strategy has been incredibly complex across a number of different markets. Which parts are driving it?
McGregor: We have 22 lines of business. It’s not complex. It’s sophisticated. We’re able to get growth in most of those businesses. We’re firing on a lot of cylinders. We raised our guidance.
Electronic News: Why did you raise your guidance?
McGregor: We’re further along in the quarter, so we have more data. We also see strength in the market. That reflects in the top line revenue. We indicated we would grow operating expenses at roughly half the rate of revenue growth.
Electronic News: How big an effect will seasonality be this year?
McGregor: It’s a little hard for us to quantify. What we try to do is shed a little light so we broke it up into three categories, consumer business, quasi-consumer business-it’s consumer business like set-top boxes, but it doesn’t run on consumer cycles-and then the enterprise or non-consumer space, which runs on yet a different cycle and doesn’t show seasonal effects.
Electronic News: Does consumer vary by geography?
McGregor: Yes. Most of our business tends to be driven by design wins and product cycle more than by the macroeconomic cyclicality and by the seasonality. But as we increase the overall consumer portion of our business, there will be a larger seasonal effect. That generally means weaker Q1s and stronger Q3s and Q4s.
Electronic News: Do you expect an oversupply of inventory this year, particularly with rising oil prices?
McGregor: In terms of inventory, we don’t see inventory rises now. We check carefully with customers. Generally, in the enterprise space people don’t put on a lot of inventory. Since the last downturn, people have been running very lean inventory. The consumer space is a little harder to predict because people generally ramp up inventory in preparation for a holiday selling season. Depending on how that materializes, they either have some inventory overhang in the first quarter or they continue strong in that quarter. That won’t be seen until after Thanksgiving.
Electronic News: That may be extended beyond Christmas now, because a lot of people are giving gift cards to take advantage of after-holiday sales.
McGregor: True. And Chinese New Year has become a bigger factor than in the past. It’s no longer just a Western phenomenon. You have two cycles. You have Christmas, and then you have Chinese New Year as an additional gift-giving season.
Electronic News: Because of that, is it harder to gauge how you run your business? Forecasting is now in multiple geographies, isn’t it?
McGregor: No, because we generally build to order, not to forecast. When a customer orders a product, we build it. It’s not like the retail business where you have to guess how many TV sets customers will buy at Christmas and hope you have enough. When the customer orders 10,000 chips, we build 10,000 chips. We don’t have the forecasting problem of the box maker.
Electronic News: No, but if a customer over-orders, that market dries up for awhile.
McGregor: You have to have a sense of that. But because we have 22 businesses and we’re quite diversified from a customer point of view, no one or two customers can swing our results.
Electronic News: Because you have so many businesses, does that also give you insight into larger market dynamics?
McGregor: Yes. We have cross-learning from the businesses. If we see some businesses are strong, we would expect others to be strong.
Electronic News: Do standards issues increase your business or slow it down?
McGregor: Some of the standards issues definitely slow it down. The 802.11n standards issues slowed the business down for everybody. Had there been a quick adoption, we’d all be shipping product now. Another area that’s a challenge is HD DVD versus Blu-ray. We have colossus companies on either side battling over this. These kinds of things do slow consumer adoption down. When a consumer is confused they hesitate on a purchase. The solution is dual-mode solutions. We had the same issue with DVD recorders. There were DVD + RW and DVD - RW, which hopelessly confused consumers. They didn’t know what to buy. Both were advertised as the right solution. Consumers sat back and waited and some vendors came out with a dual-mode solution. It will be interesting to see if that is the resolution on the HD equivalent, or whether there is a compromise.
Electronic News: In the consortium you formed with Intel and a lot of the other large players over 802.11n, is there any concern that will result in a third option instead of one combined option?
McGregor: We sure hope not. It’s an open specification, and the work that came out of there has been submitted to the IEEE as a draft standard. Our hope is to have everyone join in. But one of the reasons the IEEE wasn’t successful was that they required a super majority to get passage of that standard, and there wasn’t the ability to do that. What’s happened is that the majority of the consumers of the technology have come to an agreement on a draft proposal. That looks pretty likely to pass, but it’s up to the IEEE to do that. It’s now a de facto standard. What really matters to end users is interoperability. They want to know that if they buy a box from Company A and a box from Company B that they’ll work together. That’s the purpose of standards. With the alliance we believe we’ve created that promise of interoperability testing between the companies.
Electronic News: Because of the number of businesses you’re in, is there any synergy on development?
McGregor: We absolutely do. We take something like voice technology, and it applies to cell phones, cable modems, some of which are now voice-enabled, VoIP phones and 802.11 phones. Voice is now a horizontal technology. Video is another horizontal technology. Another way you see that is in cable set-top boxes and satellite set-top boxes. That’s a vast amount of R&D. And then we’ll see another opportunity, such as digital television, and we’re able to apply the R&D from cable and satellite set-top boxes to digital TV with a very small incremental cost. That’s a much more leveraged model than doing digital television from scratch, which would be a massive undertaking.
Electronic News: Does that cut down your R&D costs as a company?
McGregor: Yes.
Electronic News: What’s your R&D as a percentage of revenue?
McGregor: We run that pretty high. It’s about 22 percent. Our model is for 20 percent. We’re running a little high right now, but we view that as an investment in new products and new product areas.
Electronic News: Because of that, can you leverage one market into another?
McGregor: I certainly believe you get efficiency in R&D in multiple areas. One of our goals is to be No. 1 in communications across the whole gamut of communications areas. What we find is that one area leverages heavily on another, particularly with the amount of convergence that’s going on. For a long time, everyone talked about convergence. Then everyone stopped talking about it.
Electronic News: That was because it was only voice and data, right?
McGregor: Yes. Now it’s everything. Video is in multimedia players, it’s in cell phones, it’s going to be a major technology for the home. I expect to see IP video soon. It’s more bits than audio. For a long time it was too many bits. Once networking starts to beef up, then video is easy.
Electronic News: It’s also a storage issue, isn’t it?
McGregor: It’s storage plus networking. A lot of the networking today is optimized for throughput but not for latency or quality of service.
Electronic News: From your vantage point, what are the hot new technologies that are coming-not the next big thing, but the technologies that will drive a host of next big things.
McGregor: Video is hot. It’s going to be something that drives bandwidth and networking. It’s going to become a checklist feature in cell phones and portable media players. It’s going to be pervasive. And now we’re developing wired networking and wireless networking with sufficient quality of service such that you can do quality video on all those devices, whereas in the past you couldn’t. It’s a battery life issue, a bandwidth issue and a storage issue. The advances in all of those, as well as silicon technology, makes this possible.
Electronic News: Is this going to be 90 nanometers or 65 nanometers?
McGregor: That’s the wrong thing to focus on. We will use whatever process technology makes sense at the time based on what’s cheap, what’s available, what gets the job done. The things to focus on are what IP will be there, what features will be available, what content will be available, and what will be the ease of use for the end user. Process technology is just what kind of hammer do you want to use when you pound in a nail. Availability of content drives people to buy stuff. Ease of use is critical.
Electronic News: Two years ago, when we sat down with your predecessor, he said that he could foresee partnerships with governments in the future. Is that still a possibility?
McGregor: One of the things that’s important as you drive new technology and new standards is to make sure that you have all of the players aligned. Governments become increasingly important in some areas, whether it’s frequency spectrum or formats or any scarce resource that the government has some say on. We also see governments being proactive in terms of encouraging companies to invest and encouraging technology companies to use their country as a place where they create or deploy technologies. Absolutely, governments are a factor.
Electronic News: So are you working with the Chinese government and the Taiwanese government and the Japanese government?
McGregor: We work with at least some of those.
Electronic News: Are you doing any venture capital-type investments?
McGregor: We do very little of that. We generally leave VC investments to VCs. We are more likely to acquire a company outright. Owning 10 percent of a company doesn’t help us that much. We would rather own 100 percent or zero percent. We have bought over 30 companies. We buy one or two a quarter. We use that as a way to enhance our growth beyond what we can do organically.
Electronic News: What size?
McGregor: We generally buy companies that are near revenue or just at revenue. We don’t buy companies that have just started. We leave that to the VCs. We also generally don’t buy larger companies. We can. We’re not opposed to it. We have $1.7 billion in the bank and strong stock, so we can buy large companies if we wanted to. But we haven’t found any that we like.
Electronic News: Is that more of an integration headache?
McGregor: Yes. I learned from previous experience that buying large companies is a lot of work. There are cultural issues and so many more things that can happen. Generally companies that are pre-revenue or at revenue don’t have complicated IT systems. They don’t have SAP or all this infrastructure that’s the nightmare to integrate. Think of this like a big Cisco switch with blades in it. Our companies are like blades. The R&D and marketing organizations slide very easily into our product organizations and the rest is the Broadcom infrastructure.
Electronic News: Do you view this like a portfolio?
McGregor: That’s a fair analysis. A lot of my job is determining where we invest in our portfolio. That’s a big part of my job.
