Nicholas’ Niche
When it comes to the semiconductor industry, the ride from Wall Street darling to investor whipping boy can be a roller coaster.
For Irvine-based chip maker Broadcom Corp. and Chief Executive Henry T. Nicholas III, the ride is a rush--even during down times. Three years ago, when dot-coms were flourishing and PC sales seemed never-ending, Broadcom was hailed as the young upstart snarling at its giant rival, Intel Corp.
Instead of making the brains of the computer, as Intel does, the Orange County company focuses on the chips used in routers, switches, networking and PC equipment and in the interactive set-top boxes that let machines talk to each other.
But the company has hit a low point. The semiconductor industry suffered its worst year in 2001, with sales falling more than 30%. Stock prices have plummeted, competition is growing among Asian companies and the industry is mired in red ink.
One belief inside Broadcom’s executive offices remains constant: High-speed Internet access--whether in the form of cable modems, DSL or some variation on wireless broadband--is here to stay. That’s good news for Broadcom, which has invested heavily in the technology.
It’s maneuvering through the ups and downs of the business that is the challenge, Nicholas said.
Question: Why is the semiconductor industry having such a hard time recovering from the tech slump?
Answer: Historically, the cycle has been dominated by the personal computing boom-bust cycle. What we are experiencing right now is kind of a hiatus in the growth in some segments.
First of all, there was the Internet bubble. In this period of hyper-growth, a bunch of dot-coms used investors’ money to buy networking equipment.
Then you had those companies cease to exist. They were not only discontinuing their purchases, but also selling [the networking equipment] for 50 cents on the dollar on EBay.
The second is in the wide-area networking space: DSL and DSL equipment. There were large purchases, which were again [fueled] by Wall Street’s irrational exuberance.
Last, the personal computer is fundamentally changing. The boom-bust cycle was driven principally by successive processor generations. What’s happening is the processor is becoming less important.
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Q: Is there anything that you wish you knew five years ago that you know now?
A: Boy, it’s great to be right. When we took the company public, the investment bankers were horrified that we didn’t want to call ourselves Broad.com.
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Q: Did the semiconductor industry feel the change before the dot-com market collapsed?
A: I think there were a lot of companies that were completely and totally blindsided. I think that’s shown by the number of pre-announcements [of lower earnings].
One year ago, you had Cisco make two pre-announcements. You had Motorola, [Texas Instruments], Intel do the same. These are all caused by catastrophic events that happened within a quarter.
We essentially made one pre-announcement, which was driven by one very large event that happened with one of our customers, 3Com.
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Q: Why did the bubble burst on dot-coms?
A: The Internet really was not an effective vehicle for building a business. You had to have ubiquitous access, it had to be always on, and the most important thing, it had to be transparent. And it’s clearly not transparent today.
Our objective is to make [the Internet] invisible, transparent. It should be as easy to use as a channel on TV. You should be able to watch a commercial, press a button that says “buy” and receive the goods and services you’re looking at. If it’s not that simple, we think it’s not going to be a successful medium.
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Q: If the Internet and these new communication products don’t succeed, what does that mean for Broadcom?
A: Consumer spending is down quarter on quarter, but consumers are still spending. Each consumer has a certain amount of disposable income. Now, he can get into his car and drive to Wal-Mart. Or he can get onto some electronic network and buy music or a video.
With respect to the semiconductor market, there’s very little silicon that goes into the bricks and mortar of Wal-Mart. There’s quite a bit of it that goes into a consumer electronic device that helps you more efficiently distribute music or video.
Even in a recessionary time, you have to look at the number of dollars that consumers spend and convince them to say, “I’m going to now turn on my TV [or computer]. I’m paying 30 cents a song instead of $12 a compact disc.”
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Q: What happens to Broadcom, and the industry as a whole, if you’re wrong?
A: People would have to discontinue purchasing all the platforms of today for it to have a material adverse effect.
Maybe we’re looking too far ahead. I look at our vision and the one thing I don’t see us missing is the next wave. I look back at what we’ve done. I can’t think of anything we would have done differently.
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AT A GLANCE
Full name: Henry Thompson Nicholas III
Born: Oct. 8, 1959, in Cincinnati
Personal: Resides in Laguna Hills with wife Stacey and three children.
2001 salary: $110,000 salary and an as-yet-undisclosed amount from stock option gains. In 2000, Nicholas realized a $56-million gain by exercising stock options.
Education: Attended the U.S. Air Force Academy. Bachelor’s degree in electrical engineering, UCLA, in 1981. Master of science degree in electrical engineering, UCLA, in 1985. Doctorate in electrical engineering, UCLA, in 1997.
Career: Worked at TRW in electrical engineering and research from 1981 to 1988. At PairGain Technologies he was manager of the integrated circuits team, 1988 to 1991. Co-founded Broadcom with Henry Samueli in 1991.
