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A Near-Duopoly Within the Semiconductor Space

PLD chipmakers Xilinx and Altera operate in a compelling niche.

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The semiconductor industry is a vast, $300 billion landscape filled with a plethora of companies of all different sizes. All compete in various market segments, from computer processors and memory chips, to power management devices and chips that control the touchscreen on your smartphone. Dig a little deeper, and you'll find two of our favorite firms,  Altera (ALTR) and  Xilinx (XLNX), both of which reside in the programmable logic device, or PLD, chip space. While the PLD segment only accounts for just over 1% of total chip industry revenue, Altera and Xilinx essentially operate in a duopoly, thanks to high barriers to entry in the market.

What's a Programmable Logic Device?
PLDs are chips that can be programmed so the circuitries in the device can be configured by electronics makers for specific applications. This is different from the more conventional high-volume applications specific integrated circuits, or ASICs, which are created to handle specific functions and cannot be reconfigured. We usually find ASICs in our everyday electronic gadgets. The trade-off between PLDs and ASICs is cost. Although PLDs are programmable, they are larger in size and may have transistors that are left unused, making them more costly on a per-unit basis for electronics manufacturers. ASICs are significantly cheaper to manufacture in mass volume, but have much higher upfront startup costs. The choice between a PLD and an ASIC boils down to whether the electronics maker will see enough volume for its products to bear the higher up-front costs associated with designing an ASIC. As a result, PLDs are usually found in lower-volume electronics, such as those in industrial, automotive, military and communications infrastructure applications.

Andy Ng does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.