Radio Chip

Betting on the little guy

Like good businessmen everywhere, chip makers like to lavish their limited sales resources on their best customers--the biggest spenders--and leave it to distributors to service the rest. So when Pasquale Pistorio declared late last year that STMicroelectronics NV will service thousands of midtier and even tinier OEMs on small but potentially lucrative projects, it took some by surprise.

After all, Pistorio had turned ST into the world's fifth-largest chip maker by focusing only on his top 80 customers. Then, on the eve of announcing his pending retirement as CEO, Pistorio mapped this new strategy for the integrated device manufacturer (IDM). But those who consider his announcement an abrupt about-face simply had not been paying attention. They'd overlooked Stelios J. (Stell) Patsiokas.

The XM challenge

When Patsiokas knocked on ST's door in 1998, he brought an idea and little else. XM Radio, the company Patsiokas wanted to discuss, had no revenue, no infrastructure, nothing more than a passionate argument for developing an untried technology that would put satellite radio in cars. A veteran of Motorola's consumer electronics shop, Patsiokas was executive vice president of the startup, working out of Boca Raton, Fla.

His job was to solicit the help of ST, a top-tier chip supplier known for partnering largely with heavyweights like Nokia Corp. Despite the odds, Patsiokas outlined XM Radio's novel idea for installing the satellite radios in cars. He wanted ST to co-develop a groundbreaking chip set. The risk was substantial. Mobile satellite radio technology was new. The receivers had to deliver digital-quality sound with an uninterrupted signal, coast-to-coast, to a moving car. Moreover, the chip set would be developed before any of the startup's satellites were in space and before any terrestrial repeaters were on the ground. "This was also the first time for 2.3-GHz wireless technology with a 4-Mbyte end-user data rate," Patsiokas said.

"One big unknown was if the technology would work at all." Design challenges included tight dashboard space and interference from AM and FM signals. But XM Radio was confident ST could handle the challenge if it agreed to supply the chips. The IDM had leading expertise in developing chips for satellite TV, automotive and consumer applications, so it had the technical issues well mapped out. Indeed, it had already developed a satellite receiver chip set for WorldSpace Corp., a Washington, D.C.-based satellite radio company.

There were some differences, however. The WorldSpace chip set was designed for stationary receivers while the XM Radio chip set would go into mobile receivers. WorldSpace had one signal processed out of the radio but XM Radio's chip set would have three. Still, the partners weren't starting from scratch. "We didn't want to reinvent the wheel," Patsiokas said. ST evaluated XM Radio's business model and decided it had potential, Patsiokas recalled. The agreement called for ST to help develop the XM Radio chip set and, in return, become the sole supplier of the component. No royalties were involved.

"There were no guarantees of volume," Patsiokas said. The finished chip sets would then go to companies like Sony Corp., Delphi-Delco and Pioneer Electronics Corp., which would integrate them into the satellite radio box and sell this box under their labels. Initially, the whole design was going to be put into an ASIC. Instead, ST developed a two-chip chip set comprising the channel decoder and an ASIC. In 2003, it became a single chip. The project quickly turned international. Other companies got involved because some had also worked on the WorldSpace chip set. Fraunhofer Institute in Erlangen, Germany, and a Swedish-German company, Coding Technologies, would develop compression algorithms; Canada-based Certicom designed the encryption technology; Lucent Digital Radio worked on digital radio transmission technology; and Westford, Mass.-based Digital Voice Systems Inc. added its vocoder technology, which transforms spoken words into digital code.

It's possible To an outsider, the project appeared faintly absurd: A startup with no volume guarantees, satellites or ground stations leading a global effort to design an untried technology. The chip set alone was a huge engineering challenge. Yet, as the teams began work in the fall of 1999, the real difficulty was not technical but human. Patsiokas ran things from XM Radio's base in Florida, but his design teams, separated by different time zones and different work cultures, were proving inefficient. Meanwhile, a competitor was developing a similar solution, further ratcheting up the time pressure. Patsiokas summoned his far-flung teams to Florida and put them in lockdown for more than a month. "We worked 18-hour days," he recalled. "It was 40 days from hell." The intense cooperation produced a chip set in late 2000, well in time for the 2001 launch date of XM Radio's satellite radio service. ST's early support is now paying off. As the single source for XM Radio baseband chips, the company had shipped a cumulative total of more than 3 million units for the satellite radio products by 2003, Patsiokas said.

ST executives would not disclose revenue. Since then, XM Radio has introduced plug-and-play devices like the SkyFI, which works in the car but can be removed to serve as a stationary receiver in the home. It uses the ST chip set. XM Radio has so far shipped about 750,000 SkyFI units. XM Radio has 1.6 million subscribers today, but Patsiokas fully expects that number to hit 20 million by 2010 as satellite radio catches on. "ROI [from the co-development project] will be huge," he predicted. XM Radio never approached other chip makers because it didn't have the resources. "I couldn't hire another 20 people to go and support another semiconductor supplier," Patsiokas said. "I couldn't go to a Philips or TI or Motorola because I would have to go and first explain what's going on. ST played a key support role and it was more than engineers for hire. It was ST's willingness to engage in a total partnership process." That early collaboration continues to bear fruit today.

ST has leveraged core development experience to co-develop an advanced chip set with New York-based Sirius Satellite Radio Inc. In April, Sirius announced an agreement with ST to produce and integrate the next-generation chip set for its satellite radios. The deal requires Sirius to buy at least 1.5 million chip sets in three years, spending about $20 million, and to pay for the development of the chips as milestones are satisfied. Change is good Pistorio's XM Radio experience provided the backdrop to his formal announcement last November that ST would pursue selective tie-ups with small companies as a key element of its corporate strategy. Such collaborative work would cover 10 areas: lighting, power supply, home appliance and automation, factory automation, metering, medical, automotive and, for smaller OEMs, connectivity, toys and games, and home entertainment.

ST is talking to or plans to have discussions with customers of all sizes within these 10 segments with an eye to increasing its market share. "Medium and small customers are looking for standard, off-the-shelf solutions, many of which we already have," said Dan Merchant, ST's vice president of U.S. sales and marketing. "When you get down to medium and smaller companies, they really want a [complete] solution. They don't want a lot of engineering." ST redesigned its Web site to offer electronic applications, or eTools, to accommodate the small OEM customer typically covered through distribution. Customers click on a specific application and see a block diagram. They can click on each block to see the parts ST now produces that fit in that block. The method allows customers to assemble a desired system online.

"It's a very efficient way," Merchant said, estimating that 60,000 to 80,000 small customers exist in the Americas. "We cannot touch them all ourselves, and our distribution customers cannot touch them all." Merchant doesn't see any challenge in carrying out the customer expansion strategy. Sales resources are being beefed up, with the U.S. staff already adding about 50 people specifically for this effort. Worldwide, the company says it will also expand sales teams, though numbers were not available. "We're taking a few customers at a time and adding resources appropriately," Merchant said. "We will eat a little and digest."

Drew Wilson can be reached at xdrewwilsonx@yahoo.com.