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Broadcom believes that one of its key competitive advantages is its broad base of core technologies encompassing the complete design space from systems to silicon. The company has developed and continues to build on four primary technology foundations: proprietary communications systems algorithms and protocols; advanced digital signal processing hardware architectures; silicon compiler design methodologies and advanced cell library development for both standard cell and full-custom IC design; high-performance analog and mixed-signal circuit design using industry-standard CMOS processes.
Broadcom Corporation is one of several companies contributing to the infrastructure that will bring high-speed Internet and other services directly to homes and offices. The company specializes in designing high-speed integrated circuits (ICs), or chips, that are used in applications such as cable TV set-top boxes, cable modems, and local area network (LAN) cards. The company also provides key technology and products in emerging broadband markets such as digital subscriber loop (DSL), fixed wireless, direct broadcast satellite, and terrestrial digital broadcast. Extremely popular with investors since going public in 1998, the company has used its stock to acquire smaller high-tech companies and integrate their technology.
Communications Markets: 1991-95
Broadcom was founded as a private company in 1991 by Henry T. Nicholas III, Ph.D., and Henry Samueli, Ph.D. The two men had 35 years combined experience in communications integrated circuits (IC). Nicholas was Broadcom's president and CEO, while Samueli was the company's vice-president of research and development. While working at TRW Inc., the pair gained experience in the Defense Department's Very High-Speed IC (VHSIC) program that later enabled them to create powerful silicon compilers for the quick design of commercial integrated circuits (ICs). Samueli was a tenured electrical engineering professor at UCLA and Nicholas's doctoral program adviser.
The company's basic strategy was to focus on emerging markets in communications that used cable or wire. Using its design cell library and silicon compiler technology, it was able to quickly develop chip products, or integrated circuits (ICs), for applications such as Fast Ethernet or advanced cable TV systems. Leveraging its military-based technology, Broadcom was able to accelerate the development of its commercial ICs.
Broadcom got its first big break in 1993 with a contract from Scientific-Atlanta, Inc. of Norcross, Georgia, which was supplying TV set-top boxes for Time Warner Corp.'s experimental cable system in Orlando, Florida. Broadcom initially supplied Scientific-Atlanta with a three-chip set for digital demodulation in the set-top boxes, and within ten months had integrated the solution into one IC using a technology called quadrature-amplitude modulation (QAM).
For the first few years Broadcom relied on full-custom designs and licensing agreements for revenue as well as funding from its two founders. Its early custom-chip customers included Rockwell International, Analog Devices, and U.S. Air Force contractors producing global positioning systems. The small and relatively unknown company was able to gain such customers because of what its engineers accomplished and the quality of its engineering team, including the two founders.
In 1994 the company's revenues exceeded $5 million. It also received about $5 million in corporate financing from Intel Corporation, which was interested in Broadcom's Fast Ethernet chips for networking. In the fall of 1994 it began shipping volume production quantities of chips using the production capacities of American Microsystems Inc. of Pocatello, Idaho, and Taiwan Semiconductor Manufacturing Co. Revenues were expected to increase fourfold in 1995. Fast Ethernet, with 100-megabit/second ICs, was seen as a new market for potential growth. The company had about 50 employees.
Supporting High-Speed Internet Access: 1996
As Internet usage quickly expanded in 1996, regional Bell operating companies were competing with cable operators to become the dominant providers of Internet access. It was not yet clear whether cable modems hooked to coaxial cables or telephone modems with asymmetrical digital subscriber lines (ADSL) would become the dominant provider of Internet access. Broadcom was positioned to support both technologies. It was developing an ASDL transceiver for Northern Telecom (Nortel) and also rolling out a cable modem chipset for coaxial cable applications.
Using the same QAM technology that it used for its QAMLink line of devices for cable TV set-top boxes, Broadcom implemented QAM in cable modems and ADSL transceivers. Broadcom's QAMLink cable modem chipset provided 1,000 times the bandwidth then available over phone lines at 28.8 kilobits-per-second. Supporting the chipsets through strategic alliances with Broadcom were such original equipment manufacturers (OEMs) as General Instrument, Motorola, Hewlett-Packard, and Scientific-Atlanta.
By 1997 Broadcom's vision was to provide the technology to make the Internet accessible without a personal computer. The company was making the silicon chips inside nearly every cable modem and digital set-top box. Red Herring, a technology monthly, named Broadcom the best private company in the United States, and Nicholas and Samueli were named to the 'Top 50 Cyber Elite' by Time Digital. It was estimated that cable companies deployed about 20,000 cable modems in 1996 and 100,000 in 1997. The demand for cable modems was expected to explode to one million in 1998. Each cable modem contained about $35 worth of Broadcom chips. For 1997 Broadcom reported a net loss of $1.2 million on revenues of $37 million.
For 1998 Broadcom forecast it would provide $30-$45 worth of chips for two million digital cable set-top boxes. Demand, however, was dependent on the ability of cable systems to upgrade their infrastructures. Most systems were not designed for 500 channels or two-way communication with the Internet.
Going Public, Rising in Valuation: 1998-2000
Broadcom went public in April 1998. It had grown to about 320 employees and boasted 36 Ph.D.s on its payroll. The company was popular with investors, because it was making or preparing to make devices that supported high-speed voice and data transmission for computer networks, cable modems and digital TV set-top boxes, high-speed telephone modems, and direct broadcast satellite systems. In other words, Broadcom appeared to be positioned to play a big role in the convergence of computers, telephones, and television. Its two biggest customers were 3Com Corporation and General Instrument Corporation.
In the first six months following the IPO, Broadcom's stock doubled in price and occasionally traded above $72, three times its original price. In September 1998 the company issued another three million shares to the public. By January 1999 Broadcom's two founders were billionaires. At least 300 employees became millionaires, from engineers to receptionists. The firm's stock hit $100 in December 1998 and was approaching $200 a share in early January. The company's revenues for 1998 were $203.1 million and net income was $36.4 million.
Series of Acquisitions: 1999
In 1999 Broadcom began making a series of acquisitions that would expand its technological capabilities. In January 1999 Broadcom acquired startup Maverick Networks, a developer of multi-layer switching technology for enterprise networks, for about $104 million in stock. The acquisition of the two-year-old company gave Broadcom the means to enter the market for corporate enterprise switches.
In February Broadcom announced it would provide products for in-home networking that would transmit voice, video, and data at high speeds over existing telephone wires. The company dubbed its home networking technology MediaShare. Nortel Networks, anxious to maintain a competitive edge in the broadband arena, adopted very high speed digital subscriber line (DSL) technology that was jointly developed with Broadcom. Nortel said its new scalable DSL transceiver would support digital television, high-speed Internet access, videoconferencing, and multiple Internet protocol data streams.
In an effort to reach small and medium sized companies, Broadcom selected Insight Electronics as its first authorized distributor. Through Insight, which was selected because of its technical expertise, Broadcom products would be made available throughout North and South America. Until now Broadband's customer focus had been on large companies, such as Cisco Systems, Nortel Networks, 3Com, Motorola, and Scientific-Atlanta.
Broadcom acquired Epigram Inc., a leader in home networking silicon technology, in April 1999 for $316 million in stock. Home networking was still in its infancy, but analysts estimated the home networking market could reach $1.4 billion in four years. The acquisition helped boost Broadcom's market capitalization by more than $850 million as investors drove up the stock price. Purchasing Epigram all but assured Broadcom it would be first to market with its own home networking technology. Epigram's technology was widely expected to be the basis for the Home Phoneline Networking Alliance's 2.0 standard, an expectation that was confirmed by the Alliance's announcement in July 1999 that it had chosen technologies from Broadcom and Lucent Technologies as the basis for the next generation in home networks.
Broadcom introduced a new, faster chip (IC) that could transmit data, voice, and video signals on a copper line at one gigabit per second, ten times faster than existing technology and a speed then attained only on fiber optic cables. Cisco Systems, 3Com, Nortel, Hewlett-Packard, and Dell were all developing products based on the new chip. Again, the company's stock soared on rumors of the announcements.
Amedia Inc., a design engineering firm and developer of advanced silicon technology that was based in India, was acquired. Then Broadcom purchased HotHaus Technologies of Vancouver, British Columbia, for $280 million in stock. HotHaus made software for embedded digital signal processors. The acquisition added to Broadcom's portfolio of ICs for broadband applications in DSL, cable modem, and wireless environments. The company hoped to bring Voice Over IP to home through an outside provider's broadband network, such as a cable operator, a DSL service provider, or via satellite provider. The Voice Over IP market was forecast to exceed $1.8 billion by 2003, up from $290 million in 1999.
In August 1999 Broadcom acquired AltoCom Inc., a maker of software-based modems, or 'soft modems,' for $180 million in stock. The acquisition gave Broadcom access to another area of Internet technology, enabling Broadcom to build chips that would work with both cable and phone lines.
Rumors began circulating in the summer of 1999 that Broadband cofounder Henry Nicholas would purchase the California Angels and the Anaheim Mighty Ducks from the Walt Disney Company. In August 1999 he gave the University of California-Irvine's rowing team a $1.28 million stock donation, the largest athletic donation in UCI's history. By mid-1999 70 percent of the 300 employees when the company went public were millionaires or better.
In October 1999 Nicholas and Samueli formed a partnership with Marvin Winkler, chairman of Gotcha International, to launch the Broadband Interactive Group (BIG). The privately held group planned to use Broadcom's high-speed communications chips to deliver interactive programming about sports and surfing. While Broadband was manufacturing interactive TV chips for cable set-top boxes, hardly anyone was using that technology, because hardly anyone was offering interactive TV services. BIG's goal was to create a demand for such services. It purchased all of Gotcha's media operations, including Gotcha TV, Gotcha.com, and three magazines. The three partners also discussed the possibility of forming a group to run the day-to-day operations of the Angels and the Ducks with the Walt Disney Co. Finally, though, Nicholas had to put an end to the rumors that the group was planning to buy the two sports teams.
Perhaps relieved that Nicholas and Samueli were not interested in owning a professional sports team, Wall Street sent Broadcom's stock surging in November 1999. With its stock price rising over $200 a share, the company's market capitalization was approaching $22 billion. The rise came in anticipation of a stock split, which often precedes a run-up in a company's stock price. By January 2000, the stock was trading at more than $300 a share. A two-for-one split was subsequently announced for February 11.
At the end of 1999 Henry Samueli, together with his wife Susan, donated $20 million to the University of California-Irvine's engineering program and $30 million to the engineering program at University of California-Los Angeles (UCLA).
Broadcom continued acquiring companies in 2000. In January it acquired BlueSteel Networks Inc., a maker of chips that scramble and unscramble data sent over the Internet, for $123 million in stock at the stock's closing price of $328.50. BlueSteel's high-performance security processors protected Internet transmissions from hackers. Broadcom noted a growing trend to include security in every application across networks, especially for consumers who wanted to participate in areas such as electronic commerce and home banking.
In March Broadcom acquired Digital Furnace Corp., an Atlanta, Georgia-based developer of software that increased the flow of information over cable lines, for about $136 million in stock. Digital Furnace's software compressed data sent over cable lines, thus tripling the capacity of cable networks equipped with Broadcom's high-speed communication chips. That same month Broadcom acquired Stellar Semiconductor for about $162 million. Stellar was a Silicon Valley designer of 3D video chips. Its cable modem chips could accelerate 3D graphics by reducing the amount of data and time it took cable TV set-top boxes to display three-dimensional pictures on TV screens.
Following the February stock split, Broadcom's stock continued to soar, reaching nearly $250 a share. The company's market capitalization was more than $50 billion. As a result of its acquisitions in 1999, Broadcom reported revenues of $518.2 million that year, nearly two-and-a-half times 1998 revenue; net income reached $83.3 million, more than three times 1998's net income. Broadcom continued to be popular with investors and was positioned as a supplier of high-speed chips to the growing communications industry.
Principal Competitors: LSI Logic Corporation; VLSI Technology Inc.; Advanced Micro Devices, Inc.; AT & T; Motorola Inc.; National Semiconductor Corporation; Hughes Electronics Corporation; Raytheon Company; Texas Instruments Inc.; Intel Corporation; Conexant Systems Inc.