Besides the new entrants into the Top 50 rankings, I was interested in how the remainder of the ranking is composed structurally—are there a few very large companies (or even one) at the top with the rest being comparatively small companies, or is the Top 50 ranking more evenly distributed with a lot of large companies vying for dominance of
M&A 31 61% 18 40%
Bankruptcy 0% 2 4%
Decline in Revenue 16 31% 22 49%
Change in Business Model 4 8% 3 7%
Total 51 45
IP Core Fabless
the market.
To answer this question I compute the Herfindahl-Hirschman Index (HHI) by squaring the relative market share of each company and then adding it up (thus either ranging from 0-1 in case absolute values are used (as in this thesis) or from 0-10,000 in case percentage values are used) as detailed in Equation 1.
Equation 1: Herfindahl-Hirschman index
𝐻𝐻𝐼 = ∑ 𝑠𝑖2
𝑁
𝑖
s: Market share of firm i N: number of firms in market
Due to the squaring of the market shares, markets with few dominant firms with high market shares and a long tail of very small firms will result in a higher HHI than markets with many firms with equal market share. Accordingly the HHI can be used as a measure of industry concentration with an HHI of below 0.15 considered
‘unconcentrated,’ between 0.15 and 0.25 ‘moderately concentrated,’ and above 0.25 as
‘highly concentrated’ by the US Department of Justice in their Horizontal Merger Guidelines (U. S. Department of Justice, 2010).
A comparison of the annual HHI of the Top 50 companies of the market for IP Cores and the Fabless market reveals that while the Fabless market is unconcentrated and the trend is flat. The market for IP Cores has a higher concentration and has been classified as moderate since 2011; it is approaching a state of high concentration with an unbroken positive trend up to 2014, the last year the data was available (see Figure 10). The 2006 HHI value for the Fabless market is based on a top 40 ranking.15
15 This fact has no impact on the HHI since a robustness check estimating the increase in HHI if all companies were included in the computation of the HHI and if all remaining companies were the same size as the 40th ranked company reveals that this would only change the total HHI by 0.00067, a negligible amount.
Figure 10: HHI of Market for IP Core and Fabless; Data: Gartner, IC Insight
For a deeper understanding of the extraordinary trend of the market for IP Cores, I utilize the detailed reporting in sub-segments of Processor IP, Physical IP, and Other Digital IP using the segments detailed in Figure 1 in Section 2.2.1. Because the reports on these sub-segments only detail the Top 10 market participants and their respective market shares in these subcategories, I cannot compute the HHI based on the entire population. Since the market share report is based on the total market size (and not just relative to the Top 50 companies), I can compute a lower bound to the HHI since several small elements of the sum detailed in Equation 1 are missing, but the individual quotients are not distorted. A robustness check of the difference between upper and lower bounds of the HHI values reveals that the gap is, in most cases, very small16 (see Appendix A 5, Table 24).
I split our analysis by looking separately at each of the three segments ‘Processor IP,’ ‘Physical IP,’ and ‘Other IP’ and discuss the impacts of the sub-segments for each of these three segments.
Probably the most conclusive segment in trying to understand the increasing concentration is the Processor IP segment. The charts for the segments always contain the technology sub-segments (such as Microprocessors and DSP) and the overall, combined segment concentration (such as Processor IP – Total). In this segment both sub-segments of Microprocessors and DSPs are highly concentrated. However, while the concentration
16 Only two years in the sub-segment ‘Controllers and Peripherals’ within the ‘Other IP’ segment show a substantial possible difference of 0.03 driven by a low number of market participants identified and a substantial share of market captured by participants classified as ‘Other,’ which, in combination leads to the possibility of few large companies constituting the rest of the market and thereby having a large impact on the HHI.
2006 2007 2008 2009 2010 2011 2012 2013 2014
HHI of Top 50 rankings
Total market concentration - IP Core vs. fabless
IP Core total Fabless total
of DSP is decreasing, the trend for Microprocessors is steadily positive and the HHI reaches values of 0.84 in 2014, as shown in Figure 11 (see Appendix A 5 for all concentration figures). That is the result of one company capturing 82.9% of the market, the second largest being 5.2%, with the sixth largest provider in this market already having only 1.0% of market share. In short, this graph captures the success story of one company that has achieved a dominant position in the IP Core market for microprocessors
—ARM.
Since the sub-segment for microprocessors also happens to be the largest sub- segment in the market for IP Cores, with a revenue based market share of 42.7% of the overall IP Core market in 2014, the high concentration in this relevant sub-segment contributes strongly to the increasing concentration in the overall HHI of the market for IP Cores.
Figure 11: HHI of Market for IP Core, Processor IP segment; Data: Gartner
For the other two segments, the observations are not as clear-cut. In the segment for physical IP (Figure 12), most segments are low to moderately concentrated with only the Physical Library sub-segment being in the area of high concentration. However the level of concentration for this sub-segment (and the others, as well) is stable and is a very small sub-segment at 2.7 % market share. The two more sizable markets of Wired and Wireless Interface (separated in Figure 1, but reported jointly here due to variations in the reporting of Gartner over the years) at 18.8% and Memory Cells/Blocks at 9.4% are both moderately concentrated at around 0.2 in the year 2014 with a modest increase in concentration for the overall market driven by the largest sub-segment of Wired and Wireless Interface, yet nowhere close to strong enough to explain the overall trend on its own.
2006 2007 2008 2009 2010 2011 2012 2013 2014
HHI of Top 10 per Segment
Processor IP - design market concentration
Processor IP - Total Microprocessors DSP
Figure 12: HHI of Market for IP Core, Physical IP segment; Data: Gartner
The last segment, Other IP (detailed in Figure13), contains the largest heterogeneity in terms of concentration between the sub-segments. The most obvious line at basically full concentration around a single firm is the Block Libraries sub-segment, however at 0.7 % market share it is too small to impact the overall concentration to any significant amount; additionally, it stagnates as of 2007 and therefore cannot explain the continuously increasing trend. The Fixed Function Signal sub-segment, which also contains Graphics IP in this chart (again due to differences in reporting of this segment over the years in the Gartner reports), is the only sub-segment sizable enough to have a potential impact on the overall trend. Indeed, I do see a steady increase from 0.12 in the year 2006 to 0.28, or high concentration in 2014 thereby contributing to the overall increase in concentration.
Figure 13: HHI of Market for IP Core, Other IP segment; Data: Gartner
One final element that cannot be captured by splitting the market into its sub-segments is that some of the most successful companies have added to their product offerings over the years and expanded into new segments of IP Cores. Since the full-market ranking (Figure 10) is captured on a combined firm level, this effect additionally
0.00
2006 2007 2008 2009 2010 2011 2012 2013 2014
HHI of Top 10 per Segment
2006 2007 2008 2009 2010 2011 2012 2013 2014
HHI of Top 10 per Segment
Other IP - design market concentration Other IP
-Total
contributes to an increasing market concentration. As summarized by one manager, “So an SoC vendor like Texas Instruments or Qualcomm whoever was building a chip, would license the CPU from company A (name confidential) and then would license the graphics and the video from company B (name confidential). That kind of lasted for probably about a decade until both company A and company B decided that actually it would be beneficial to expand their portfolio and add more product lines” (Quote interviewee E).