There is a trend that the current downturn is only going to accelerate: to turn fixed costs into variable costs. Often this is what is behind outsourcing of some capability. Sometimes it is driven purely by either cost (let’s do it in China) or core-competence considerations (do we really need to run our own cafeteria?) but often it is driven by a desire to switch an inflexible fixed cost for a variable cost. Instead of owning a fab (fixed cost) then let’s just buy wafers from TSMC (variable cost).
There are two big problems with a large expensive fixed cost. One is just that it is expensive and so it ties up a lot of capital (or a lot of expense budget for a “fixed” cost like employees) for which there may well be more profitable uses. Second, the fixed cost usually puts in place a fixed capacity of some sort, and that capacity risks always being either more than the market need is, or less than the market need is.
TSMC makes money as a foundry, of course (well, maybe not right now). It’s scale is enormous so it may well be able to make money selling wafers for the same price as you can get wafers out of your own fab, even if you have one running at capacity. But that’s the point. Your fab is never running at capacity. It is either below capacity, in which case wafers cost more than the “standard price” because all that depreciation needs to be spread over fewer wafers. Or else it is above capacity, meaning that there are wafers that you could sell profitably that are not being built (if your planning is poor, you may even have orders for them, and commitment dates that you are going to miss). Even if you pay a price higher than your standard price for wafers, it is worth a lot to avoid having to absorb fab variances when the fab is not full, and to gain the capability to sell more than capacity when you have a strong order book.
In the web space, you no longer need to build your own high-capacity server farm. Amazon, Google and others will sell you server time and disk space on a purely variable cost basis. If you website becomes a big hit then scaling should be much more straightforward.
In some ways you can look at Amazon S3 or TSMC as companies that are in the business of making the up-front investment in fixed cost assets and then charging you a variable cost to use them. Lots of other companies do the same. It doesn’t cost an airline anything (well, not much) extra to fly an extra passenger; it is basically in the job of taking airplanes (fixed cost) and working out good business models to sell trips (variable cost). Cell-phone companies largely have a network of base-stations (fixed cost) and work out how to charge each customer for using them (variable cost). It’s not always obvious what the best model is for making the cost variable: do you charge data per megabyte, or unlimited data for a month? How does the money get split when you are roaming on other people’s networks? Is data the same price as the digitized data underlying a voice-call?
When supply chains disaggregate, usually one thing that happens is that non-core areas, especially ones involving fixed costs such as equipment or full-time employees, are divested. New companies spring up to specialize in providing that non-core activity as their core competence. Ross Perot made his fortune at EDS taking companies’ IT departments off their hands and created a big specialist company to provide those services. Semiconductor companies get rid of their EDA groups and an EDA industry comes into existence (Cadence, Synopsys, Mentor etc). Semiconductor companies get rid of some of their fabs and a foundry industry comes into existence (TSMC, UMC, Chartered etc). Semiconductor companies get rid of their technology development (TD) groups and rely on the foundry industry for that too. One interesting area of debate right now is whether design is next, and how much of design. Nokia already moved its chip development group into ST. eSilicon, according to Jack Harding its CEO, is doing very well. Faraday is (or at least was) doing about 200 designs a year.
When semiconductor companies design chips about as often as they reconfigure buildings, does it make any more sense to have their own not-very-expert employees floor-planning their chips than their own building architects floor-planning their offices.