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GLOBALFOUNDRIES gets license to additional IP in exchange for 10-year commitment to providing IBM Power architecture chips

The sun may have set on the International Business Machines Corp.'s (IBM) Microelectronics unit, but its decline was illustrated in all too telling fashion this week.  IBM announced on Monday that it had cut a deal with the privately held GLOBALFOUNDRIES to take the struggling unit off its hands.  The most eye-catching part of the deal is the cash -- IBM is actually paying GLOBALFOUNDRIES to take the money-losing unit.
 
I. First to the RISC Game, But Too Slow to Capitalize on Head Start
 
The deal comes amidst mounting losses.  The Microelectronics unit lost $700M USD in 2013 and $400M USD in H1 2014.  That loss is relatively small compared to the $17.5B USD (GAAP) in net income IBM reported for 2013.
 
But the reality remained that the fab and applications processor business was IBM's worse performing unit and faced mounting losses.  For a company that today gathers most of its profit from enterprise-grade software and services, the unit looked increasingly like an out of place dinosaur.  Its hey-day had long since come and gone.
 
The Microelectronics unit was always a bit of an underutilized side project for the pioneering computing firm, but the unit managed to achieve a number of groundbreaking achievements over its history.  The Microelectronics unit's early years included its development of complex instruction set computer (CISC) processors for mainframes.  These included the S/32 (System/32), S/34, S/36, and S/38 mainframes of the late 1970s/early 1980s.  It also developed the OPD Mini Processor, which was used in the IBM Office System/6, an early client PC with nascent productivity software.
 
In 1975, IBM manager John Cooke envisioned a radical shift in application processor design, proposing the fundamentals reduced instruction set computer (RISC) application processor design.  By 1980 Cooke's efforts had yielded a finished product: the IBM 801.  But IBM failed to capitalize on his innovation; the IBM 801 was never widely distributed.

IBM's Cooke
IBM researcher John Cooke poses with the IBM 100, an early prototype implementing his RISC-style computer architecture. [Image Source: IBM]

Today, ARM Holdings plc (LON:ARM) has leveraged the merits of RISC to surpass even the mighty Intel in application processor shipments to the consumer and embedded markets.  But even before ARM became a major market force, Sun Microsystems had quickly risen to outsell IBM in enterprise fulfillments for RISC processors.
 
IBM's consumer business was highlighted by the iconic 1981 hit, the IBM Personal Computer, but the advent of BIOS and IBM compatible PCs quickly led to a waning importance in the consumer market.  Of course, that did not adversely impact the Microelectronics unit directly, as IBM had actually been using a complex instruction set computer (CISC) processor from Intel Corp. (INTC) -- the 16-bit Intel 8088 -- in the consumer PC box.  It's fair to argue, though, that by losing relevance in the consumer PC market, it lost a potential opportunity to sell new RISC processors to consumers.

IBM logo
By the mid 1980s, Sun Microsystems had begun to sell RISC processors and IBM got serious about trying to finally productize the technology.  Its IBM 801 design morphed into the Research OPD Micro Processor (ROMP processor) under the Project America effort, which later became known as Project Cheetah.  In 1986 Project Cheetah went commercial with the ROMP-powered RT PC (RISC Technology Personal Computer).  But a high entry cost of $20K+ USD (~$43,000 USD in 2014 dollars) made it "a bit of a flop" in IBM's own words.
 
II. POWER's Apple and Sony Eras
 
In 1990 IBM introduced the POWER1 architecture, the start of a chip line that would eventually represent the pinnacle of IBM's advances in the enterprise and consumer applications processor market.  In 1992, Apple, Inc. (AAPL) and Motorola allied themselves with IBM and by 1994 Apple's Macintosh computers were based on IBM processors designed with IBM's new POWER architecture.
 
The greatest successes of the partnership came with the popular iMac series of PowerPCs, a PC line designed by Jony Ives, the Apple design wizard who would later craft the iPhone and iPad.  The PowerBook laptops and other mid-to-late 1990s designs also used chips coproduced by IBM and Motorola.

iMac classic
PowerPC drove the classic Jony Ives-designed iMac. [Image Source: Apple]

Overall, though, the promising architecture struggled in sales from day one.  And to make matters worse in 2001 Motorola backed out of the alliance, leaving IBM to alone design chips Power architecture chips for Apple.  In June 2005 Steve Jobs announced a fix for PowerPCs' compatibility and portability headaches -- scrapping IBM's POWER architecture and transitioning to Intel x86 applications processors.  A year later, Apple completed the transition to x86.

But even as it was losing the Apple business IBM was launching another new POWER business -- the multicore CELL processor for the PS3.  Coproduced by Japanese semiconductor firm Toshiba Corp. (TYO:6502) and Sony Corp. (TYO:6758), development of CELL began in 2001 and continued through 2006.  It culminated with the launch of the PS3 in Nov. 2006.  

IBM now had a high volume business, but its struggles were far from over.  It reportedly was getting only around 10 to 20 percent yields in the first couple years of its CELL chip production, which contributed to the PS3's high launch price and early supply struggles.  Developers also found the design powerful (no pun intended), but difficult to program for.  The development difficulty left as much as half the processing resources unutilized in early PS3 titles, according to industry sources.

CELL BE

IBM, to its credit, eventually overcame much of these supply issues and matured the CELL design -- initially produced on the 90 nm node -- through a number of die shrinks, first to 65 nm, then to 45 nm.  Yields improved and correspondingly the PS3 finally became profitable for Sony.  By 2008 a handful of Toshiba laptops even picked up the design, a sign of its improvements.
 
The struggles, though, led to Sony chilling to semiconductor fabrication and opting for a more traditional x86 processor from Advanced Micro Devices, Inc. (AMD) for the PlayStation 4.
 
Sony was far from alone in its struggles in the processor market. With capital costs necessary to shrink application processors to ever smaller nodes rising fast, Intel's gaudy profit margins fell back down to Earth and its smaller x86 rival AMD was forced to spin off its foundry business in 2009, creating the privately held GLOBALFOUNDRIES company.
 
 
III. The Fall of POWER and What Remains
 
In Feb. 2012, facing common adversities, IBM and GLOBALFOUNDRIES partner with South Korean chipmaker Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) to form the "Common Platform Alliance", whose members committed to co-development of 28-nm, 22-nm, and 14-nm transistor fabrication development.
 
The partnership with GLOBALFOUNDRIES and Samsung helped IBM's Microelectronics unit to limit its losses and stay competitive in terms of process.  IBM is currently working to use the alliance's common technology to introduce the 22 nm massively parallel POWER8 architecture, which should be widely available by early next year.
 
IBM still has one major consumer market contract -- its partnership with Nintendo Comp., Ltd. (TYO:7974) to fabricate the 45 nm "Espresso" system-on-a-chip which drives the Wii U.  

IBM Espresso
IBM's Espresso POWER family CPU powers the Nintendo Wii U gaming console. [Image Source: Marcan]

The Espresso design employs a GPU from AMD and a CPU design derived from the PowerPC 750, the same aging architecture that drove the original iMacs in the late 1990s.  Globally the Wii U has sold over 7 million units since its launch in Nov. 2012.
 
But the Wii U has been a slower seller than even the PS3 and aside from it; IBM's Microelectronics unit's only revenue came from patent licensing and low-volume sales of POWER architecture servers.  Up to date numbers of current POWER server revenue are hard to come by, but we know from past releases that the division by 2010 was in a downward slide and was earning less than $1B USD quarterly in revenue.

IBM power system sales
[Image Source: IBM via ITJungle]

Overall the IBM Microelectronics unit accounted for roughly 2 percent of IBM's revenue in 2013.  IBM saw revenues of $99.8B USD last year, so that amounts to roughly $2B USD in revenue, indicating PowerPC has slid even further to half its 2010 sales levels by revenue, or less.
 
IV. The Future: Hope for POWER?
 
With annual losses approaching roughly a third its unit's annual revenue, the Microelectronics unit was clearly badly dysfunctional and in need of some sort of sale or spinoff.
 
The GLOBALFOUNDRIES purchase could be just what the doctor ordered.
 
One obvious advantage of the deal is that IBM saves face and employees will keep their jobs -- for now at least.  If IBM had simply opted to close the unit, it would be marking a sad end to a long line of applications processor that had struggled, but had achieved some modest success over the years. Instead, POWER has the chance to live on under the deep-pocketed umbrella of GLOBALFOUNDRIES leadership.
 
The deal will put GLOBALFOUNDRIES in control of IBM Microelectronics' East Fishkill, New York and Essex Junction, Vermont fabs.  The East Fishkill fab, a 300 mm wafer facility, opened in 2003 on the 90 nm node and employs over 4,500.  It achieved its peak production in the PS3 era, when it was one of the primary fulfillers of orders for CELL processors.
 
More recently, the fab received upgrades in 2012 to allow it to enter volume production on the 32 nm node, with silicon on insulator (SOI) circuitry.  Most recently it entered bulk production of high-K metal gate (HKMG) on the 28 nm node.  Today the fab produces a mix of 28 and 32 nm chips at volume and is testing upgrades that will allow it to produce on the 20 and 22 nm nodes.
IBM roadmap
The East Fishkill fab had already worked closely with GLOBALFOUNDRIES Fab 8, located roughly 100 miles to the north in Malta, New York.  Malta, in turn, is located roughly 130 miles to the south of the Essex Junction facility, a 200 mm fab that employs roughly 4,200 people.  The Vermont facility had seen minor layoffs of roughly 140 employees in March, amid the mounting losses of the Microelectronics unit and tapering of the PS3 CELL processor business.
 
Just how many employees at the two fabs will stay onboard remains to be seen.  GLOBALFOUNDRIES CEO Sanjay Jha stated to The Burlington Free Press:
 
We have no plans for layoffs or shutting the fabs down in any way.  That is our commitment.
 
The two facilities employ roughly 8,500 to 9,000 employees.  GLOBALFOUNDRIES has committed to keeping at least 5,000 of these employees onboard, including 800 of "the best technologists in the world".  But it may wind up keeping well north of 5,000 employees, as it already committed to retaining over 4,000 employees at the Essex Junction fab -- virtually the whole staff.

IBM Essex Junction
IBM's facility in Essex Junction, Vermont will continue to produce 200 mm wafers under its new operator, GLOBALFOUNDRIES. [Image Source: VTDigger]

One factor that ensures that commitment won't change quickly is that the deal hinges on GLOBALFOUNDRIES pledging to continue to produce POWER server processors, which it has committed to providing IBM with for the next decade.  In exchange some intellectual property rights will transfer to GLOBALFOUNDRIES, and other patents will be licensed to GLOBALFOUNDRIES in exchange for its support of POWER chipmaking.

GLOBALFOUNDRIES is already the second largest fab company in the world.  Its trio of 300 mm wafer fabs and four 200 mm fabs produce 2 million wafers, a total that places it behind only Taiwan Semiconductor Manufacturing Comp., Ltd.'s (TPE:2330) (TSMC).  IBM Microelectronics, meanwhile was the eleventh largest fab in 2013.  Together the combined entity will have about a quarter of the revenue of TSMC.
GlobalFOUNDRIES

The deal could help GLOBALFOUNDRIES achieve its ambitious target of 14 nm FinFET transistor production in 2015.  GLOBALFOUNDRIES also hopes to achieve profitability in 2015, according to past statements.

IBM
IBM Microelectronics was already co-developing 14 nm node FinFET SOI technology with GLOBALFOUNDRIES and Samsung. With the unification that partnership reduces to two major players -- Samsung and GLOBALFOUNDRIES. [Image Source: PC Magazine]

The cash portion of the deal will involve IBM paying GLOBALFOUNDRIES $1.5B USD.  IBM also expects $3.2B USD in other costs relating to the sale, adding up to a $4.7B USD pretax charge for Q3 2014.

IBM writes that it still plans on following through with plans to invest more than $3B USD in semiconductor nanotechnology research.  IBM has maturing projects in both nanophotonics and carbon nanotube products.  It's also exploring a variety of next-generation memory technologies and other future computing circuit types.  GLOBALFOUNDRIES should get first access to those novel solutions, as IBM's key production ally and chosen guardian of its fab legacy.

Sources: IBM [press release], The Burlington Free Press





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