Legal woes, stock drop mar Rambus' future

Summary:It has been a rocky three months for Rambus. But things are likely to get worse

Memory-chip designer Rambus reported a small profit on Thursday, but that is the highlight of an otherwise rocky three months, scarred by a sliding stock price and landmark legal defeats.

Things are likely to get worse. Industry analysts say the company faces an uncertain future as its patent litigation against several large memory makers plays out in the courts -- litigation potentially worth millions of pounds. "I think Rambus made a big mistake by pursuing the legal strategy as aggressively as it did," said Martin Reynolds, research fellow at Gartner. "It's a big PR issue. There's a lot of damage out there they'll have to control."

Rambus is expected to report earnings of 4 cents a share on revenue of $22.3m (£16m) for its fiscal third quarter, according to analysts polled by First Call.

Though the small profit is better than many chip companies have managed during the ongoing tech slump, Rambus faces much greater liabilities. Analysts say the company's aggressive pursuit of royalties from manufacturers of SDRAM (synchronous dynamic random access memory) and the resulting legal battles with Micron Technologies and Infineon have hurt its ability to establish its own memory technology, RDRAM (Rambus dynamic RAM), in the PC market.

Rambus has filed patent-infringement lawsuits against several memory makers, including Micron Technologies, Infineon and Hynix Semiconductor, formerly Hyundai.

The litigation being pursued by Rambus has nothing to do with its own RDRAM technology, the subject of tremendous debate in the high-tech community over purported performance advantages and high costs. Instead, the company claims that its patents cover many of the innovations inside SDRAM, the most popular form of memory used in current PCs.

As a result, Rambus argues it should receive royalties for each memory chip based on SDRAM or on the next generation of SDRAM, known as DDR.

If the courts uphold its claims, Rambus stands to gainbns of dollars in royalties from resulting licensing agreements with memory makers.

But the company's chances of claiming such a sweeping victory have dimmed in recent months, since a federal judge in Virginia dismissed Rambus' patent suit against Infineon. The judge also upheld Infineon's counterclaim alleging that Rambus committed fraud by failing to properly disclose patent information when required to do so by an industry standards body.

Meanwhile, an Italian court also sided with Micron.

Rambus is appealing both cases, but the rulings are likely to play a significant role in swaying the outcome of other cases. The setbacks have already been reflected in Rambus' stock, which has dipped from $112 a share a year ago to below $10 a share.

Disclosures about Rambus' conduct may have damaged its ability to enter into long-term partnerships with major manufacturers, analysts say.

"Midterm, the industry is going to use a lot of Rambus; RDRAM will grow quite nicely in the next couple of years," said Dataquest's Reynolds. "In the long term, they're likely to be kicked out of it altogether, because they... don't have the trust of the industry."

Rambus executives declined to comment for this report, citing the pre-earnings quiet period.

Most of the damage comes from the court cases. If Rambus loses, as it did in the first go-round with both Micron and Infineon, then the company will be forced to rely solely on royalties from RDRAM, which has been slow to penetrate the PC industry.

Mercury Research estimates that, based on Pentium 4 sales of about 3 million processors, manufacturers have shipped fewer than 10 million total RDRAM modules. Most of those modules have been paired with Intel's Pentium 4 chip, which works only with RDRAM. That will change soon, however, with the introduction of an SDRAM-compatible chipset for the Pentium 4 later this year.

Even with Intel on Rambus' team, much of the future for RDRAM rests on Rambus' relations in the tightly interwoven community of PC makers and component suppliers. The company has "burned through some good will -- not all of it," said Kevin Krewell, senior analyst with MicroDesign Resources, concluding that Rambus "may be down, but it's not out".

Even so, RDRAM faces tough competition from the DDR standard, seen by many as a more cost-effective way to meet the growing demand for high-performance memory.

Gartner research released in March shows that SDRAM makes up 84 percent of the current memory market, with RDRAM accounting for 8 percent and DDR for 3.5 percent.

But Gartner predicts a much more even split next year. SDRAM will grab 55 percent of the market, with 43 percent divided between DDR SDRAM and RDRAM. It's too early to predict what the percentages will be, said Andrew Norwood, an analyst with the company, but "the DRAM companies say 28 percent of production will be DDR and only 15 percent will be Rambus."

Although demand for high-performance memory will continue to grow, Rambus may not be the main beneficiary, said Mercury Research analyst Dean McCarron.

"The fundamental technology issues that brought Rambus into being are still there," McCarron said. Those include "latency," or how fast new data can be accessed, and the need for higher-bandwidth memory.

"The question remains, had Rambus been an open standard, would it have taken over the market?" McCarron said. "I don't know if it'll ever be answered."

Analysts say that looking a few years ahead, Rambus may well find itself designed out of the picture. By 2004-2005, PC processors will reach speeds of at least 4GHz and will call for even greater memory bandwidth. But PC makers are unlikely to be inclined to pay Rambus' premium to meet those needs, McCarron said.

"The market has said pretty clearly that 'We like cheap memory, and we are willing to take the performance hit,'" he said.

As a result, companies that must make technology decisions now for PC products planned for the 2004-2005 time frame may forgo RDRAM, which, though it has come down in price substantially since its introduction, is still about three times the cost of SDRAM, according to analysts.

That could relegate Rambus to the position of bit player in the memory business, popular in niches such as video-game consoles and networking products, where high performance is essential. But the company may be unable to garner more than a sliver of the PC market, where there's some wiggle room.

"Rambus technology is going to be a niche player in the PC industry," Krewell said. "What it really comes down to is, will they get royalties on DDR? If they don't, they will become a small technology company."

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