On Semiconductor’s recent acquisition of Sound Design Technologies reduces the number of independent manufacturers of digital signal processor (DSP) chips for hearing aids, lessening competition in an industry that is already highly concentrated. Less competition is not a good thing over the long run, because when fewer manufacturers control a market, they can charge higher prices for the products they’ve already built. They can also invest less in new technology innovations because there are fewer competitors out there likely to leapfrog them. However, over the short term, On Semiconductor’s acquisition acquisition of Sound Design may actually be a very good thing for the hearing industry. Here’s why.
Ever since Sound Design spun out of Canadian semiconductor maker Gennum several years ago, it has been the only independent DSP chip manufacturer focused on the hearing aid market. Many hearing-aid manufacturers who do not design and build their own chips use Sound Design’s chips to power their hearing aids. DSPs are specialized semiconductor products whose hearing-aid manufacturer customers expect lower costs and higher performance every year along with more miniaturization and special features. DSPs allow hearing-aid makers to provide better feedback canceling capability, automatic adjustment to different listening environments, automatic adjustment of directional microphones, wireless communication between left and right hearing aids to provide better hearing “in stereo,” Bluetooth integration, and numerous other features that have dramatically improved digital hearing aids in recent years.
Sound Design’s new Wolverine DSP is a high-performance digital engine for hearing aids that is smaller than earlier DSPs, consumes less power, delivers more processing capability and enables easier and more flexible development and deployment of custom sound-processing algorithms and special applications by hearing-aid manufacturers. Clearly the company’s focus on the hearing-aid market has paid off.
But chip design, manufacturing and distribution is a highly capital-intensive business, and Sound Design on its own was nowhere near as large as many of the semiconductor companies it would have to compete against. Without being able to achieve economies of scale from a manufacturing operation selling a lot of products, it’s hard for a chip company to keep costs as low as customers want.
Therefore being acquired should enable Sound Design to leverage On Semiconductor’s mass-production capabilities to keep costs down. It will also be able to tap On Semiconductor’s deep bench of designers with extensive experience developing power and signal management semiconductors, logic chips, discrete components and custom devices — all of which can be applied to next-generation hearing-aid DSPs. That’s a benefit to hearing-aid manufacturers, who need to continue integrating all kinds of new capabilities into ever-smaller form factors. On Semiconductor spun out of Motorola several years ago and is now a leading publicly held semiconductor company with nearly $2 billion (USD) in annual revenue, so it’s got all the resources a small manufacturer of hearing-aid DSPs should need. If it allows Sound Design’s team of executives to continue focusing as relentlessly on the hearing-aid market as they have in the past, the acquisition could be a win-win-win for On Semiconductor, Sound Design, hearing-aid manufacturers who depend on them, and hearing-aid users who will continue to benefit from new technologies and better performance at lower costs.
However, that’s a big “if.” The business landscape is littered with the carcasses of failed acquisitions where hoped-for synergy was never achieved. And in this case, competition in the target market has suffered a double-whammy, because in 2007 On Semiconductor acquired the other leading independent maker of hearing-aid DSPs, AMI Semiconductor. Combining Sound Design with AMI’s hearing-aid products leaves On Semiconductor as the only game in town for hearing-aid manufacturers who want to acquire a standard DSP rather than develop their own. That means less competition in the hearing-aid industry. Which gets us back to where we started — the fear that as one of only a few suppliers in an already-concentrated industry, On Semiconductor might slow down investments in new technology and features to improve its profit margins and, with fewer competitors breathing down its neck, limit price reductions as well.
That’s why I’m giving On Semiconductor’s aggressive move into the hearing-aid business two cheers, not three. They are big cheers, because On Semiconductor should be able to continue providing new DSP technologies that improve performance while lowering costs for hearing-aid manufacturers. But I will reserve my third cheer for the yet-to-be named competitors out there, in Silicon Valley and elsewhere, who are inventing new chips that will outperform what’s on the market today and give On Semiconductor a competitive run for its money.