When DVDs supplanted VCRs in the home-entertainment market, it looked like good times for chip makers Zoran (NASDAQ:ZRAN) and ESS Technology (NASDAQ:ESST). High margins rarely last in high tech, however, as invariably one technology trumps another or competition floods the marketplace and squeezes the markups.
Thus, while some companies like Motley Fool Stock Advisor top pick Netflix (NASDAQ:NFLX) and select movie studios like Disney (NYSE:DIS) and Viacom (NYSE:VIA) flourished on the conveniences of the new format, the tale's been one of freefalling prices on the hardware side.
Ordinarily, this is where we'd get to the worst of times for Zoran and ESS, but something peculiar happened: Their roads diverged.
Shares of cash-rich, yet revenue-poor ESS Technology are stuck in the single digits. Zoran, meanwhile, nearly tripled off its October lows. Last month, Zoran posted a record quarter as its digital-camera chip business took off; ESS saw second-quarter revenues plummet a staggering 64%.
But might Zoran and ESS cross paths again? It could happen. Zoran, which just closed its $450 million acquisition of Oak Technology, now finds itself slashing its earnings guidance as it comes to grips with the dilutive deal.
As for ESS, the picture is not so bleak after all. Taiwan's MediaTek took a big share of ESS's DVD business, but with litigation between the two settled, ESS now gets a steady stream of royalties. ESS also aimed smaller when it scooped up Pictos in a $27 million deal that won't leave much of a mark on future income statements.
Of course, MediaTek now finds its own healthy margins threatened by newcomers like VIA Technologies, and the vicious circle of life in this slice of the technology world continues. Unless your name happens to be Intel (NASDAQ:INTC), it's hard to stay on top.
Is the chip business really a cutthroat island? Is even Intel's dominance a sure thing or will AMD (NYSE:AMD) nibble away at the bellwether's market share? All this and more -- in the Intel discussion board . Only on Fool.com.
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