the microdisplay corporation: a study of a growing companyschenato/papers/finalreportmdc.pdf · the...

The MicroDisplay Corporation: A Study of a Growing Company

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Introduction to Management of Technology Professor Robert Cole

May 8, 2002

Jonas Andersson Catherine Lai

Luca Schenato Nathan Ota

Chris Savarese Daniel Steingart

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Table of Contents Introduction ................................................................................................................................ 3 Mission Statement ...................................................................................................................... 3 Methodology .............................................................................................................................. 3 Industry Overview...................................................................................................................... 4

Industry Structure................................................................................................................... 4 Industry Trends ...................................................................................................................... 5

Scenarios .................................................................................................................................... 6 Kings of the Mountain............................................................................................................ 6 A Fight to the Finish............................................................................................................... 8 Lonely At the Bottom............................................................................................................. 9 Barking Up the Wrong Tree................................................................................................. 11

Indicators .................................................................................................................................. 12 Kings of the Mountain Indicators......................................................................................... 12 A Fight to the Finish Indicators............................................................................................ 13 Lonely At the Bottom Indicators.......................................................................................... 13 Barking Up the Wrong Tree Indicators................................................................................ 13

Cash Flow Analysis as Applied to the Scenarios ..................................................................... 14 Global Assumptions ............................................................................................................. 14 Scenario Specific Assumptions............................................................................................ 16

Kings of the Mountain Assumptions................................................................................ 16 A Fight to the Finish Assumptions................................................................................... 16 Lonely at the Bottom Assumptions .................................................................................. 17 Barking up the Wrong Tree Assumptions........................................................................ 17 Summary of Analyses ...................................................................................................... 18

Strategies .................................................................................................................................. 19 Kings of the Mountain Strategy ........................................................................................... 19 A Fight to the Finish Strategy .............................................................................................. 20 Lonely At the Bottom Strategy ............................................................................................ 20 Barking Up the Wrong Tree Strategy .................................................................................. 21

Summary .................................................................................................................................. 21 Appendix A MicroDisplay Market Scenarios .......................................................................... 24 Appendix B Scenario Indicators .............................................................................................. 25 Appendix C Strategies per Scenario......................................................................................... 26 Appendix E NPV Calculation for Kings of the Mountain ....................................................... 27 Appendix F NPV Calculation for Fight to the Finish .............................................................. 28 Appendix G NPV Calculation for Lonely at the Bottom ......................................................... 29 Appendix H NPV Calculation for Barking Up the Wrong Tree .............................................. 30 Bibliography............................................................................................................................. 31

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Introduction

The MicroDisplay Corporation (MDC) is a small start-up company in the Bay Area focusing

on design, manufacturing, and marketing of liquid-crystal-on-silicon (LCOS) microdisplays.

In its sixth year of operation, the company is transitioning to a self-sufficient company.

Recently the company strategy was adjusted to focus on rear projection television (RPTV)

applications to facilitate growth. MDC is now transitioning from small-scale production to an

emerging high-volume industry.

Mission Statement

As such, the Management of Technology (MOT) team is commissioned to develop a three-

year outlook for the rear projection television market. From the outlook, the team will

recommend a manufacturing-based strategy for MicroDisplay Corporation’s maturation into

the leading supplier of LCOS panels.

Methodology

A multi-step process is the foundation for the recommended strategy. The first objective was

to characterize the RPTV and LCOS industries. Importantly, the research was focused on

determining current trends within the respective industries. Next, scenarios and scenario

indicators were developed. A net present value analysis (NPV) of manufacturing options for

each scenario resulted in scenario-specific strategies. Lastly, the industry trends were

matched with the scenario indicators to determine the current scenario MDC is facing and

consequently the appropriate scenario-specific strategy.

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Industry Overview

This section provides an overview of the RPTV and LCOS industry structure and the current

industry trends.

Industry Structure

The LCOS-based RPTV market is an intersection of several industries. Manufacturers of

small display screens such as Texas Instrument’s MEMS-mirror DLP displays, high

temperature polysilicon displays, organic light emitting diode displays, as well as LCOS

displays characterize the microdisplay industry. As a subset of the microdisplay industry, the

LCOS industry includes applications such as near-to-eye displays, cinematic projection

systems, and television projection systems. The RPTV industry uses multiple solutions from

the microdisplay industry, including LCOS systems, as well as the traditional cathode-ray

tube.

The value chain seen in

Figure 1 describes the RPTV industry in more detail. Suppliers provide the basic ingredients

such as wafers and glass plates. Component makers assemble the basic ingredients into

products such as LCOS panels or optical lens configurations. In turn, engine makers

configure a display system, light source system, and optical system into a complete projection

engine.

Lastly, the original equipment manufacturers (OEM) integrate the engine into the television

set. Importantly, the OEM’s in many cases participate across the full assembly spectrum as

seen in Figure 1, thereby bypassing the component and engine makers.

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Supplier ComponentMaker

Distributor Consumer

<lenses><lamps><speakers>others…

HitachiJVCPhilipsSamsungSony

<wafers><glass><LC><glue>others…

Best BuyCircuit CityFry’s

EngineMaker

ZeissCorning

OEM

Figure 1: RPTV Value Chain

Industry Trends1

The consumer demand for high definition digital television, including RPTV, is increasing.

The increasing sources of content in new formats, especially DVD sales, mark the growing

demand for digitally enabled television. China is mandating the transition from analog to

digital television content, which is opening up a huge market. Meanwhile, LCOS projection

systems are gaining momentum as innovators prove the viability of LCOS projection systems

as a cost efficient solution. The acceptance of LCOS in the RPTV industry is highlighted by

the recent surge of consortiums, such as the Taiwan LCOS Consortium, and groups.

As interest in LCOS increased, a surge of new start-up companies flooded the industry.

During 2001, larger OEM’s began to develop competencies in LCOS while many of the

smaller companies struggled to stay alive during the economic downturn. Most notable is the

death of Zight, a leader in near eye LCOS, and its acquisition by Three Five Systems. In

order to survive, the industry began to shift to an alliance and partnership based structure. In

contrast to the pre-2001 do-it-all attitude, companies began to specialize in design,

manufacturing, or assembly of LCOS panels.

1 The trends are a culmination of data recovered from monthly Microdisplay Reports, an independent publication, from January 2001 to March 2002, as well as additional secondary research.

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Currently, the industry is aligning itself into several vertical alliances, including the large

OEM’s. The transition to partnerships is accentuated by the shift of manufacturing facilities

to Asia. Highlighting this trend, a small number of large foundries, such as UMC (Taiwan)

and Amkor (Korea), are emerging as the industry leaders in LCOS manufacturing.

Scenarios

The four scenarios (Appendix A MicroDisplay Market Scenarios) are derived from the two

axes “Industry acceptance of LCOS as a technology for RPTVs” and “Number of key

suppliers of LCOS”. The axes are derived from a set of initial possible axes based on the

level of external influence to MDC and their mutual independence.

The scenarios are descriptions of the future derived from industry knowledge and discussions

within the group as well as with the company. They should all be viewed as equally possible

and the results of a structured and collective guess.

Kings of the Mountain

The Kings of the Mountain scenario is characterized by a high industry acceptance of LCOS

as the solution for RPTVs. There are a few competitive suppliers of LCOS panels, and the

majority of RPTVs are LCOS based.

In this scenario only a few competitors in the LCOS panel market have found viable solutions

to manufacturing volumes of quality LCOS panels at reasonable prices. They are successful

in achieving quality and an economic solution because they have superior technology that

dramatically lowers the cost of the final system.

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To manufacture volumes of quality LCOS panels at reasonable prices, suppliers seek quality

and an economic solution. Some LCOS supplies are licensing and outsourcing; others are

licensing without outsourcing. There are also LCOS suppliers who seek to find partnership

opportunities.

For LCOS suppliers who do licensing to ramp capacity, they license their manufacturing

know-how to manufacturers. In this instance, suppliers either let the licensees manufacture

completely so that they may buy back from the manufacturer and resell the product, or the

suppliers license their know-how to licensees and both the licensee and the supplier

manufacture LCOS using their respective factories, sharing on both manufacturing

engineering and manufacturing R&D dollars.

In the former case where the supplier lets a licensee manufacture completely, ramping

production carefully according to a roadmap of expected sales maximizes the supplier’s

profits. By licensing out IP and know-how and thus providing competitors with all

information needed before they develop it themselves, the LCOS supplier takes good

advantage of its lead-time. Furthermore, by doing licensing, the LCOS suppliers are aware of

the competitors who are using their technology.

Yet, there is the risk of losing control and values in spite of the capital gain. For example,

licensing gets worse when negotiation is not properly made. Since no technology stands still,

it is inevitable that licensee will make some technology improvements. Although it is not

unusual for the derivative improvements to be licensed back to the original company at no

extra cost or limitations, it is also possible that a licensee prevents the original company from

having the derivative improvements even though the company may very well have made the

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improvements itself.

While some LCOS suppliers do licensing and outsourcing, some LCOS suppliers do licensing

without outsourcing because outsourcing to meet high capacity can make IP vulnerable. They

are aware of the fact that IP in manufacturing erode over time as third party LCOS foundries

discover how to reliably manufacture microdisplays. Thus to protect their competitive

position, these suppliers allocate resources for display development while emphasizing their

manufacturing roadmap in order to stay ahead of the competition.

Instead of doing licensing, some LCOS suppliers seek strategic partnership for manufacturing.

Some make partners on the panel customer side, for example, with OEMs and engine makers,

since they have reliable and economic manufacturing solutions. These LCOS suppliers gain

advantages to having ties to OEMs, engine makers, or other potential customers, for example.

By having an OEM to do a design-in of their microdisplay into a consumer product, the

LCOS supplier ensures its survival in the RPTV market.

A Fight to the Finish

The Fight to the Finish scenario depicts a volatile market characterized by a high industry

acceptance of LCOS as the solution for RPTVs, coupled with a high number of key suppliers

of LCOS panels. This scenario suggests that the majority of RPTVs will be LCOS-based.

Furthermore, this scenario suggests that there will be many competitive suppliers of LCOS

panels, where the term many can be interpreted as meaning anything on the order of ten to

twenty firms.

Given the possibility that most LCOS will be good enough in the eyes of consumers, LCOS

panels may become commoditized, simplifying differentiation in the LCOS panel space to a

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price war. At this point, the manufacturer able to produce the cheapest panel will have a

major advantage. An efficient manufacturing solution will therefore be very important in this

scenario.

If there are lots of players in a popular field, then it should be reasonable to assume that

foundries would 1) see lower risk in investing the capital to service this market, and 2) be

more interested in becoming an integral part of a rapidly growing market.

Complimentary assets become important in this scenario. If many players have a solution, but

only a few have pre-existing ties to OEMs, engine makers, or other potential customers, then

those few will have a major advantage.

Standards may be slower to develop if many players exist in the field with many different

implementations of LCOS panels. Customers will presumably partner up with LCOS

suppliers and negotiate interfaces and other compatibility issues, but these negotiations will

not necessarily ever span to the entire market.

Lonely At the Bottom

The Lonely At the Bottom scenario is characterized by a low industry acceptance of LCOS

for RPTV, and hence low numbers of LCOS panel suppliers. Technologies different from

LCOS conquered the market for large screen TV sets, mainly because LCOS has not

delivered the promise of dramatic cost reductions for large OEMs. Many OEMs that initially

explored the adoption of LCOS panels, stumbled on problems like reliability and chip

uniformity and yield when trying to ramp up productions. Also integration with optical

engines caused problems and good brightness and contrast was difficult to achieve with

LCOS displays.

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The high expectations placed on LCOS panels to reduce manufacturing costs while

maintaining at least comparable performance with competing performances were not fulfilled,

thus souring its acceptance in the industry. LCOS TV set prototypes did show good quality,

small foothold and acceptable costs, but their advantage over other technologies like HTPS or

DLP and front end CRT was only marginal. Many of these OEMs also invested heavily into

more reliable technologies like enhanced CRT or DLP. CRT does not present as much room

of improvement in the future as the LCOS solution, but manufacturing facilities are already in

place for fast ramp up and process expertise had been built over the years so that reliability

and yield are not issues.

OEMs betting on enhanced CRT sets believe they can leverage its proved reliability over the

end-user that might be scared by a new technology. DLP has some nice features like high

contrast and brightness, and it can leverage its adoption in the latest movie-theatre, giving the

impression to the viewer of a comparable experience. In a nutshell, big OEMs did not see any

compelling reason for investing on LCOS.

Small startups developing LCOS microdisplay that flourished on the hype of LCOS promises

started facing financial problems since big OEMs moved their investments into alternative

technologies. Some of them attracted attention among OEMs, but they never succeeded in

securing a real commitment. Many of these exited the market or got acquired.

However, few small LCOS microdisplay manufacturers did survive. Instead of developing a

flexible and customizable but more expensive microdisplay satisfying multiple OEMs, they

found small but profitable niches. They leveraged their in-house facilities and the

accumulated expertise in the technology to develop specialized products for few dedicated

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customers. These companies never reached large sales, but were able to maximize initial

investments.

Barking Up the Wrong Tree

In this scenario heavy early investments in production technologies and OEM contracts could

prove to be very costly. There will be a demand for RPTVs but unfortunately LCOS will not

be the preferred standard technology so MDC will have to look around for new opportunities.

The new opportunities could be in a variety of fields and MDC should not limit their search

for new business areas; But MDC should try to be open to new profitable uses of their

technology and production methods. In one discussion with MDC it was mentioned that the

production methods could be used for optical switching. This illustrates the kind of

opportunities that MDC would need to look if the RPTV opportunity would fail. MDC

already has a foothold in the medical device business in their existing near eye business that

could be further exploited.

The competition here is very hard to predict as the new opportunities are within industries that

are yet to be found and determined. The competition could be found among the traditional

LCOS companies that MDC is competing with today as they try to scramble to find the killer

application for LCOS-based microdisplays. However it’s also likely that the new business

area would have a different value chain and as LCOS emerge as a new and hopefully

promising technology all players in the new value chain are likely to use their resources to

position themselves. This reorganization within the value chain should, if possible, be

anticipated by MDC before entering the new business.

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The licensing of technology, especially production methodology, in new business areas

should be considered. This is a fast way to establish MDC in a new market even though the

profitability of licensing, as indicated by MDC, is far below the margins they would receive

when they are producing and selling products.

In this scenario there is also a chance that competition has caught up with MDC and their

initial advantage of being one year ahead of competition. The very slow market acceptance

has provided the competition with that extra time that they needed. Companies such as

Phillips are likely to have their in-house LCOS expertise at similar levels as MDC.

Anticipating this situation and intervening by licensing out IP and know-how provides

competitors with all information needed before they develop it themselves. This may very

well be a way for MDC to use their time advantage in a good way.

Indicators

The indicators (Appendix B Scenario Indicators) are future events that will indicate what

scenario the LCOS industry is moving towards. The indicators should be detectable to MDC

and guide them in their choice of strategy.

Kings of the Mountain Indicators

Preceded by industry acceptance of LCOS panels, this scenario is marked by the formation of

consortiums which become the driving force for LCOS-based RPTV standards. Standards are

decided upon quickly, either one receiving industry-wide support or two to three competing

standards. This creates a few teams consisting of a) one or two foundries, b) an LCOS

designer, and c) an OEM. These alliances can be viewed as “virtually vertical corporations.”

Thus, MDC would have to become the exclusive supplier of LCOS panels to one OEM in this

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scenario to survive. Failure to join one of these camps forces the LCOS maker out of the

market and probably out of business.

A Fight to the Finish Indicators

While consortiums are likely to form, indicating industry acceptance, standards cannot be

agreed upon initially. Because companies are eager to get to market, each OEM chooses to

make their LCOS-TV in their own way, effectively allowing the market to choose the best

standard. In this case, each OEM need not be LCOS specific, so through one or two foundries

a single LCOS maker can supply multiple companies. The price to performance ratio here

increases industry support, and each OEM tries to take proprietary measures to further this

advantage. This market supports many LCOS makers at first. Non-exclusive arrangements

between LCOS makers and OEMs make this market fertile for foundries; each has a large

variety of technologies to produce and OEMs eager to buy them.

Lonely At the Bottom Indicators

Due to a miscalculation of RPTV-LCOS acceptance, the majority of LCOS suppliers change

product focus or simply die off. Consortiums are unnecessary because of lack of industry

acceptance. LCOS evaluation kits are bought, in unpredictable quantities, by other markets

than LCOS. Since the number of LCOS producers is small, and industry need is uncertain,

few foundries are willing to take on this unusual technology. The few remaining markers

tailor their product to one specific application in hope for survival.

Barking Up the Wrong Tree Indicators

Though RPTV-LCOS does not catch on because of meager price to performance advantage

over other large screen technology, multiple LCOS manufacturers find hope for existence. To

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find markets, LCOS makers sprinkle their technology in diverse markets, hoping that one will

become a winner.

Cash Flow Analysis as Applied to the Scenarios2

To get an understanding of the risks, costs, and potential revenues associated with each

scenario creating a cash flow analysis is helpful. There are overall assumptions which apply

to all four scenarios, and from that specific analyses are executed.

Global Assumptions

If MDC is to manufacture at high capacity, Sandeep Gupta, CEO of MDC, has determined

that they must form a relationship with a foundry. For production over 20,000 units a month

(MDC’s current capacity), MDC does not have the time or in-house staff to handle such

demand effectively. Thus, in the three scenarios with potentially high volume, a foundry will

produce all of MDC’s LCOS panels. MDC’s options with regard to sales and production are:

1) MDC outsources all production, having the foundry manufacture all LCOS panels,

buying them back at wholesale plus a premium structure defined later, and selling

them for a large profit. In this option MDC lays out money to buy the panels, but

has a potentially huge profit from selling to the OEM.

2) MDC licenses the technology to the foundry, allows the foundry to be responsible

for all sales, and gets a value fee. While the profit potential is not as great, MDC

does not have to pay any per-panel costs.

3) Some mixture between 1 and 2, with MDC and the foundry selling percentages of

capacity (ex. 75% MDC, 25% foundry). The actual percentage is continuous,

depending on the contracts with the foundry and the market scenario.

2 Appendixes E-H display assumptions and calculations

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When teamed with a foundry, MDC is capable of producing 100,000 units a month. Full

scale production will begin in January 2003. Current operating costs for year 2002 are

$3,000,000 per year, and will increase by $600,000 per year in all scenarios but Lonely at the

Bottom. Each LCOS costs $100 dollars to make, and the foundry is capable of making a

complete LCOS panel. The market value of each LCOS is $250. According to Sandeep3,

MDC LCOS processing technology is worth $50 per LCOS to foundries and OEM’s, and

MDC will be able to command at least this value for five years. MDC and/or the foundry are

responsible for the sale of the panels.

To give incentive in the outsourcing relationship for a foundry, the foundry gets a percentage

of the $50 MDC value for each LCOS MDC sells. When the foundry sells no LCOS panels,

this is set at $10 dollars per LCOS. This decreases as the foundries begin to sell LCOS panels

on their own, at a rate of 20% of the percentage of production MDC sells. Thus, if MDC sells

100% of production, they pay 20% of their added value, or $10 per chip. If MDC sells 75%

of production, they pay 15% of their added value, or $7.50 per chip, and so on.

Finally, as features and process technology improve, the manufacturing cost and market price

for a brand new LCOS panel will remain constant for at least three years.

3 Phone interview with Sandeep Gupta, April 4, 2002.

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Scenario Specific Assumptions

The analysis in Table 1 was generated by adding the following scenario assumptions to the

global assumptions.

Kings of the Mountain Assumptions

Since “virtually vertical” alliances are forming, foundries will be quick to take on the

production but wary to sell these chips wholesale themselves. As a result, MDC will be

responsible for all sales to the OEM in any case.

First, MDC must find itself in an RPTV alliance to survive. Once in an alliance, the

company’s ability to sell LCOS panels is dependant on the success of RPTV’s overall and the

relative success of MDC’s partner OEM. The rewards are high; if MDC sells at capacity

they stand to make the most money possible out of all the scenarios, with a value of over

$480,000,000 after 3 years. Conversely, since MDC is directly tied to the OEM’s success, if

the OEM fails to gain market share, MDC will lose everything.

A Fight to the Finish Assumptions

RPTV’s have large market potential and there are no exclusive vertical alliances, so foundries

are willing to outsource and eager to sell LCOS panels to a variety of OEM’s. In this case, it

is assumed that demand always meets or exceeds capacity, and the main variable for MDC is

how much of their revenue comes from sales to the OEM versus process/product licenses.

If MDC believes the market is headed towards a Fight to the Finish scenario, it is important

for them to lock in a large percentage, if not all, of the foundry’s LCOS capacity through an

initial multi-year contract. For once the foundries see the high margins commanded by LCOS

they will be loathe giving up capacity at wholesale.

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In the best case, MDC is able to sell all of the capacity ($483,000,000 after 3 years); in the

worst case they play it safe and get licensing fees for three years ($160,000,000).

Lonely at the Bottom Assumptions

The foundries will have nothing to do with MDC in this scenario; MDC will have to max out

their internal capacity at approximately 20,000 units per month. While the market for LCOS

is initially dismal for RPTV’s, and other LCOS makers find it difficult to survive, MDC’s

superior technology may allow survival and perhaps prosperity. Initial survival obviously

depends on running the company as lean as possible and maintaining efficient operations until

flush markets can be unearthed.

Thus, the financial assumption here is that the three million dollar per expense rate remains

roughly constant; assuming any savings through layoffs will be counteracted by expenses

related to seeding and scouting new markets.

In the best case, MDC is resourceful and can sell most of its in-house capacity ($87,000,000

after 3 years), at worst, they fail (-$6,500,000).

Barking up the Wrong Tree Assumptions

Much uncertainty prevails in this scenario. As a result, the cash flows must be measured as

both a function of the success of LCOS in markets outside of RPTV and whether or not MDC

plays it safe by licensing or bets on selling LCOS technology to uncharted markets.

In the best case, MDC is able to sell 75% of maximum capacity a year to various markets

(Near Eye, optical switch, and other non-RPTV LCOS applications) with potential 3 year net

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value of $258,000,000; at worse they fail in a competitive market (-$5,500,500). The middle

ground involves licensing to cover a little over operating expenses per year and to sell

remaining capacity to various early markets.

Summary of Analyses

While a successful strategy in kings of the mountain will net the largest gain, MDC has little

ability to hedge its bets because of an exclusive relationship with an OEM. In fight to the

finish MDC has the safest profit potential but MDC must be willing to buy up the foundry’s

capacity in advance to fully capitalize on it. Both of these scenarios, overall, are pull

situations, where MDC has to worry more about positioning itself well rather than pushing the

technology on the market.

Lonely at the bottom is the hardest market to survive in, compounded with the fact that MDC

must be responsible for production, sales, and creation of markets. Barking up the wrong tree

has good profit potential, but must work hard to seed markets to recognize this potential.

These two scenarios are definitely “push” cases; MDC must take an active role in

demonstrating the technology to become profitable.

3 Year Revenues Best Case Middle Range Worst Case

Kings of the Mountain $483,000,000 $267,000,000 $0

A Fight to the Finish $483,000,000 $350,000,000 $160,000,000

Lonely At the Bottom $87,000,000 $40,000,000 (-$6,500,000)

Barking up the Wrong Tree $258,000,000 $80,000,000 (-$5,500,000)

Table 1: Summary of NPV analysis

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Strategies

MDC’s choice of strategy should be based on what scenario they are facing. By observing

indicators, MDC will be able to predict which scenario they are moving towards and what

their strategy should be. Appendix C Strategies per Scenariohighlights the success factors for

each scenario described in this section.

Kings of the Mountain Strategy

Based on NPV analysis, outsourcing capacity for fabricating LCOS microdisplays is the best

choice given the large market demand. Although outsourcing promises higher returns than

licensing in the long term, it requires larger upfront investments and the revenue flow is

further down. In this scenario, the industry coalesces into two or three consortia battling

against each other to set their own standards. For a small startup company with limited

financial resources such as MDC, it is vital not only to win this battle, but also to win it

quickly.

Therefore, in order to speed up the solidification of standards to its advantage, MDC should

needs to attract several big customers (read OEMs), such as Samsung or Sony. MDC should

avoid the temptation to sign preferential partnership with a single big OEM, since this could

deter other competing OEMs from joining the consortium. These big names would endorse

MDC’s consortium and facilitate acceptance in the whole industry.

Moreover, MDC should tailor its product to winning consensus over a single standard. MDC

might have to cross-license or give up to part of its IP portfolio to promote its consortium. For

example, MDC could cheaply license its substrate IP since it can still rely on a strong

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complementary asset, i.e. its process IP and know-how. In this case, MDC will trade off

product margin for quicker solidification of standards.

A Fight to the Finish Strategy

As in the Kings of the Mountain scenario, large market demand for LCOS indicates

outsourcing as a better choice than licensing. The risks and benefits resulting from this option

are already highlighted above. The main difference with that scenario is a larger number of

LCOS microdisplay makers each promoting its own standard. Since competition is much

higher in this scenario, a key success factor is to lock in a visible customer.

Differently from the previous scenario, MDC should seek a large preferential customer to

acquire visibility and shorten time-to-market. In order to create an attractive incentive for a

large OEM, MDC should create a strong partnership with other key players in the value chain,

such as the optical engine maker, to offer the “whole” product tailored to the customer.

Moreover, MDC should focus on differentiating from other LCOS microdisplay makers based

on the most relevant features from the customer prospective such as cost, reliability and quick

ramp-up capacity.

Lonely At the Bottom Strategy

Unlike from the top two scenarios, market demand for LCOS microdisplays for large screen

RPTV is relatively small, therefore licensing seems the best option because it guarantees

immediate revenues and small upfront investments. Also, licensing fosters the pollination of

the market and possibly the resurging of industry interest in LCOS. Since only a few of

MDC’s competitors are still present in the market, this could facilitate the task of finding

niche markets for MDC products.

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In this case, MDC should upgrade its internal manufacturing facility to match customer

demand. Albeit licensing and sales from the internal line are the best options in this scenario,

they still might not guarantee steady and secure revenues for the future. As a consequence,

MDC should consider the option of selling the company while it is profitable.

Barking Up the Wrong Tree Strategy

As in the Lonely at the Bottom scenario, outsourcing in not a viable option because of small

demand, and licensing is a more promising alternative. However, since many LCOS players

are still alive, MDC might have to cross-license part of its IP with other LCOS makers to

favor market pollination.

Moreover, MDC should explore more actively new markets and new applications for its

microdisplay by selling cheaply as many evaluation kits as possible. If this scenario persists,

MDC should evaluate the alternatives of continuing the search for a killer application for its

microdisplays or of selling the company to maximize investors’ returns.

Summary

The MOT team worked to create an objective model through scenario planning that MDC

could employ to periodically gauge the LCOS market for RPTVs and derive appropriate

strategies. Four scenarios have been presented here, each with their own set of indicators,

characteristics, and recommended responses. The MOT team also performed a net present

value analysis to help guide the recommendations for each scenario. It is expected that MDC

would benefit from reevaluating the LCOS market with the tools presented here on a regular

basis, and from using these tools to help shape their strategies.

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The MOT team researched the current state of the LCOS market and discovered several

trends which are all applicable to the scenario model. The formation of consortiums within

the LCOS industry suggests that LCOS is indeed being accepted as an industry standard. The

existence of many small companies in the past years further implies a situation like the Fight

to the Finish scenario. Recently, however, several of these smaller companies have either

failed or merged with other companies, indicating a gradual shift towards the Kings of the

Mountain scenario.

The MOT team feels that at this point in time, the LCOS market is still best characterized by

the Fight to the Finish scenario, but that the market may continue to migrate towards the

Kings of the Mountain scenario. Thus, strategies that MDC should pursue include

outsourcing to a third-party foundry with the intent of buying back and selling the displays, as

well as attempting to establish a partnership with a single panel customer (OEM or engine

maker).

MDC should work closely with this partner to customize their display to the partner’s needs,

but should be cautious of entering into any exclusive contracts, so as to leave their options

flexible in the event that the market continues to shift to fewer players. MDC should also

continue to monitor any activities in the consortiums that are forming. If standards appear to

be solidifying at an increasing rate, this would indicate acceleration towards the Kings of the

Mountain scenario, and would suggest that MDC would need to tailor their design to meet

these standards.

The LCOS market may change rapidly, of course, and the above suggestions are merely one

interpretation of the current market in the context of the models presented by the MOT team.

23

As mentioned above, these models are meant to be objective, and MDC should consider

reinterpreting the market, the model, and the resulting recommendations frequently in order to

stay ahead of their competition and become the leading provider of high resolution imaging

devices.

24

Appendix A MicroDisplay Market Scenarios

25

Appendix B Scenario Indicators

26

Appendix C Strategies per Scenario

27

Appendix E NPV Calculation for Kings of the Mountain Base AssumptionsCost Per LCOS $100Price Per LCOS $250Value Added/ LCOS $50

Additional AssumptionsProduction Constant for 3 years6 Month ramp up time from 6/2002 allows for full scale production to start 1/2003Foundry does everythingLCOS's are either sold by foundry or MDCAs features improve, production costs get cheaper, allowing for same cost and price

Case 1 2003 Case 1 2002 2003 2004 2005Yearly Production 1200000 RevenueSales From LCOS Sold By MDC $0 $300 000 000 $300 000 000 $300 000 000Capacity 100% From LCOS by Foundry $0 $0 $0 $0Sold By Foundry 0% Operating ExpensesSold by MDC 100% Cost of LCOS for MDC $0 ($120 000 000) ($120 000 000) ($120 000 000)Premium to MDC 20% Cost of Outsourcing $0 ($12 000 000) ($12 000 000) ($12 000 000)

Cost of Operations ($3 000 000) ($3 600 000) ($4 200 000) ($4 800 000)Start up costs ($5 000 000) $0 $0 $0Cash Flow ($8 000 000) $164 400 000 $163 800 000 $163 200 000

Net Cash $483 400 000

Case 2 2003 2004-05 Case 2 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $300 000 000 $225 000 000 $225 000 000Capacity 100% 75% From LCOS by Foundry $0 $0 $0 $0Sold By Foundry 0% 0% Operating ExpensesSold by MDC 100% 100% Cost of LCOS for MDC $0 ($120 000 000) ($90 000 000) ($90 000 000)Premium to MDC 20% 20% Cost of Outsourcing $0 ($12 000 000) ($12 000 000) ($12 000 000)


Net Cash $393 400 000



Net Cash $303 400 000



Net Cash $267 400 000



Net Cash $141 400 000

28

Appendix F NPV Calculation for Fight to the Finish Base AssumptionsCost Per LCOS $100Price Per LCOS $250Value Added/ LCOS $50

Additional AssumptionsProduction Capacity Constant for 3 years6 Month ramp up time from 6/2002 allows for full scale production to start 1/2003Foundry does everythingLCOS's are either sold by foundry or MDCAs features improve, production costs get cheaper, allowing for same cost and price

Case 1 2003-05 Case 1 2002 2003 2004 2005Yearly Production 1200000 RevenueSales From LCOS Sold By MDC $0 $300 000 000 $300 000 000 $300 000 000Capacity 100% From LCOS by Foundry $0 $0 $0 $0Sold By Foundry 0% Operating ExpensesSold by MDC 100% Cost of LCOS for MDC $0 ($120 000 000) ($120 000 000) ($120 000 000)Premium to MDC 20% Cost of Outsourcing $0 ($12 000 000) ($12 000 000) ($12 000 000)


Net Cash $483 400 000

Case 2 2003 2004-05 Case 2 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $225 000 000 $300 000 000 $300 000 000Capacity 100% 100% From LCOS by Foundry $0 $15 000 000 $0 $0Sold By Foundry 25% 0% Operating ExpensesSold by MDC 75% 100% Cost of LCOS for MDC $0 ($90 000 000) ($120 000 000) ($120 000 000)Premium to MDC 15% 20% Cost of Outsourcing $0 ($6 750 000) ($12 000 000) ($12 000 000)


Net Cash $458 650 000

Case 3 2003 2004-05 Case 3 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $225 000 000 $225 000 000 $225 000 000Capacity 100% 100% From LCOS by Foundry $0 $15 000 000 $15 000 000 $15 000 000Sold By Foundry 25% 25% Operating ExpensesSold by MDC 75% 75% Cost of LCOS for MDC $0 ($90 000 000) ($90 000 000) ($90 000 000)Premium to MDC 15% 15% Cost of Outsourcing $0 ($6 750 000) ($6 750 000) ($6 750 000)


Net Cash $409 150 000

Case 4 2003 2004-05 Case 4 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $150 000 000 $225 000 000 $225 000 000Capacity 100% 100% From LCOS by Foundry $0 $30 000 000 $15 000 000 $15 000 000Sold By Foundry 50% 25% Operating ExpensesSold by MDC 50% 75% Cost of LCOS for MDC $0 ($60 000 000) ($90 000 000) ($90 000 000)Premium to MDC 10% 15% Cost of Outsourcing $0 ($3 000 000) ($3 000 000) ($3 000 000)


Net Cash $390 400 000

Case 5 2003 2004-05 Case 5 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $75 000 000 $150 000 000 $150 000 000Capacity 100% 100% From LCOS by Foundry $0 $45 000 000 $30 000 000 $30 000 000Sold By Foundry 75% 50% Operating ExpensesSold by MDC 25% 50% Cost of LCOS for MDC $0 ($30 000 000) ($60 000 000) ($60 000 000)Premium to MDC 5% 10% Cost of Outsourcing $0 ($750 000) ($3 000 000) ($3 000 000)


Net Cash $302 650 000

29

Appendix G NPV Calculation for Lonely at the Bottom Base AssumptionsCost Per LCOS $100Price Per LCOS $250Value Added/ LCOS $50


Case 1 2003-05 Case 1 2002 2003 2004 2005Yearly Production 240000 RevenueSales From LCOS Sold By MDC $0 $60 000 000 $60 000 000 $60 000 000Capacity 100% From LCOS by Foundry $0 $0 $0 $0Sold By Foundry 0% Operating ExpensesSold by MDC 100% Cost of LCOS for MDC $0 ($24 000 000) ($24 000 000) ($24 000 000)Premium to MDC 0% Cost of Outsourcing $0 $0 $0 $0


Net Cash $87 400 000

Case 2 2003 2004-05 Case 2 2002 2003 2004 2005Yearly Production 240000 240000 RevenueSales From LCOS Sold By MDC $0 $60 000 000 $45 000 000 $45 000 000Capacity 100% 75% From LCOS by Foundry $0 $0 $0 $0Sold By Foundry 0% 0% Operating ExpensesSold by MDC 100% 100% Cost of LCOS for MDC $0 ($24 000 000) ($18 000 000) ($18 000 000)Premium to MDC 0% 0% Cost of Outsourcing $0 $0 $0 $0


Net Cash $69 400 000



Net Cash $42 400 000



Net Cash $19 000 000



Net Cash $6 400 000

30

Appendix H NPV Calculation for Barking Up the Wrong Tree Base AssumptionsCost Per LCOS $100Price Per LCOS $250Value Added/ LCOS $50


Case 1 2003-05 Case 1 2002 2003 2004 2005Yearly Production 1200000 RevenueSales From LCOS Sold By MDC $0 $112 500 000 $112 500 000 $112 500 000Capacity 75% From LCOS by Foundry $0 $22 500 000 $22 500 000 $22 500 000Sold By Foundry 50% Operating ExpensesSold by MDC 50% Cost of LCOS for MDC $0 ($45 000 000) ($45 000 000) ($45 000 000)Premium to MDC 10% Cost of Outsourcing $0 ($2 250 000) ($2 250 000) ($2 250 000)


Net Cash $242 650 000

Case 2 2003 2004-05 Case 2 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $37 500 000 $56 250 000 $56 250 000Capacity 50% 75% From LCOS by Foundry $0 $22 500 000 $0 $0Sold By Foundry 75% 75% Operating ExpensesSold by MDC 25% 25% Cost of LCOS for MDC $0 ($15 000 000) ($22 500 000) ($22 500 000)Premium to MDC 5% 5% Cost of Outsourcing $0 ($375 000) ($375 000) ($375 000)


Net Cash $90 775 000

Case 3 2003 2004-05 Case 3 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $37 500 000 $37 500 000 $37 500 000Capacity 50% 50% From LCOS by Foundry $0 $22 500 000 $22 500 000 $22 500 000Sold By Foundry 75% 75% Operating ExpensesSold by MDC 25% 25% Cost of LCOS for MDC $0 ($15 000 000) ($15 000 000) ($15 000 000)Premium to MDC 5% 5% Cost of Outsourcing $0 ($375 000) ($375 000) ($375 000)


Net Cash $113 275 000

Case 4 2003 2004-05 Case 4 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $37 500 000 $37 500 000 $37 500 000Capacity 25% 25% From LCOS by Foundry $0 $7 500 000 $7 500 000 $7 500 000Sold By Foundry 50% 50% Operating ExpensesSold by MDC 50% 50% Cost of LCOS for MDC $0 ($15 000 000) ($15 000 000) ($15 000 000)Premium to MDC 10% 10% Cost of Outsourcing $0 ($750 000) ($750 000) ($750 000)


Net Cash $67 150 000

Case 5 2003 2004-05 Case 5 2002 2003 2004 2005Yearly Production 1200000 1200000 RevenueSales From LCOS Sold By MDC $0 $0 $0 $0Capacity 50% 50% From LCOS by Foundry $0 $30 000 000 $30 000 000 $30 000 000Sold By Foundry 100% 100% Operating ExpensesSold by MDC 0% 0% Cost of LCOS for MDC $0 $0 $0 $0Premium to MDC 0% 0% Cost of Outsourcing $0 $0 $0 $0


Net Cash $69 400 000

31

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