The old Charles Dickens phrase about it being the best of times and yet the worst of times rings true for today's application-specific integrated circuit (ASIC) industry. Whereas the overall market is essentially flat, a handful of companies is significantly outpacing the rest.

At the successful end of the market is IBM, whose ASIC sales grew 12.4 percent during 2005, to more than $2.3 billion, according to iSuppli. That's impressive, considering that worldwide ASIC revenues declined 1.8 percent during 2005, from $21.1 billion to $20.7 billion, and iSuppli expects them to grow less than 4 percent annually through 2010.

Thanks to its leading-edge technology, IBM has long supplied its ASIC design services to networking customers, such as Cisco Systems and Juniper Networks, that need to push the limits of chip performance. Yet the company's recent growth has come from consumer electronics. Besides powering the latest Xbox and PlayStation game consoles, IBM's ASICs are now finding their way into TVs, DVD recorders, camcorders and digital still cameras from the likes of Matsushita, Sharp and Sony.

Research firm Gartner reports that IBM's consumer ASIC sales more than doubled during 2005, from $210 million to $546 million, boosting it from No. 9 in consumer ASICs to No. 3.

Tom Reeves, IBM's vice president of semiconductor products, says consumer chip designs tend to be smaller, less complex and less costly than IBM's typical high-end ASICs. But IBM's reputation for designing custom chips that work on the first try is attracting consumer manufacturers struggling to keep up with fast-moving markets. Says Reeves, "We're finding that the predictability of our silicon is leading to our success."

At the market's other end are Japanese ASIC vendors NEC Electronics, Oki and Renesas, whose ASIC sales each fell more than 20 percent during 2005, according to iSuppli. Out of 2005's top 10 ASIC vendors, in fact, only four—IBM, Sony, STMicroelectronics and Texas Instruments—increased their sales last year.

Several factors are squeezing ASIC makers. Escalating design costs, which can exceed $30 million for a complex chip, deter some potential customers, although structured ASICs (which let customers tailor just the top metal layers of a standardized chip design) offer lower costs and shorter development time. The increasing performance of FPGAs also continues to erode ASIC sales, as customers that can afford higher prices opt for the shorter time to market of programmable chips.

The cost of new technology and manufacturing capacity is another big challenge. Although many ASICs are still designed with older, less expensive processes, the most lucrative high-volume custom chips now require 90-nanometer or smaller circuits to achieve the lowest-possible cost, better performance and power savings.

No. 5-ranked ASIC maker Fujitsu spent nearly $1 billion during 2005 on process technology and new fab development. Keith Horn, senior vice president of marketing for Fujitsu Microelectronics America, says the company will break ground this year on yet another $1 billion fab that will make 65-nm chips on 300-millimeter wafers. "For us, it's fundamentally important," says Horn. "Process technology underpins almost everything we do."

The costs are so daunting that even industry pioneer LSI Logic—ranked No. 11 by iSuppli despite nearly 21 percent ASIC sales growth during 2005—opted, in April 2006, to sell its last remaining manufacturing plant and shift to a fabless strategy. The company also recently decided to stop developing its structured-ASIC product line and focus its remaining ASIC business on storage and consumer products.

That's clearly the approach of No. 8-ranked Agere Systems, which is offering its ASIC designs only to customers in storage, enterprise and communications. The handwriting is on the wall, says Tim Moeller, an Agere ASIC marketing manager: "It's too expensive these days to be everything to everybody."

Technology writer Russ Arensman writes frequently for Electronic Business.