In a century in which technology left few aspects of life unchanged in some countries, the microprocessor may have been the most transformative of all. In three decades it has worked itself into our lives with a scope and depth that would have been impossible to imagine during its early development.

If you live in a developed country, chances are good that your household can boast of more than a hundred microprocessors scattered throughout its vehicles, appliances, entertainment systems, cameras, wireless devices, personal digital assistants, and toys. Your car alone probably has at least 40 or 50 microprocessors. And it is a good bet that your livelihood, and perhaps your leisure pursuits, require you to frequently use a PC, a product that owes as much to the microprocessor as the automobile owes to the internal combustion engine.

Throughout most of its history, the microprocessor business has followed a consistent pattern. Companies such as Intel, Motorola, Advanced Micro Devices, IBM, Sun Microsystems, and Hewlett-Packard spend billions of dollars each year and compete intensely to produce the most powerful processors, which handle data in 32- or 64-bit increments. The astounding complexity and densities of transistors on these ICs—now surpassing 200 million transistors on a 1-cm² die—confer great technical prestige on these companies. The chips are used in PCs, workstations, and other systems that, for the most part, have been lucrative, high-volume markets.

As with other ICs, microprocessors have for the past few decades been undergoing the exponential rise in performance prophesied by Moore's Law. Named for Intel Corp.'s cofounder, Gordon E. Moore, it describes how engineers every 18 months or so have managed to double the number of transistors in cutting-edge ICs without correspondingly increasing the cost of the chips. For microprocessors, this periodic doubling translates into a roughly 100 percent increase in performance, every year and a half, at no additional cost. The situation has delighted consumers and product designers, and has been the main reason why the microprocessor has been one of the greatest technologies of our time.

In coming years, however, this seemingly unshakable industry paradigm will change fundamentally. What will happen is that the performance of middle- and lower-range microprocessors will increasingly be sufficient for growing—and lucrative—categories of applications. Thus microprocessor makers that concentrate single-mindedly on keeping up with Moore's Law will risk losing market share in these fast-growing segments of their markets. In fact, we believe that some of these companies will be overtaken by firms that have optimized their design and manufacturing processes around other capabilities, notably the quick creation and delivery of customized chips to their customers.

The changes portend serious upheaval for microprocessor design, fabrication, and equipment-manufacturing firms, which have been laser-locked on Moore's Law. Executives lose sleep over whether they can keep on shrinking line widths and transistors and fabricating larger wafers. We don't blame them, given their history. Nor do we see blissfully peaceful slumber in their near future: this is not another article forecasting the imminent demise of Moore's Law.

On the contrary, we believe that the top IC fabricators will have little choice but to invest ever more heavily so as to keep on the Moore trajectory, which we expect to go on for another 15 years, at least. We don't see these investments as sufficient for future success, however.

Will semiconductors hit a physical limit? They surely will, someday. But this is probably the right answer to the wrong question. The more important question is: as technological progress surpasses what users can use, how do the dynamics of competition begin to change?