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(Original article: Shrinking chips, shrinking revenue By Brooke Crothers on Year in Review.)

The year began with a bang. Atomic in scale.

Intel rolled out the tiny Atom processor, launching the Netbook phenomenon. This is not your father’s PC processor: it’s very small and not particularly fast, but it’s very power-efficient. The mini notebooks, known as Netbooks, typically weigh less than three pounds and have screens under 11 inches diagonally.

Netbooks also signaled the arrival of the solid-state drive–faster, quieter, and cooler than the longstanding staple of PC storage, the hard disk drive. This also brought some extra scrutiny about the reliability of SSDs. The first high-profile use of a solid-state drive was the MacBook Air, launched in January.

Expanding on the “smaller is better” theme, Intel introduced its Centrino 2 brand, built on a 45-nanometer Penryn process with improved power efficiency.

While Advanced Micro Devices shrank chip geometries, it also focused on reducing the size of the company because of missteps and the consequent financial shortfalls. Emblematic of growing financial strains, AMD was losing the processor war to Intel. But not all was lost. Its ATI unit made gains on rival Nvidia in graphics chips.

Nvidia, not known for making small chips (but known for making very fast ones), wanted to ensure its graphics chip message was getting out and the chief executive launched into a diatribe against Intel. He alleged, in effect, that Intel makes lousy graphics silicon. But Nvidia was also on the receiving end of scathing criticism when it finally came clean about a longstanding graphics-chip defect. Hewlett-Packard, Dell, and Apple all issued warnings and fixes for laptops with the potentially defective graphics processors.

Intel, never one to shrink from competition, announced that it would enter, by 2010, the market for high-end graphics chips. The chip, code-named Larrabee, would give Nvidia and AMD something to think about. And that’s about all they could do since the chip–at least initially–was merely a paper tiger.

In October, serious revenue shrinkage began, starting with the memory chip industry. Micron Technology, the largest U.S. memory chipmaker, posted a $1.6 billion loss, and struggling SanDisk was targeted by Samsung for a buyout.

After persistent rumors, AMD finally split in two. AMD became a designer of chips, while the Foundry Company became the manufacturing arm. Abu Dhabi-based Mubadala Development Co. was slated to invest billions in the manufacturing operations.

The U.S. financial-crisis tsunami hit Silicon Valley, and its impact was felt in Asia as well. Intel saw the writing on the wall and inserted a heavy dose of caution about future revenue and the impact of the financial crisis into its third-quarter earnings statement. The fourth quarter, Intel said, could see consumers and businesses deferring purchases.

Meanwhile, Taiwan Semiconductor Manufacturing Co., the world’s largest contract manufacturer of chips, chimed in and said chip demand from PC makers was crashing.

One bright spot was an insatiable industry appetite for the Atom processor as the Netbook market grew beyond Intel forecasts.

There was a brief respite from the bad news when Intel announced its new Nehalem chip architecture in the form of the Core i7 processor. Gamers were ecstatic.

The year ended with a bang, too–as in, implosion. Chip companies will see two years of sales declines, predicts market researcher Gartner.