A semiconductor device comprises a first semiconductor die. An encapsulant is disposed around the first semiconductor die. A first stepped interconnect structure is disposed over a first surface of the encapsulant. An opening is formed in the first stepped interconnect structure. The opening in the first stepped interconnect structure is over the first semiconductor die. A second semiconductor die is disposed in the opening of the first stepped interconnect structure. A second stepped interconnect structure is disposed over the first stepped interconnect structure. A conductive pillar is formed through the encapsulant.