Last month, Broadcom (NASDAQ:BRCM) announced its intention to exit the cellular baseband business on account of the intense competition in the market. A substantial increase in R&D expenses for developing cellular baseband products has lowered Broadcom’s mobile and wireless operating income in the last two years. The baseband market is quite R&D intensive, and Broadcom has spent over $3 billion on cellular baseband related R&D since 2007 without earning any profit.  (Read: Rising Competition Forces Broadcom To Exit The Baseband Market)
Broadcom intends to instead increase its focus and competitiveness in the broadband, infrastructure and connectivity businesses. Additionally, the company is actively widening business opportunities in the Internet-of-Things (IoT) space, with an aim to gain a head-start over other chips markers. Currently, the rising mobile adoption worldwide is driving growth in the semiconductor market. IoT is still at a nascent stage, but is expanding fast and is considered to be the next big growth driver in the semiconductor industry.
In this article, we discuss the growth opportunities in the wearable technology space (part of IoT), and recent steps taken by Broadcom to leverage the growth potential in the market.
Our price estimate of $38 for Broadcom is almost in line with the current market price.
Wearable Technology Is The Next Big Wave In Computing
IoT includes all other computing devices apart from PCs, tablets and smartphones. Gartner estimates the market to grow almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets.  Wearable devices, clothing and accessories incorporating computer and advanced electronic technologies, is a subset of the IoT market and is considered to be the next big wave in computing. Juniper Research estimates the wearable computing device shipments to increase from 15 million units in 2013 to 150 million units by 2018. ABI Research forecast the figure to cross 450 million units during the same period. 
The smart watch was one of the earliest wearables to hit the market, with companies such as Sony (SmartWatch), Samsung (Galaxy Gear), Pebble, and many others selling their variants in the market. Even Qualcomm (NASDAQ:QCOM) (Broadcom’s biggest rival in the mobile baseband market) released its own smart watch last year.
Apart from smart watches, there is huge opportunity for wearable devices in the medical and fitness space. Additionally, there are numerous other areas and devices where wearable technology is useful and applicable, for e.g. jewelry with proximity detection, baby socks that monitor sleep patterns, clothing that can cool consumers and many more. All these devices require a range of wireless standards, including Wi-Fi, Bluetooth Smart, near-field communication (NFC) and GPS. Broadcom is a leader in connectivity solutions and claims that its technology is designed to support innovation in all the above categories.
Broadcom Continues To Expand Its Wearable Technology Portfolio To Tap Growth in The Market
Broadcom highlighted its intention to tap growth in the emerging wearable technology market in August last year, when it expanded its Wireless Internet Connectivity for Embedded Devices (WICED) portfolio with the launch of a new wireless platform (WICED Direct) specifically targeting the smart wearable components. By allowing two devices to communicate with each other securely via Wi-Fi without an access point or computer, WICED Direct simplifies the implementation of Internet connectivity into an array of consumer devices. By integrating Wi-Fi Direct into the WICED platform, Broadcom enables OEMs to rapidly develop wearable products that communicate seamlessly to the cloud via smart mobile devices. The company claims that emerging segment leaders are currently designing health and wellness devices based on WICED technology, including blood pressure monitors, glucometers, smart watches, fitness bracelets, and more. 
In December 2013, Broadcom introduced a new Bluetooth Smart System-on-a-Chip (SoC) into the WICED family with a highly integrated design and smaller size, which helps reduce power consumption to extend battery life for wearables. The company claims that the Bluetooth Smart technology is growing at a rapid rate and quickly becoming the core of many small, battery-operated wearable devices.
Broadcom continued to expand its portfolio for wearable devices in 2014. In February, it introduced the industry’s first Global Navigation Satellite System (GNSS) SoC designed for low-power, mass-market wearable devices, such as fitness trackers and smart watches. It also launched the next-generation NFC controllers designed to deliver simplified connectivity and drive adoption in mass market smartphones and wearables. The new controllers reduces power consumption by more than 60%, use 30% fewer components and a 35% smaller board area than previous generations.  Last month, Broadcom introduced a new family of low-cost combo chips, which the company claims offers best-in-class performance for the advanced wearables market and rapidly growing entry-level smartphone market.
The value of a wearable device lies in its ability to connect to a smartphone or the Internet with minimal impact on battery life. Broadcom is actively widening business opportunities in the wearable devices space by offering the breadth of IP and customized components that enable creative new smart wearable devices to be connected. Its expertise in NFC, Bluetooth Smart and Wi-Fi help wearable devices to seamlessly connect to smart mobile devices and unlock new use cases.
The wearable technology market is quite competitive with companies including Qualcomm, Intel (NASDAQ:INTC) and Texas Instruments (NASDAQ:TXN) increasing their focus on developing chips for the market. However, by entering the market at an early stage, Broadcom aims to gain a significant footprint in this fast growing segment.
The recently launched Samsung Gear 2 and Gear Fit wearable devices are powered by Broadcom’s chips. Samsung sold 800,000 Galaxy Gear smartwatches in just two months. Notes:
- Intense 3G Price Competition and 4G LTE R&D Took Toll On Broadcom Baseband Business, Strategy Analytics, June 2, 2014 [↩]
- Gartner Says the Internet of Things Installed Base Will Grow to 26 Billion Units By 2020, Gartner Newsroom, December 12, 2013 [↩]
- Broadcom Targets Wearable Tech Role, TechWeek Europe, August 30, 2013 [↩]
- Broadcom Targets Accelerating Wearable Market with Wireless Connectivity for Embedded Devices (WICED) Offerings, Broadcom Press Release, August 27, 2013 [↩]
- Broadcom Drives New Field Communication into Affordable Smartphones and Wearables, Broadcom Press Release, February 24, 2014 [↩]
- Broadcom Can Turn Things Around, But It Needs to Fix its Mobile Business, The Motley Fool, May 8, 2014 [↩]