Qualcomm (NASDAQ:QCOM) may be enjoying a big lead over rivals in the 4G LTE market currently, but the gap is likely to narrow in the coming years as competition intensifies in a still nascent market. While rivals Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC) have already achieved LTE compatibility with their app processors, Broadcom (NASDAQ:BRCM) is expected to make a similar announcement soon following its recent deal with Renesas. Some primarily emerging market players such as MediaTek are also entering the fray with plans to launch their LTE solutions in the coming months. By the end of 2014, we expect many of these rivals to have integrated LTE modems on their app processors as well, further narrowing the technology gap with Qualcomm.
Shift In LTE Mix To Markets Outside The U.S.
Admittedly, Qualcomm’s technological superiority in basebands and first-to-market LTE solutions, which have set the 4G benchmark so far, will continue to help it dominate the LTE market in the near term. But an increasing number of rival LTE options will come as a boon to handset manufacturers looking to drive chipset prices down in a bid to better penetrate the emerging markets. This would fit right in with the strategy that most new LTE-chipset entrants are likely to adopt initially – to focus on the low-end before attempting to loosen Qualcomm’s stronghold on the high-end market.
Rising low-end penetration of LTE will not only cause Qualcomm to lose market share to emerging market rivals such as MediaTek, which is to be somewhat expected considering that Qualcomm accounts for over 95% of the LTE market currently, but also hurt its pricing power as 4G becomes more mainstream. Qualcomm’s near-monopolistic hold on the LTE market has so far helped it command a premium pricing in the market, and we expect the same to continue in the near term as well. From less than $17 in 2010, Qualcomm’s chipset ASPs have risen to over $24 in Q2 2013. In the longer run, however, the gradual proliferation of LTE handsets should cause chipset prices to fall and put pressure on Qualcomm’s margins in a maturing LTE market.
China To Push Prices Down…
What could accelerate the process is China’s emergence as a potential 4G powerhouse in the coming years, with the government expected to hand out LTE licenses by the end of this year. In preparation, China Mobile and China Telecom have already awarded contracts to infrastructure vendors such as Huawei, ZTE and Alcatel Lucent to build out their respective LTE networks. Up until now, LTE compatibility was an essential requirement for handsets only in the U.S. market. But China’s LTE foray will see handset manufacturers start to increasingly support 4G in their low-end smartphones as well.
The impact from this trend on Qualcomm is twofold. In addition to a loss of LTE chipset market share, a decline in chipset prices will cause LTE handsets to become cheaper as well, directly impacting Qualcomm’s licensing revenues. Since Qualcomm’s 3G/4G technology is widely used in handsets, it collects a certain percentage of the price of smartphones sold as royalty. This makes handset ASPs a very important driver of its high-margin licensing business. Growing LTE penetration at the high-end has been one of the reasons behind handset prices rising by more than 15% since 2010. But as the technology gets widely adopted in emerging markets such as China, handset ASPs are likely to face increasing pressure in the coming years.
…But Increase Qualcomm’s Addressable Royalty Market
Much of this impact could however be offset by China Mobile’s transition from a non-industry TD-SCDMA standard to 4G LTE. China Mobile is not only China’s largest wireless carrier, but also the world’s, with a huge subscriber base of 750 million that overshadows Verizon’s by almost seven times. Given Qualcomm’s strong LTE patent portfolio and its relatively low presence in the earlier TD-SCDMA standard, China’s transition to LTE should give it a wider base to collect royalties from.
We currently estimate that the 2G to 3G/4G transition will see 3G/4G penetration of mobile devices worldwide grow from about 50% currently to about 65% by the end of the forecast period. However, the increasing adoption of smartphones in the emerging markets buoyed by the growing number of low-end affordable smartphone options could see 3G/4G penetration increase to about 80%, by the end of our forecast period. Such a scenario would add a further 10% upside to our $72 price estimate. However, if mobile ASPs fall to about $150 from the current level of $220 simultaneously due to the growing emerging market mix, the upside to our price estimate would be limited to only about 6%.