Why Qualcomm Remains The No.1 Player In Cellular Baseband

by Trefis Team
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As per a recent report by Strategy Analytics, Qualcomm (NASDAQ:QCOM) retained its lead position, accounting for 66% of the $4.7 billion (2.5% annual growth) global cellular baseband processor market, in Q1 2014. With a 15% and 5% market share, MediaTek and Spectrum Communications occupied the second and third position, respectively. Marvell Technology was the fourth largest player (in terms of revenue), while Intel’s (NASDAQ:INTC) ranking slipped from No.3 (8% market share) in 2013 to No.5 in Q1 2014. [1] [2]

Owing to its strong and diverse client base and a very powerful 4G LTE portfolio, Qualcomm continues to dominate the global cellular baseband market. Its market share increased from 52% and 64% in 2012 and 2013, respectively, to 66% in 2014. As per Startegy Analytics, the global cellular baseband market was worth $17.8 billion, $18.9 billion and $4.7 billion in 2012, 2013 and Q1 2014, respectively.

In this article, we discuss what makes Qualcomm the leading player in the cellular baseband market and factors that can limit its growth in the future.

Our price estimate of $73.86 for Qualcomm is at an approximate 10% discount to the current market price.

See our complete analysis for Qualcomm stock here

Strong Presence In The LTE Baseband Market

Owing to its early investment in multi-mode LTE technology, Qualcomm has managed to establish a considerable lead over other players in the cellular baseband market. Over the last four years, the company has spent $14 billion on R&D, which has helped it gain over 95% revenue share in the LTE baseband segment. [3]

2013 witnessed a significant increase in the demand for LTE-based smartphones and devices, with the start of LTE rollouts in many new markets. With the 3G market declining and a hostile pricing environment within 3G, the baseband market shifted towards LTE multi-mode solutions last year. According to a GSMA Intelligence report, the global number of LTE connections is expected to surpass one billion by 2017, around 47% of which is expected to come from emerging countries like India and China. [4]

Qualcomm’s LTE and LTE-Advanced basebands gained strong traction in the baseband market, which helped the company increase its share in the cellular baseband market in 2013. LTE basebands account for over 40% of Qualcomm’s total baseband shipments. Its Snapdragon chip family continues to gain strong foothold and is the preferred supplier for top-end smartphones by Samsung, Sony, Xiaomi, LG, Google, LG, Motorola, HTC, and Nokia.

Qualcomm To Benefit From The LTE Rollout In China

The high-end smartphone market in developed markets has become largely saturated amid efforts by carriers such as Verizon and AT&T to control subsidies and boost margins. As a result, we expect Qualcomm’s future revenue growth to be increasingly driven by emerging markets such as China and India. These countries have very low 3G/4G penetration, and carriers there are intent on driving data usage through smartphones. According to IDC, smartphone sales in China increased by 67% over the previous year to reach 350 million in 2013, giving the country a share of about 35% of the world market. That figure is expected to increase by another 30% to 450 million this year. [5]

The biggest opportunity for Qualcomm in China is China Mobile, which is transitioning from its TD-SCDMA standard to TD-LTE. China Mobile is not only China’s largest wireless carrier, but also the world’s, with a subscriber base of over 760 million that overshadows Verizon’s by almost seven times. Its market share of Chinese wireless subscribers stands at about 65% currently. However, the carrier hasn’t been able to leverage its dominance in the overall market to drive 3G adoption in the country due to shortcomings with the TD-SCDMA standard, which wasn’t widely supported by handset makers. With the TD-LTE transition, China Mobile is looking to offset the 3G disadvantage and make up for lost time. This provides Qualcomm with a big opportunity to further its LTE dominance and gain baseband market share in China, especially now that the carrier will sell only five-mode handsets going forward.

Qualcomm has the most mature and widely used portfolio of five-mode chipsets portfolio developed on its state-of-the-art baseband technology. Thus, we expect it to benefit from China Mobile’s plans to offer five-mode LTE-enabled handsets. Additionally, China Mobile has decided to offer discounts on smartphones that will run on Qualcomm’s superfast 4G LTE network.

Increasing Competition Can Limit Qualcomm’s Future Growth

Because of the growth potential that it offers, there is intense competition in the LTE baseband space. Though many players have already exited the market (Texas Instruments (NASDAQ:TXN) and Broadcom (NASDAQ:BRCM)) on account of the cut throat competition, Qualcomm faces increasing competition from the remaining players (MediaTek, Spreadtrum, Marvell, Intel etc) who are all set to bring commercial multi-mode LTE chip products to the market in 2014. Intel and Marvell recently received some significant LTE design-wins. [6] Intel has spent billions trying to build up its mobile chip business and has abundant funds to continue investing in the field. Intel’s first LTE solution, the 7160, is now available in the Samsung Galaxy Note 3 Neo and the Asus Fonepad 7, in addition to the previously announced Samsung Galaxy Tab 3. The Cat 6 LTE solution, the 7260, will start shipping this quarter. The company expects its LTE roll-out to accelerate in the second half of 2014. (Read: Why Intel Can Gain Additional Share In The Mobile Market?)

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Notes:
  1. Strategy Analytics: LTE Accounted for Over Third of Cellular Baseband Revenue in 2013, FierceWireless, February 14, 2014 []
  2. Qualcomm Leads Mobile Baseband Chipset Market – Analyst Blog, Nasdaq, July 2, 2014 []
  3. LTE Dominance Raises Qualcomm’s Baseband Share to Two Third in Q3 2013, Strategy Analytics, December 20, 2013 []
  4. LTE Chipsets: Qualcomm Dominates, Rest Catching Up, LightReading, December 26, 2013 []
  5. China’s Smartphone Shipments to Exceed 450 Million by 2014, IDC, September, 2013 []
  6. Qualcomm Leads Mobile Baseband Chipset Market – Analyst Blog, Nasdaq, July 2, 2014

    Due to its dominance in the mid-to-low tier devices, MediaTeK is Qualcomm’s biggest rival. MediaTek’s Turnkey model is favored by many small and medium-sized firms because of its cheap prices. Qualcomm is more popular at the high-end of the spectrum. While some bigger players have had to exit the baseband market on account of mounting losses, MediaTek has managed to remain profitable. The commercial multi-mode LTE chip products will help drive LTE down into mid-to-low tier devices.

    With many believing that the high end of the smartphone market is saturating (though the belief is greatly debated), Qualcomm faces the risk of not being able to profitably migrate down into mid-range or low-end phones.

    After its acquisition of Infineon Wireless, Intel was once the No.2 player in baseband. However, its smartphone application processors failed to impress and it was late in rolling out its LTE solutions, due to which the company’s baseband share has declined in the last few years. ((Intel’s Cellular Baseband Share Plumments, The Motley Fool, February 25, 2014 []

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