An interesting trend emerged last quarter when standalone processors outgrew baseband-integrated application processors, accounting for 41 percent of total smartphone applications processor shipments in the quarter up from 31 percent in the year-ago period. Meanwhile, Qualcomm (NASDAQ:QCOM) continued its reign at the top and Broadcom (NASDAQ:BRCM) displaced NVIDIA (NASDAQ:NVDA) from the fifth position to enter the top five for the first time. ((Broadcom Grabs Fifth Spot from NVIDIA, Strategy Analytics, December 6th, 2011)) Having gained a toe-hold on the market, Broadcom is now ramping up plans to increase its presence in the smartphone market next year. ((Broadcom CEO Sees Closing Cellular Chip Gap With Qualcomm, WSJ, December 15th, 2011))
Broadcom’s plans mean one more competitor for Qualcomm to deal with but given its strong product portfolio and diversification across mobile OS platforms, we don’t see any near-term risks to Qualcomm’s huge lead in the market.
Trend shift only a short-term change
Although the trend of standalone processors gaining more traction than integrated solutions may have Qualcomm concerned a little bit since the company has long been an advocate of integrated solutions, we don’t see the trend lasting for a long time.
Generally integrated solutions are preferred by handset manufacturers as it enables optimum performance at low cost while not hogging too much power. However, growing demand for dual-core processors and LTE-enabled chips, both of which are relatively new to the market and therefore not yet part of a standard integrated solution has caused a short-term trend shift in favor of standalone processors.
As these high-end smartphones start seeing mass-adoption and the LTE technology matures, emphasis will soon be back on power, cost and space optimization. That should tilt the scales back in the favor of integrated chipsets, in line with the long-term market trend.
However, in order to address the near-term market needs, Qualcomm broadened its portfolio to include standalone Snapdragon processors as well, that helped it participate in the LTE market. This shows Qualcomm’s ability and willingness to adapt, which will serve it well in the long-term even in the face of growing competition in the smartphone market.
Average pricing improves in the near-term
The move certainly did help Qualcomm take advantage of the short-term shift to stem the decline in average chipset pricing this year, as standalone processors cost more than when packaged with a baseband and other chipsets. This was of course helped along by the acquisition of Atheros’ that allowed Qualcomm to integrate chipsets with other features and sell at a higher price point. However, we believe that in the longer-term, as the trend dies and integrated solutions are made more feasible, Qualcomm will be forced to reduce its pricing gradually.
Qualcomm’s mobile device chipsets account for almost 40% of our $63 price estimate and the company has recently bolstered its integration capabilities with its recent Atheros’ acquisition. However, emerging competition in the form of Broadcom, NVIDIA and Intel has also made similar acquisitions to boost their baseband capabilities. Intel acquired Infineon and NVIDIA acquired Icera recently. Intel and NVIDIA may have the smarts for faster chips, however, given Broadcom’s dominance in wireless products for the broadband market, we believe the company is better positioned than other entrants to transfer its integration capabilities in Wi-Fi and other connectivity standards to the handset.
Looking ahead, Qualcomm will have to come out with LTE capable baseband modems integrated with its application processors ahead of competition in order to continue to stay ahead of the pack. We will especially be watching Broadcom very carefully for we believe it to be a very capable and hence a potential competitor to Qualcomm in the long-term.