How Samsung Is Rethinking Its App Processor Strategy With The Exynos 8890

Although Samsung Electronics (PINK:SSNLF) is a semiconductor powerhouse in its own right, it hasn’t really expanded its footprint in the $21 billion app processor market beyond catering to its own smartphone unit. However, that may be set to change with the introduction of the Exynos 8 Octa 8890 processor, which marks a departure of sorts from the company’s previous app processor strategy. This is Samsung’s first app processor to feature a custom core design, and it’s also the first integrated one-chip solution in the company’s premium lineup, combining processor and modem functionality. ^[1] More importantly, Samsung appears to be looking at selling these chips to third party OEMs, taking on Qualcomm‘s (NASDAQ:QCOM) Snapdragon lineup, which powers a bulk of the high-end Android smartphone market.

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Trefis has a $1,220 price estimate for Samsung, which is about 10% ahead of the current market price.

Custom Cores And Integrated Modem To Improve Performance And Reduce Costs 

The Exynos 8 Octa 8890 will be the first chip in Samsung’s lineup to feature a custom core design, much like other ARM-based chip designers such as Qualcomm and Apple (NASDAQ:AAPL). Samsung claims that the chip, which uses its 14-nm fabrication process, offers a 30% improvement in performance and 10% improvement in power efficiency compared to its predecessor, the Exynos 7420. The chip’s graphics unit performance is said to be 40% faster than its counterpart in the Exynos 7. This could potentially pit the Exynos 8 against Qualcomm’s Snapdragon 820 in the race to become the app processor of choice for next year’s flagship Android smartphones. This is also the first premium Samsung processor to integrate the application processor as well as an LTE modem into a single piece of silicon. This should allow for better power efficiencies, while also bringing down costs and improving margins for the product. These sorts of improvements are crucial in the SoC market, given the falling average selling prices of smartphones.

Focusing On OEMs To Drive Growth

While there have been a handful of exceptions, Samsung has usually reserved its Exynos lineup for its own smartphones. However, the company may ramp up production of the new chips beyond its own needs – it will likely feature in the upcoming Galaxy S7 – and begin supplying them more widely to other handset manufacturers. For instance, the company has been touting the space and design flexibility as well as the benefit of reduced components that these chips would provide handset vendors. This could be part of Samsung’s strategy to rely less on its smartphone business, while driving sales of components. Making a bigger bet on app processors could also make Samsung a one-stop-shop of sorts for OEMs looking to build new devices, since it could provide key smartphone components ranging from displays to NAND and DRAM memory modules to processors. The market for these types of solutions appears to be increasing. Many fast-growing vendors – particularly in China – are working with little intellectual property and hardware engineering capabilities, focusing their efforts on industrial design, marketing and distribution. As many of these vendors are already customers of Samsung’s memory and display businesses, the company could potentially cross-sell processors as well.

Samsung May Have Competitive Advantages In App Processor Market

The worldwide smartphone application processor market stood at $20.9 billion in 2014, according to data from Strategy Analytics, with Qualcomm leading the market with about a 52% share, followed by Apple (captive use) and MediaTek, who held 18% and 14%, respectively. ^[2] While we don’t have data on potential pricing and margins for these new chips, its safe to assume that playing a bigger role in the app processor market will be value accretive for Samsung’s semiconductor unit. Firstly, the move could help to partially diversify semiconductor revenues away from the largely commoditized and cyclical memory market, since the company would have better product differentiation with these new custom core logic chips. We estimate that memory accounts for over 70% of Samsung’s revenues. Secondly, Samsung has the advantage of using a vertically integrated manufacturing model, unlike the other big players in the app processor space such as Qualcomm and Mediatek, who work with a fabless model. Samsung’s foundry operations are the world’s fourth largest, per Gartner. ((Worldwide Semiconductor Foundry Market Grew 16.1 Percent in 2014, According to Final Results by Gartner, Gartner, April 2015)) Samsung might also have advantages in terms of scale, since its smartphone business – which shipped over 230 million devices over the first three quarters of this year – could continue to drive a base level of demand for its logic chips.

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1. Samsung Press Release [↩]
2. Revenue from Smartphone Apps Processors Grew at a Robust 21 percent to Reach $20.9 Billion in 2014, Strategy Analytics, April 2015 [↩]