The following column was provided by Scott Smyser and Dale Ford, senior analysts with iSuppli Corp., an El Segundo, Calif.-based market research firm.
The spin-off of Motorola Inc.'s Semiconductor Products Sector (SPS) will allow the new company to compete more efficiently in the merchant market, iSuppli Corp. believes. However, SPS also will be confronted with some cold realities when it moves out from under Motorola's umbrella.
For wireless ICs, Motorola SPS has served as the internal development arm for Motorola's Personal Communications Sector (PCS), the division of the company that sells mobile phones.
The relationship between SPS and PCS recently has been somewhat on-again/off-again. However, for the most part, PCS has sourced the majority of its key components from SPS. In return, SPS's top priority has been meeting the needs and demands of Motorola PCS and its sister divisions.
While there have been benefits to this integrated supply/sourcing relationship, this arrangement also has created two key challenges.
First, it has placed PCS in a difficult position as it balances cooperation and support for a sister division while also sourcing components from external suppliers, something it needs to do in order to remain competitive. Second, given its primary mission of supporting Motorola's equipment divisions, SPS has become too reliant on other Motorola divisions, such as PCS, for its wireless revenue.
A majority of SPS's wireless revenue comes from internal sales to PCS and other Motorola divisions. iSuppli estimates that 28 percent of the revenues generated by the Motorola SPS group in 2002 were derived from the wireless segment.
PCS occasionally has sourced key components for its mobile phones from SPS's competitors. For example, Motorola PCS a few years ago sourced baseband processors from Texas Instruments Inc. However, a large share of this business eventually was shifted back to SPS.
Typically, there are significant costs incurred when shifting between key suppliers of baseband components. It could be that the shift of the business from Texas Instruments back to Motorola SPS was driven by a desire to support SPS during a very difficult downturn in the semiconductor industry.
However, it is not clear what benefits the PCS division derived from this shift from external to internal baseband suppliers. SPS more recently announced a new Microsoft Corp. operating system-based handset, the MPx200, which uses a Texas Instruments OMAP processor.
Now that SPS is on its own, what will that mean for PCS?
PCS certainly will be looking to source components from other suppliers besides SPS to try and remain competitive from technical and cost perspectives. SPS undoubtedly will remain a supplier to PCS, but to what extent remains to be seen. SPS will be competing for business at PCS just like every other supplier.
One of the key questions SPS investors will be asking is what type of agreements will be put in place to smooth the transition of division from being an internal supplier to being an external supplier. One possible scenario would have Motorola guaranteeing that a certain percentage of its sourcing would be directed to SPS, with that promised percentage declining over time.
SPS now will be competing more directly with other wireless component suppliers and will have a freer hand in making strategic decisions that benefit its business. However, with its historical priority on supplying the PCS division, it will need to reorient its product development, marketing and sales practices to align more effectively with a merchant market business model, iSuppli believes.
Motorola's solutions for mobile handsets have differed from those of other suppliers. The company's Power Amplifier Modules (PAMs) use Enhanced-Metal Semiconductor Field-Effect Transistor (E-MESFET) technology, in contrast to the mainstream approach: Gallium Arsenide (GaAs) Heterojunction Bipolar Transistor (HBT). While E-MESFET is said to be more cost effective, it may have a difficult time competing against the mainstream technologies like GaAs HBT and the newer technology of Indium Gallium Phosphide (InGaP) HBTs.
Motorola's solutions also are more modular than what is sold by the competition. While offering integrated module solutions delivers some advantages, it also brings some negatives.
Motorola's newest solution for GSM includes a PAM and an antenna switch combined into one module. The module is dual-band and provides an alternative to designing in the two separate modules, i.e. the PAM and antenna switch, discretely.
While this is a great solution for a dual-band handset, a designer has to rethink the design and layout for a tri-band handset. Furthermore, the cost premium associated with the integrated module may not be worth the ease of design.
Motorola's solution for GSM also integrates an RF synthesizer into the baseband processor. If a designer wants to use Motorola's RF transceiver and not its baseband processor, he will have to incorporate a separate discrete synthesizer to operate with the RF transceiver in order create a complete system-level RF solution. This is Motorola's way of locking customers into its complete solution, something that designers don't always like.
With regard to DSP-centric baseband components, Motorola will face some fierce competition in the merchant market. Texas Instruments has a very strong position in GSM/GPRS baseband ICs and now is moving into CDMA in order to compete with Qualcomm Inc. Texas Instruments also has its OMAP platform, which Motorola PCS has already adopted, as noted before.
iSuppli believes that the spin-off of Motorola SPS is a positive development. This move may be necessary to help SPS reverse a trend of declining share in the wireless market during every quarter since the second quarter of 2002. Motorola's share of the wireless semiconductor market dropped to 4.3 percent in the second quarter of 2003, down from 6.3 percent during the same quarter in 2002.
The transition for the wireless sector in the SPS group will not be without its perils and will place the new company in a position where it will have to swim hard to avoid sinking in the swift wireless current of the competitive merchant market.
Scott Smyser is iSuppli Corp.'s senior analyst for frequency control, RF, and wireless products. Contact him at email@example.com
Dale Ford is a vice-president for iSuppli Corp. and an analyst for Wireless Systems Application Markets and Application Specific Devices. Ford can be contacted at firstname.lastname@example.org