Handset sales are being driven by two very different markets: feature-rich 3G phones and ultralow-cost phones. In developed countries, handset makers can only achieve revenue growth by offering phones with must-have features—the iPhone being a prime example.
The feature lists for these phones are amazing. In addition to handling numerous cellular air interfaces, the phones must support Bluetooth, Wi-Fi, FM and other communications standards. On top of this, they must provide high-quality audio and video experiences. The list goes on.
To deliver those features at price points that attract consumers, wireless chip vendors must make enormous R&D investments; vendors that underinvest risk being left behind. This was a key problem for Agere. In 2006, the company spent $445 million on R&D—a total that included spending on non-handset technologies such as its hard drive controller business. Compare that with Qualcomm, which spent $1.5 billion on R&D, most of it handset-related. That spending gap was likely a key factor in Agere's sale last year. It could no longer compete on its own.
Even with intense investment, developed markets offer limited opportunities. To maintain their growth, handset makers must develop ultralow-cost (ULC) handsets for countries such as China and India. According to ABI Research, "The developed markets' high saturation rates mean that over 80 percent of new mobile phone subscribers in the next five years will come from emerging markets."
The growth of the ULC handset market is changing the dynamics of the handset business. Traditionally, a handset manufacturer would rely exclusively on one vendor to supply chips for all its phones. That resulted in a small number of vendors dominating the market. ULC phones are changing this model.
ULC phones use commoditized technology for which there are many providers. Having multiple vendors gives handset makers more design flexibility and more power to negotiate lower prices. Thus, handset vendors are using multiple sources for their ULC offerings. For example, Nokia no longer relies exclusively on Texas Instruments for baseband chips in its ULC phones. Instead, the company last year announced partnerships with Broadcom, STMicroelectronics and Infineon. Similarly, Samsung now uses an NXP solution for its ULC handsets. A big winner in this shift is CEVA, which supplies DSP cores to all these second-tier players.
The opportunities for second-tier players are huge going into 2008 and beyond. The future looks particularly promising for Infineon. "Infineon's ambitious goal is to be among the top three cellular chip vendors by 2010, and they have a good shot at it," said market analyst Will Strauss, president and founder of Forward Concepts (Tempe, Ariz.).
Ironically, one reason for Infineon's strong position is that it acquired Agere's wireless business. While Infineon seems well positioned for the future, other second-tier players may fall victim to industry consolidation. In addition to Infineon's acquisition of Agere's wireless business, 2007 saw NXP purchase SiLabs, and saw Mediatek buy ADI's wireless business.
In short, while the future looks risky for vendors that do not make sufficient R&D investments, the market is full of promise for those that give handset manufacturers a viable alternative to TI and Qualcomm.
Note: this is an article I wrote for EE Times with links added in so you can read more on this important topic. For even more on this topic, check out Under the Hood: Vendors dial up integrated chips for ultralow-cost phones.