Competition increases in the mobile chipset market
Qualcomm’s (QCOM) licensing model has been criticized by customers and regulators as the smartphone market slows. Adding to the pressure, mobile OEMs[1. original equipment manufacturers] other than the top three—Samsung (SSNLF), Apple (AAPL), and Huawei—operate on wafer-thin margins.
So, Qualcomm is focusing on expanding its MSM (mobile station modem) business—which comprises baseband modems, application processors, and SoCs (systems-on-chips)—beyond mobile and into adjacent markets.
According to third-party research reports, Qualcomm (QCOM) accounted for 42.0% of the smartphone application processor market in 1H17 and more than 50.0% of the modem market. However, it’s facing growing competition from Intel (INTC), Samsung, and MediaTek in the modem market.
The top three handset makers are building custom SoCs, reducing Qualcomm’s share of the SoC market. These custom SoCs don’t compete directly, as they aren’t sold to other OEMs. However, Qualcomm loses a significant portion of its order from these handset makers.
Intel and MediaTek
Qualcomm (QCOM) dominates the high-end modem market, leaving the lower end of the market for MediaTek and Spreadtrum. However, Apple started sourcing modems for some of its GSM (Global System for Mobile Communications) iPhones from Intel, breaching its exclusivity contract with Qualcomm.
This action led to a lawsuit between Apple and Qualcomm. It also raised concerns that Apple might stop using Qualcomm modems starting in 2018 in favor of modem chips from Intel and possibly MediaTek.
However, the possibility of Apple using MediaTek modems is unlikely to happen as early as 2018 because MediaTek’s modems lag in capability. Plus, these modems haven’t been qualified by major telecom operators in Europe and the US. There is a possibility that Intel could become the exclusive modem supplier for Apple’s iPhones in 2018.
On the SoC front, Apple has been manufacturing its own SoCs since 2010 with the iPhone 4. During that year, Samsung switched to Exynos SoC with the Samsung Galaxy S. However, it continued to use Qualcomm’s Snapdragon SoCs in some of its smartphones.
Now, Huawei and Google (GOOG) are building their own mobile SoCs. Google’s second-generation Pixel phones were the first to use its custom SoC, Pixel Visual Core, which it developed in collaboration with Intel. However, Google’s SoC wouldn’t completely replace Qualcomm’s Snapdragon right away. Qualcomm would still supply SoCs to Google for some time until the latter’s chips mature.
Google agreed to acquire HTC’s smartphone business for $1.1 billion. Under the deal, Google would have access to HTC’s intellectual property and 2,000 hardware engineers, who would design and develop Pixel devices.
Qualcomm’s market share
With $22.3 billion in annual revenues, Qualcomm (QCOM) owns ~42.0% of the mobile chip market. A loss of just 5.0% market share in MSMs would cost the company more than $2.0 billion in annual revenues and $0.23 in EPS (earnings per share).
Growing competition and slowing smartphone sales are encouraging Qualcomm to expand in adjacent markets and in 5G. In this series, we’ll look at Qualcomm’s efforts in adjacent markets.