Tendril Networks - being smart about energy

Saturday, August 2, 2008

Over the last month, I have written several articles on smart energy. Yesterday, I also posted on the interesting parallels between cellular wireless and smart energy industries. Today, I will focus on the company that got me interested in smart energy in the first place - Tendril Networks.

Tendril Networks is a smart energy startup based out of Boulder, Colorado. Tendril was started with the intention of providing Zigbee middleware that can enable a multitude of applications. Since Adrian Tuck came on board as its CEO, Tendril has turned around and solely focused on the smart energy vertical. Smart move, I should say. Today, the company seeks to be a niche player offering a complete end-to-end solution for the utility company and the consumer.

Tendril, unlike other players in this market, has taken a customer-centric approach to the smart energy problem. The company’s philosophy is simple – give the consumer the choice. Consider the following situation -

It is peak summer and you cannot stay inside your home without the air-conditioner. It is very likely that your neighbors think the same way. The resulting peak utilization leads to capacity limitations. In a model being promoted by Tendril’s competitors such as Comverge (NASDAQ: COMV), the utility company steps in and turns off these high utility devices. This outage helps the utility company recover from this peak capacity crisis but may potentially ignore consumer inconvenience.

Tendril’s Residential Energy Ecosystem (TREE) begs to differ by passing the control and choice onto the user. The in-house display, Insight provides usage and cost details to the user. Examples of such data include variable electricity prices, current and projected usage and costs, price increase and emergency situations. So, if the utility company senses peak hours, it can send out warnings and spike the price and let the user react to it as against forcing an outage.

Besides the residential gateway that controls the devices and their usage, Tendrils’ USP comes with its backbone software portal. This portal, aptly named Vantage, allows the users to remotely control these devices and define rules for various signals from the utility company. You may, for example, decide that you want your heater turned on when you come home from office, no matter what the current rate of electricity is.

Tendril does have its share of challenges. It has to compete with existing metering and devices companies to gain foothold. Besides, it has its task cut out in terms of being able to convince the consumer of its benefits. If the device is not mandated at homes, the utility company may not see value in its solution. After all, if it can neither prevent outage nor monetize it enough if the consumer does not feel the need for TREE, then the entire model fails. Perhaps a work-around would be for the utility company to mandate TREE with subsidies for the devices.

Tendril looks to deploy its end-to-end solution in around 50000 homes by the end of this year by partnering with utility companies. The company has grown from less than 20 beginning this year to about 60 employees to match the rapid recognition and success it is gaining in the smart energy market. Adrian expects the company to grow to around 150 by the end of 2009 commensurate with the 10-folds deployment increase that it hopes to achieve during the same period.

Tendril raised $12 million recently and is looking for a much larger round of financing by the end of this year. For VCs and private equity companies looking at Tendril for an investment, I will say that Tendril is well-positioned to exploit growth in the smart energy market. This is true for the simple reason that the company has all components that have the potential to drive the value chain (read my previous article on the value chain here.) Depending on how the industry moves, the company has the ammunition to very quickly adapt, discard or outsource commodity and low-margin components to carve out a sustained revenue stream.

For me, Tendril is for smart energy what Qualcomm was for wireless twenty years ago – a bold startup with a complete, novel solution that efficiently addresses the capacity problems dogging its industry. Whether Tendril will meet with the kind of phenomenal success that Qualcomm has had will depend on the company’s understanding on the value chain drivers and also the strategic and tactical acumen of Adrian and his team.

[Note: In case this article sounds too esoteric, I would encourage you to read the previous Smart energy articles I have published here, here, here, here and here]

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Smart Energy and Cellular - a study of parallels

Friday, August 1, 2008

I recently started writing about Smart Energy as an exciting new technology frontier. There is another reason that Smart Energy was attractive for me. As I dug deeper and started thinking more about it, I found an uncanny resemblance between one of the possible smart energy business models and the cellular mobile carrier business model in the US.

The basic issue

The utility companies fear that they will be capacity limited in the future and wish to use smart metering as a way to slow the process. If, for example, the grid supported 20 users previously, they now hope that with ‘smart’ usage, 25 users can be supported. This will also guarantee a delay in the deployment of additional infrastructure. This, in turn, translates to a delay in Capacity Expenditure deployment.

This is very similar to the capacity problems that 3G network carriers will face as more users begin to extensively use their smart-phones for data. The carriers will turn to advanced transmit and receive techniques so more users can be supported for the same power expended at the base-station. This, in turn, will delay the deployment of more base-stations. Advanced receiver techniques like interference cancellation will assist the carriers to get a higher RoI as well.

The Value Chain

The cellular value chain, in my mind, comprises of four players namely the service provider, the cell-phone maker, the chipset/technology provider, and the consumer. In a model which is driven by the service providers trying to reduce CapEx, they will be driving the chain. In the US, for example, the service provider determines technology, the devices and the usage model. Until Apple changed the name of the game with its iPhone, the service providers called the shots here. Though the iPhone is tied to AT&T, it has been driving the increase in the latter’s customer base proving the power of brand and user experience.

The Smart Energy is closest to the cellular carrier-centric model. The utility company is akin to the service provider. The back-end software infrastructure and platform provider is parallel to the technology provider (e.g. end-to-end CDMA-based network for cellular). We have zigbee chipset companies such as Ember. I also like to use the cell-phone analogy to describe the two hardware components installed at the consumer site – the in-house display is parallel to the cell-phone and the gateway that controls the devices is similar to a femtocell or an in-house base-station.

The drivers

The Smart Energy value chain is slightly different in that the energy company has a monopoly. In other words, it is unlikely for the user to be able to pick the utility company. This implies that at least initially, the utility company will drive the value chain. A sound business case and monetization capabilities become imperatives. It is also the task of the technology providers (software platform makers, for example) to make their case with the utility companies. Their task is cut out – why is their system the best method for monetization? At the same time, how attractive is it to the consumer? How do they sell the devices and the services to the consumer?

These technology companies are hence in a position similar to Qualcomm’s about 15 years ago when the latter was trying to pitch CDMA to carriers world-wide. The difference, however, is that the utilities companies are more local and regional in scope. So, the technology companies will have to win over multiple utilities companies to grow market share. Hence word of mouth and deployment success become very vital.

Word of mouth will be driven by consumer feedback and user experience. So, much like the iPhone that has given 3G a big impetus in the US, devices with a great UI, look and feel become important as tools to mold consumer mindset much. The utility companies, in order to maximally monetize on ‘Smart Energy’ will go with the solutions that gain maximal consumer traction. Of course, devices/services that offer great consumer experience without much for the utility companies will automatically be sieved out of the equation.

The gateway companies will directly interface with the utilities companies to sell themselves. Gateways will be similar to the modems that Comcast installs at consumer sites. So, its capabilities will be driven by the needs of the utility company.

Clearly, while the technology and devices companies have the potential to drive the value chain at various points, I am not as optimistic about chipset companies. Though they will ride on shipment volumes, they will never be in the driver seat since the chipsets already seem to be commodity products.

A final word

So, while there are differences in the value chain between the cellular and smart energy industries, there are many similarities that cannot be ignored. On the contrary, companies should actively learn from how the cellular industry has evolved in the last fifteen to twenty years as they look to gain foothold in this promising new technology frontier. Feel free to contact me if you need additional insights along these lines. For now, let me throw in some future questions whose answers may well lie in past lessons –

How do companies protect themselves from another intellectual property war?
How about sustained consumer interest? Device churn etc.?

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Posted by Vijay Nagarajan at 3:58 PM 0 comments Links to this post  

Infineon - Valuation

Sunday, July 27, 2008

[Originally for Sramana Mitra's site]

Last month, we discussed in detail the various businesses of Infineon and also peeked into its strategy. We noted that Qimonda was the cause of most of its miseries. We also suggested acquisition and growth possibilities for the German company. Against this background, it is time for us to look at its valuation.

I value Infineon at $9.30 per share. This valuation accounts for the recent Qimonda write-offs as well as potential future losses due to the memory manufacturer. The two successive write-offs, totaling 1.411 billion euro, demonstrate Infineon’s firm commitment to leave the loss-making Qimonda behind as it creates a strategy for its future.A further upside of my valuation is the wireless communications segment. Given the competition and Infineon’s relative unpreparedness for the convergence movement, I have assumed a modest growth rate for Infineon’s communications segment. The situation can change if the company addresses the lack of connectivity solutions in its portfolio, either through long-term partnerships or acquisitions. With the company vigorously shaking off Qimonda, watch out for more activity on the wireless front.

The biggest downside is expense management. The analysis assumes that the company will execute on its promised cost-cutting measures. Its non-Qimonda operating margin of around 5% is far below the industry average. Thus, CEO Peter Bauer’s objective of reducing costs by around $300 million a year becomes a critical metric for the company’s success. It remains to be seen how successful the company will be in cutting 10% of its workforce in the face of Europe’s tough labor laws. If it continues to have low margins, Infineon’s valuation will drop to about $6 per share.

Infineon has its task cut out for it since the company has to strike a fair balance between its expenses and the need to embark on an aggressive strategy to grow its mobile wireless market share. It has the 3G iPhone now, but all bets are off for the mobile chipset supplier for next year’s refresh. It hopes to retain Apple with the newer 3G chip and reference designs it announced recently. But beyond that, Infineon may find the going tough on the baseband front. With Nokia and EMP looking away from TI in the recent years, STM and Broadcom seem poised to better exploit this situation. Infineon will have to embark on an aggressive all-inclusive platform development strategy. But this involves high development costs. With the current turmoil due to Qimonda and its string of poor quarterly results, the company will find it tough to justify such a strategy.

In summary, the $9.30 valuation assumes that Infineon will successfully get over Qimonda and execute on its expense management plans. This valuation has the potential to go up if the company overcomes competition to aggressively grow its wireless communications business. The stock is trading around $8 today after its recent quarterly results. I will perhaps not buy Infineon shares now. I would prefer to see the company deliver on its cost-cutting measures. But will I buy it at $7? Yes, since the upsides outweigh the downsides on this stock at that price.

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Posted by Vijay Nagarajan at 3:41 PM 0 comments Links to this post  

Atheros to Broadcom

Saturday, July 26, 2008

Hello readers,

I have resigned as a Systems Engineer at Atheros this week after a very fulfilling year's stint. I will be joining Broadcom Corporation as a Product Manager early August. The move is a carefully thought out career decision to progress to strategy and business development roles in the wireless/semiconductor industries.

Atheros has been a great company to work for. As a company, it is very nimble and is great at execution. I view it as a 900 person start-up replete with very friendly people. I have special respect and appreciation for Don Breslin who is a great engineer and a wonderful manager. I will treasure the positive experiences at Atheros as I progress in my career.

Moving forward, I am getting into a role that I have been carefully chiseling towards. Broadcom, with its broad portfolio and its wide brand recognition offers me the right platform to make my transition from engineering. Besides, as I have written in the past, I believe that Broadcom, with its aggressive campaign in mobile wireless and its complete platform portfolio, is positioned to be a key player in the convergence devices movement if it plays its cards right. So, I am very excited about my role and look forward to being an active contributor to its future revenue and profit growth.

If you wish to discuss this move further with me, please feel free to contact me using the email form on this site.

An unfortunate side-effect of this move will be my inability to continue coverage of most, if not all, topics in the blog. I may, from time to time, post tutorials, FAQs and white papers on various wireless topics but will abstain from wireless/semiconductor stock analysis and commentary from August.

Given this situation, I am looking to find writers/analysts who can take over my blog and continue to build on its credibility and visibility. The sizable readership and subscribers base now comprises primarily of wireless industry executives, entrepreneurs, VCs and the Wall Street community. So, well-researched and credible content guarantees great visibility. Interested readers, please contact me using the email form in this site with your professional details and why you are interested in taking over my blog.

The blog has been a personal branding vehicle for me. For the moment, I have to take this hard step away from this blog that I have so passionately maintained over the past year and a half. I will, however, try to tie up some loose ends and also address some recent reader requests over the next week.

While I will focus my wireless market insights and analytical abilities towards Broadcom’s continued success, I am still undecided on how I can channelize my passion for writing and information sharing. I am contemplating another blog covering others topics of interest to me such as product management functions, financial analysis methods, blogging as a personal branding and developmental tool, and technology career choices. I welcome other ideas from my readers as well.

Finally, I wish to thank my readers who have been a motivating factor for me to produce well-researched content. It has been a fulfilling year and a half for me. Thanks again!

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Posted by Vijay Nagarajan at 9:28 PM 1 comments Links to this post  

Inside the 3G iPhone - revisiting my predictions

Sunday, July 13, 2008

TechOnline published a very detailed teardown analysis of the 3G iPhone that can be accessed here. Their analysis went a step beyond iFixit's disassembly as they scrutinized 'under the hood' of the various iPhone components to identify them more accurately. Their extraordinary effort also lets me review my iPhone predictions that were summarized in my June 2008 post here.

Here is the photo of the iPhone 3G chipset as dissected by TechOnline -

Prediction #1: As this photo indicates, Infineon emerged the cellular chipset winner. The analysts are not sure if it is the PMB 8878 since they had no way of comparing the iPhone component with a known sample of the Infineon 3G baseband offering. They found that the baseband was a two-chip, single package solution. They further identified it as the 2G chip and a 3G accelerator.

For the moment, I have no reason to suspect that this is anything butthe PMB 8878. I don't believe that Infineon would have a chip customized for Apple. On the other hand, the company perhaps quickly cobbled together a 3G solution in the form of a two-chip PMB8878 to cater to the market needs (including those of Apple.) Given the long cellular product cycle and the tight iPhone schedules, this would have been the path of least risk as compared to spinning single chip solutions. For the record, Infineon recently announced smaller and more sophisticated 3G solutions with its own software stack. These latest chips (that are not in the iPhone) are likely the more thought out, and more optimal single chip UMTS solution.

The two-chip solution inside the iPhone 3G further brings back the question I have been asking for a while now. Does the 3G IP in Infineon partially or wholly belong to InterDigital? It could well be that the iPhone has many if not all elements of the SlimChip IP from InterDigital. Apple's license with InterDigital last year will then have deeper implications than the normal 3G license that the King of Prussia-based company seeks from handset vendors.

While the exact details will emerge in the coming days, my prediction #1, "Infineon will be at the heart of the iPhone. " has turned out to be true.

Prediction #2: "Samsung will perhaps continue to own this part. " Not much surprise here as the iFixit teardown revealed last Thursday. Prediction #2 was true too.

Prediction #3: Before we discuss WLAN and Bluetooth, here is a second picture from TechOnline -

So, as it turns out, Apple yet again went with Marvell for WLAN. Prediction #3, "For platform stability issues, I will bet on Marvell grabbing this socket again." was right.

Prediction #4: "If WLAN belongs to Marvell, CSR, which is in the current iPhone, will likely own the Bluetooth socket again." A look at the figure above will make it 4 on 4 so far.

Prediction #5: The 3G iPhone carries the Hammerhead II GPS solution co-developed by Infineon and Global Locate, the company that was bought by Broadcom last year. So, that makes my prediction #5 - "The next generation will have GPS and it will likely belong to Broadcom" - right too. I don't know the specifics of the licensing agreement between Global locate and Infineon. So, I will not be able to comment on whether BRCM will benefit from this component, if at all.

Prediction #6: The touchscreen controller belongs to Broadcom as well.

In summary, all six iPhone predictions I have recorded in this blog have come out to be true. As you can see, I based my prediction on most of these components on the rationale that Apple will not want to hamper the stability of the 3G iPhone by testing out new components in a short time span. As it turns out, most of Apple's component decisions were based on this very logic and is aptly pointed out by the TechOnline article.

[PS: For a more thorough look into the component dissection, please visit TechOnline's site]

[Disclosure: Long IDCC at the time of writing]

Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.

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Infineon cellular chipset in iPhone 3G

Thursday, July 10, 2008

iFixit has dissected the iPhone 3G here. It is a well done and well documented dissection that comes a full day early for iPhone geeks in the US. I do not wish to steal the thunder from the ifixit folks. So, while I will let you look up the rest from the iFixit site, I will touch upon one component that is very close to my heart.

I am hopefully not jumping the gun but here is what I read from the photos that iFixit has posted-

While the folks who did the dissection have so far identified the Infineon Smart3i chip, I think the photo of the chipset also indicates the Infineon 608 baseband. The chip with the part number 337s3394 is very likely the PMB8878, or XGOLD 608. This is further corroborated by the 608xx labeling on that chip and also a similar part from the last iPhone that was identified as the S-GOLD2 baseband processor.

This perhaps confirms something that I have been predicting for around a year now. Infineon's chipset is in the 3G iPhone and by extension, InterDigital's 3G protocol stack is also in!

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InterDigital - Thoughts on the ITC staff report

Wednesday, July 9, 2008

The staff attorney assigned to the InterDigital-Samsung ITC dispute favored Samsung in his report. His position that there is no violation calls for rejecting InterDigital's proposal to ban disputed Samsung products in the US. InterDigital's stock took a 25% dip as the Street is now pessimistic about its prospects. As the drama unfolds, here is an attempt to even out public perception. Before you read on, however, please note that I am neither a legal expert nor a Wall Street analyst. So, take it for what it is, just an opinion.

Firstly, while the staff report is an unbiased third-party opinion on the case, it is still only one instrument for the Administrative Law Judge (ALJ) to decide. The judge is yet to hear both companies' positions. The staff report is not binding on the judge. There is precedence in the past where the ALJ has acted against the staff recommendation. So, while InterDigital has lost some positioning in this case now, the staff recommendation is certainly not the end of the road for this ITC dispute.

Secondly, contrary to what I alluded to in my last post, an unfavorable decision by the ALJ will only reject the call to ban Samsung phones in the US. Besides, one theory is that a 'no violation' decision may be the result of the staff attorney finding that this is a licensing dispute that has to be amicably resolved between the parties without warranting a ban.

Thirdly, and perhaps most importantly, InterDigital has many more things going for it beyond the ITC dispute. Most notably, the company has already licensed to Apple and RIMM, both of whom are battling it out in the smartphone market. It is also very likely to be a beneficiary of the 3G iPhone to be released shortly. Ironically enough, Samsung sources 3G chipsets for some of its designs from Infineon. These phones will hence use InterDigital's 3G protocol stack and, like the 3G iPhone, contribute per-unit royalties to the King of Prussia-based company. You can find more about InterDigital's products and strategies here and here.

Finally, for the curious minds who are wondering what will happen to InterDigital's valuation if the Samsung case goes against it, I will direct you to my February 2008 valuation post here. A nominal assumption on the total royalty money gave me a $75/share valuation then. You can look at the revenue impact of the royalty rate replete with graphs there.

In summary, I feel that the sell position taken by many investors is understandable. InterDigital is a volatile story stock and the ITC staff report did little to buttress investor confidence. On the other hand, a 25% drop seems unwarranted in the light of a) lack of enough information given that the case is still in its preliminary stages and b) many other developments to look forward to from InterDigital.

[PS: Thanks to all the readers who responded to my previous post]

[Disclosure: Long IDCC at the time of writing]

Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.

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Posted by Vijay Nagarajan at 3:30 PM 1 comments Links to this post  

InterDigital - Samsung ITC case

Tuesday, July 8, 2008

If there is an award for bad blog-post timing, then I will perhaps be a front-runner this month! Just yesterday, I posted about Nokia and IDCC settling their UK disputes. I mentioned that it was a sign of more good news to come. Today, IDCC announced that the ITC staff in the Samsung case has favored Samsung. This has let to an astronomical 25% drop in IDCC's share price as people scampered to let go of their shares in anticipation of more bad news.

This is not a great development for IDCC. The downside is that if the ALJ upholds the staff's recommendation, then IDCC will lose any right to collect royalty from Samsung in the US. This will also likely percolate to its ITC case against Nokia creating a domino effect. This being said, the dispute still has a long way to go. Both parties are yet to make their respective cases.

For the moment, I am looking for more clarity in this matter. I would appreciate it if readers can provide any information that can be disseminated to educate others here. Please send me emails through the contact form. I would especially appreciate insights on the actual proceedings, court reports etc. that can go beyond what is being commonly reported.

More updates to follow as I come to know more!

[Long IDCC at the time of writing]

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InterDigital - More good news on its way?

Monday, July 7, 2008

InterDigital, the King of Prussia-based wireless company, saw its shares jump by about 5% last week when the S&P and Nasdaq were down by around 2%. The reason for this optimism was the news that InterDigital and Nokia have agreed to end two legal proceedings in the UK.

In July 2005, Nokia asked a London High Court declare InterDigital's intellectual property as non-essential to UMTS (3G standard encompassing WCDMA and HSDPA). InterDigital, in turn, filed a suit against Nokia in December 2006. The companies recently decided to drop these lawsuits. The terms of the agreement are unknown. Besides, the companies continue to be at loggerheads in front of the ITC in the US. While this settlement does not reflect a sudden friendliness or alliance between the two warring companies, it is certainly a good sign for both parties.

For Nokia, it means lesser distractions from its focus of retaining and growing its mobile market share and its fight to match new niche players like Apple. For InterDigital, ending the UK disputes quickly was becoming important. Its legal disputes with tier-one handset vendors were dragging their feet pulling down the company's intrinsic value with them.

I see the amicable end to the UK disputes also as a sign of more good news to come. For both companies, this is a good data point for their ITC-related licensing negotiations. If the companies can agree on the ITC litigation as well (which I presume will revolve around the exact 'per-unit royalty' that InterDigital will then collect from Nokia's 3G phones), the wireless IP-house will widen its 3G footprint. It will also carry this momentum forward into the ITC litigation/negotiation discussions with Samsung for more favorable results.

Like I have said before, I don't doubt that IDCC has important 3G IP. It is more a question of when and how much the industry is willing to pay for it. Maybe we will know many of these answers over the next few months. Earlier coverage on InterDigital can be found here, here and here.

For me, like for many other InterDigital investors, this week will answer some other questions to bring more good news. This Friday, I will watch out for the many 3G iPhone teardowns that will follow its world-wide release. If my analysis is right, we will see InterDigital's 3G protocol stack inside the new iPhone. IDCC is guaranteed per-unit royalty from Infineon for each of its 3G chipset sold. I will let you guesstimate what it means to InterDigital's revenue for the next few quarters!

[Long IDCC at the time of writing]

[Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.]

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Smart Energy - Business Case

Why would the energy/utility companies implement Smart Energy? What sense does it make for them? Fair questions to ask! I will attempt an answer here.

Despite the ‘green’ benefits, the most important thing to make this concept fly is for it to make business sense to the utilities companies and the slew of start-ups that have created an elaborate value chain.

The first argument is the ability of these devices to delay capacity expenses for the utility company. What does this mean? The energy companies have already invested substantial money in the infrastructure. For them, as the number of users increase, it will help them until they hit maximum usage. Once the usage hits this point, there are only two ways to go. If it has more money, and if it makes economic sense, the company will roll out infrastructure to support the load increase. If not, the user is faced with power outage.

The smart energy systems present an alternate route for the utilities companies. If the usage is controlled to a point that the capacity is reached five years later rather than today, then it delays the additional roll-out thus saving these companies billions of dollars temporarily.

Of course, the additional roll-out of capacity is inevitable. So the utilities companies should analyze what, if any, are the additional economic benefits of such a system. While I am sure there are research studies with cost-benefit analysis, the usage models and the consumer participation levels are unclear. So, the energy companies are likely to roll out minimal monitor systems to experiment and add incremental features to get a sense of what the consumer wants and what he is willing to pay.

Secondly, once implemented widely, the industry can have a sustained revenue stream. One way to accomplish this is the Software as a service (SaaS) model. The utility company can charge a nominal monthly rate per household per month for the software monitor and control platform. The company, in turn, can share this revenue with the software platform provider. Alternately, the utility company can pay a one-time fee for the platform vendor and monetize the service by itself.

To conclude, Smart Energy can make very good economic sense to the companies involved if they can combine creativity, common sense and a basic understanding of consumer behavior.

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Posted by Vijay Nagarajan at 2:22 PM 0 comments Links to this post  

Smart Energy - Convergence and consumer awareness

Saturday, July 5, 2008

In the two earlier parts of this series here and here, I had talked about various aspects of smart energy. In this part, I will look into smart energy and convergence devices and will touch a little bit on consumer awareness.

7. How about a more advanced use case?

That brings me to my favorite topic – convergence devices. It is very easy to foresee a remote application that will interface with the backend platform and help you control your electrical appliances through your convergence device. A very appropriate example is to have a smart energy iPhone Application, right?

Here is another use case. Suppose that your laptop or your mobile device has a zigbee radio and an energy management stack running. You could potentially set the application up such that when you step out of the house, your mobile device ‘loses contact’ with the gateway. The gateway then realizes your absence and sets the devices in your home in ‘hibernate’ or ‘absent’ mode. This may include a much lower thermostat setting, automatically turning off your humidifier or your ice-machine. Cool, eh?

8. What part should the consumer play? Will this be thrust on us?

Well, like I mentioned earlier, this is very much a part of the ‘green’ initiative. But its implementation will be successful and pervasive only when there is a win-win situation for the consumer and the utility company. While the utility company and the value chain will seek to monetize smart energy, they will have to ensure that the consumer will also benefit. The ideal situation will be for the industry to give back to the consumer rather than merely benefit from his/her philanthropic nature. So the consumer, in his part, should make sure that the utility company does not take him/her for a ride and that there is a value proposition for all parties.

Remember that ‘Smart Energy’ is not just another gimmick by the corporate world, but is for a noble cause. In my mind, it is also an awareness tool that demonstrates how you and I can contribute our little something to Mother Nature. It is to be seen how the entire chain will come together to define the value proposition to the consumer.

In the next part of this series, I will talk about why the utilities companies will want to implement smart energy.

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Posted by Vijay Nagarajan at 9:48 AM 1 comments Links to this post  

Smart Energy - FAQ Part 2

Wednesday, July 2, 2008

I recently started this Frequently Asked Questions series on Smart Energy. Here is the second part of the series -

4. How does the energy company communicate with the user?

There are two main components that help the energy company achieve its objectives.

Smart energy gateway: This is typically connected to your broadband connection and serves as an access point for the energy companies to talk to you. In the future, we may have carriers providing zigbee-enabled gateways for the user to have a single device that provides broadband also communicates with your energy company.

In-house Display: This is essentially the smart-energy equivalent of a mobile phone. This wireless device can be a kitchen-top device or a device attached to your refrigerator. The gateway can communicate raw data to the device which can process and provide information for the consumer to assimilate. Examples of such information include peak hours, rates, usage, usage projections etc.

5. How are the devices controlled?

A rudimentary model would be to assume that once the information is provided, the user will use his discretion to manually turn off devices. A more advanced model would be to provide control features in the display either through buttons or touch-screens. The control information is the stimulus for the gateway to communicate with the intelligent or smart devices installed in your house.

6. That is in-house control. How about remote control?

This is where the usage model gets more interesting. The energy company may use the back-end platform it uses to communicate through the gateway to perform a multitude of other functions. The most logical thing to do is to provide a web interface through which the user can monitor the information passed on to the display. Additionally, he/she can also control the actions of the gateway. Hence you have a remote monitor and control mechanism in place.

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Posted by Vijay Nagarajan at 4:16 PM 0 comments Links to this post  

Infineon - Future and Strategy

Tuesday, July 1, 2008

[Originally for Sramana Mitra's site]

Over the past two weeks, we have looked at Infineon’s financials and various business units. Before we proceed to its valuation, it will be useful to examine the company’s key strategic initiatives and growth possibilities if we exclude Qimonda from the picture.

Infineon states its strategic objectives clearly in its 2007 annual report. The company hopes to leverage its strength in energy efficiency and security to remain a semiconductor leader. It sees the growing need for mobility and communications as the drivers for its own growth. As the company is betting on mobile phones and broadband customer premises equipment markets, it recognizes the need to make strategic acquisitions to strengthen these segments.

The company also opts for a mixed manufacturing model. The German chipmaker wishes to retain control over process technologies for RF, power, embedded flash and others that it considers its traditional strengths. For standard CMOS processes, however, it will engage in long-term strategic partnerships with other companies while extensively using the services of silicon foundries.

I see a lot of positives in the company’s strategic plan. Its focus on strengths such as energy efficiency and its choice of an optimal manufacturing strategy are especially commendable. Given its portfolio, the mobile and the carrier markets are obvious growth drivers. Infineon, however, needs to take care as it is pitted against most other semiconductor leaders in these markets, including TI, Qualcomm, Broadcom and STM. Also, while it is certainly a leader in low-power technology and system integration, the competition is rapidly narrowing the gap given the increased thrust towards mobility and convergence.

It also appears that with Ziebart’s exit as CEO, Infineon’s strategy of making small but solid acquisitions may change. I am guessing that the company will now engage in larger M&A activities to gain scale, much along the lines of STM’s recent move to get NXP’s wireless business. The prime candidate being discussed is NXP. An Infineon-NXP merger would create an automobile and industrial semiconductor juggernaut.

With regards to wireless, Infineon’s acquisition of LSI’s mobility business was well motivated: LSI not only offered a sustained baseband program but also brought in substantial 3G IP from Agere to Infineon. Still, as I mentioned in the previous piece, Infineon lacks a full product portfolio to build a complete mobile platform.

This is where a merger with Freescale becomes a viable option. Freescale has its own baseband solutions for UMTS, EDGE and GSM/GPRS. More importantly, it not only has application processor capabilities, but it also delivered the industry’s first single-core modem architecture and has already embarked on long-term evolution (LTE) development. The complementary R&D that Freescale can add to Infineon’s low-power strength can, in my mind, create a powerful mobile wireless entity.

While these are good synergies, the two companies still do not have a complete connectivity portfolio between them. Infineon will probably need to follow a hybrid acquisition strategy, combining the merits of Ziebart’s philosophy while going for scale through Freescale and/or NXP. The company should perhaps go for small acquisitions or long-term strategic partnerships for connectivity solutions to secure and grow its mobile market share.

I also think that with its unique strengths in energy efficiency and low-power electronics, Infineon should look actively into Zigbee and smart energy systems as a diversification area. I believe that smart energy is a burgeoning industry and Infineon, among the semiconductor giants, is best positioned to exploit this growth.

In this post I have looked at various strategic directions and initiatives for Infineon. I have also put forth my vision for the company. With this thorough analysis behind us, we turn to the company’s valuation in the concluding part of this series.

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Smart Energy - FAQ Part 1

I have so far in this blog talked extensively about the mobile wireless space. Mobile wireless is very near my heart since my engineering specialization is in this field. Of late, there is one other industry that has caught my attention – Energy management and smart energy. So, I have put together a FAQ for the ‘smart’ reader that I will publish over several parts.

1. What is energy management?

Energy management is the concept that allows residential and business consumers to monitor and control the way their electrical appliances are used. The control mechanism may be in-house or remote-platform based.

2. Why would we need to control electrical appliances?

There are several reasons we want to be able to do this. Firstly, as responsible citizens of this world, we ought to give Mother Earth the respect she duly deserves. As we strive to go ‘green’, we should collectively work towards energy efficiency. Where else to begin this but at your home? Like someone said, ‘Charity begins at your home.’

Secondly, the energy companies are perennially running out of capacity and we are hit by power outages. Not only is the population growing, but the per-capita consumption of energy is also increasing by the day. The power companies are trying to device a more efficient, graceful strategy. If they can have nominal electrical usage per household, then such outages can be avoided or at least reduced. One scheme that the power companies are toying with is the idea of differential rates during peak hours. If the energy company communicates peak hour information to the user, this will encourage him/her to turn off electrical appliances that are unnecessarily running during those times.

Thirdly, there is the luxury angle. How many of us would like to have our house temperature right when we step in after an exhaustive work day? Or would you not like the A/C or the heater to fall back to a nominal temperature when you are not around?

3. How is the intelligence built into electrical appliances?

The smartness can come from several short-range communication mechanisms. A good emerging example is the use of Zigbee which is a short-range radio communication standard being promoted for home networking. Once your thermostat is equipped with a zigbee radio, it can be controlled by a central device which will also be zigbee-enabled. Suppose you have set a timer in this central device to turn off you’re A/C at 8AM when you step out of the house, zigbee signals are sent out to the A/C at the right time to enable this automation.

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Infineon - Wireless Business

Saturday, June 28, 2008

[Originally for Sramana Mitra's site]

We recently evaluated Infineon’s industrial and automotive business and its wireline communications business. Let us now take a quick look at its wireless communications business that has been in the news for the past year due to the company’s presence in the iPhone.

Infineon’s cellular ICs include solutions for GSM/GPRS, EDGE and 3G/UMTS solutions. It has sought to leverage its strengths in power management and system integration to design low complexity, low cost and high performance chips. The company recently announced the latest additions to its single chip X-GOLD family of cellular ICs. Infineon’s highly integrated power management features enable industry leading battery life standards. Besides, its SMARTi transceivers for 2G and 3G are widely used by leading handset vendors.

Apart from the cellular ICs, Infineon has a low, non-negligible market share in the Bluetooth market. In collaboration with Global Locate (now Broadcom), Infineon also developed the Hammerhead II A-GPS solution for the cellular market. It also has a presence in the digital cordless and RF power markets.

While Infineon specializes in low-power chipsets and is looking to increase its wireless footprint across Europe and elsewhere, there are holes in its product portfolio. This is especially critical in the context of the global movement towards convergence devices. Firstly, the company does not have an application processor family that complements its rich and highly competitive baseband solutions. Secondly, it does not have a complete set of mobile connectivity products. With Global Locate getting acquired by Broadcom, Infineon’s future in GPS/A-GPS is unclear. Unlike the other leading cellular IC vendors, Infineon also does not have embedded WLAN solutions that will complete its current connectivity portfolio.

Infineon’s strategy seems to be to provide low-cost cellular platforms whose gaps can be filled by other vendors. The 2G iPhone platform is a good example. While its cellular ICs were from Infineon, the application processor was from Samsung, WLAN from Marvell and Bluetooth from CSR. This model will work fine as long as handset vendors are interested in picking the best-in-class components based on cost and performance. If, on the other hand, the trend drifts towards highly integrated single vendor solutions, the handicaps in Infineon’s mobile portfolio will result in the company losing its market share, potentially including iPhone designs 2009 and beyond. Infineon will not be in a position to compete with the likes of Qualcomm, Broadcom and STM, all of whom have a complete portfolio to build single-stop cellular platforms.

Given these loopholes in its mobile and wireless portfolio, mergers and acquisitions become viable paths for Infineon to stay competitive. In the sequel, we will discuss potential acquisition areas and targets before looking at its valuation.

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Infineon - Wireline Communications Business

Friday, June 27, 2008

[Originally for Sramana Mitra's site]

We have, so far in this series, reviewed Infineon’s financials, Qimonda and the industrial and automotive businesses. As we continue to dissect Infineon in our valuation analysis, we will now take a look at its wireline business.

Infineon’s play in wireline communications is based on the convergence of data, voice and video in a single network and the resulting demand for high quality electronics. The company offers broadband solutions for central office and customer premises equipment (CPE). The company’s product lines include xDSL, 2G/3G wireless infrastructure and Ethernet solutions.

According to Gartner, Infineon held the fourth position for application-specific wireline ICs in 2006, with 5.6% market share. The company was also fourth in the wireline access network IC segment with about 15% market share. The German chipmaker further strengthened its position by acquiring TI’s CPE business in the fourth quarter of 2007. Infineon hopes to leverage TI’s customer base and carrier deployments to become the ADSL market leader.

While Infineon is a leading player in wireline communications, competition and the market make it difficult for it to achieve disruptive growth here. As an example, for the company to sustain long term in the customer premises equipment market, it needs to watch out for disruptive technologies and applications that can be integrated into such equipment. Femtocells, or indoor base stations, are good examples. Another relevant but more ‘down the road’ example is the integration of a smart-energy gateway used to monitor and control customer site energy consumption.

In the next part of the series, we will look at Infineon’s wireless play, which complements its wireline communications business. As we will see, wireless is the growth driver Infineon is relying on.

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Good Bye, George Carlin

Sunday, June 22, 2008

Sometime in 2006, I was in my favorite Starbucks location next to the TensorComm office in Colorado ordering my usual drink, "Double Tall, Extra Hot, Non-fat, no foam Latte!" I was proud of my concoction because I thought this very closely resembled my mother's coffee.

Now, my boss started chuckling and asked me if I had read George Carlin's new rules for 2006. I had not. I got back to my desk and checked it out and could not help bursting in laughter at what I saw. One of his rules read -

"..The more complicated the Starbucks order, the bigger the a** hole. If you walk into a Starbucks and order a "decaf grande half-soy, half-low fat, iced vanilla, double-shot, gingerbread cappuccino, extra dry, light ice, with one Sweet-n'-Low and one NutraSweet," ooh, you're a huge a** hole..."

"I am not that big an a** hole, but I still am one, " I thought to myself. Since then, I have often reflected on some of my idiosyncrasies and have consciously tried to improve myself. Of course, I should thank my boss for it. But George Carlin and his subtle message have certainly had a lasting effect on my life.

Yesterday, the comedian known for boldly pointing out such human follies and absurdities passed away due to a heart failure. I pray that his soul rests in peace.

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Posted by Vijay Nagarajan at 12:52 PM 0 comments Links to this post  

Infineon - Industrial and Automotive Business

[Originally for Sramana Mitra's site]

We recently evaluated Infineon’s financials and the negative impact Qimonda has had on it. While it is facing difficulties offloading its Qimonda stake, the German chipmaker has done well in its two business segments. Let us take a quick look at the Industrial and Automotive business in this part.

The main products of this segment include power semiconductors, sensors and microcontrollers, silicon discretes, chip card and security ICs. Infineon’s ICs are used in power trains, body and convenience features such as air conditioning in your car, its safety features such as ABS, airbags and stability control, and its infotainment aspects. Industrial applications include power management and supplies, power generation and distribution, and industrial control. Customers include Avnet, Bosch and Siemens.

Market research firm Semicast reported that Infineon is the leader in the industrial segment ahead of STM and Renesas. Semicast estimates that Infineon has about 7.5% of the $20 billion industrial market. Further, this market is expected to grow to $33 billion in 2013 presenting Infineon with a good growth driver. Strategy Analytics ranks Infineon as the second largest supplier of ICs for automotive applications worldwide with about 9% market share. Additionally, Infineon is number one in the power semiconductors market with 6% share in 2006 according to an IMS research report.

Driven by the strong demand for energy efficient solutions, the industrial and automotive business will stay healthy. The company expects healthy growth rate in the industrial segment primarily based on its leadership position in power applications. It also hopes for roughly stable sales within its automotive business based on its ability to provide complete high quality semiconductor solutions integrating power, analog, mixed signal IC and sensor technology.

Like Semicast’s Colin Barnden notes, the challenge will be to hold on to the leadership position in the face of increased competition. The uncertain economy will make the stable industrial and automotive segment very attractive for semiconductor companies. The segment thus presents a good opportunity for Infineon subject to competitive risks. For the moment, I am willing to give Infineon the benefit of doubt that it will at least continue to maintain its market share here if not grow it modestly.

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Posted by Vijay Nagarajan at 12:52 PM 0 comments Links to this post  

Infineon - The Qimonda Challenge

Wednesday, June 18, 2008

[Originally for Sramana Mitra's site]

In the last part of this series, we looked at Infineon’s recent financials and pointed out that Qimonda is a key reason why the company is struggling to create more shareholders’ value. Let us now take a deeper look into Qimonda’s challenges and Infineon’s strategic initiatives to address the situation.

The picture below, taken from Infineon’s fiscal 2007 annual report, illustrates the root cause of Qimonda’s misery.


The DRAM prices dropped a whopping 29% in fiscal 2007 led by seasonal demand weakness, inventory build-up prior to the Windows Vista launch and capacity conversion from NAND to DRAM by the competition. The 44% increase in shipments and the continuing market diversification strategy were not enough to stave off these challenges leading to a net sales decrease of 207 million Euros in 2007.

Despite these issues, the DRAM business requires Qimonda to invest heavily in its research and manufacturing capabilities. In 2007, Qimonda announced plans to build new manufacturing facilities in Singapore and Malaysia. It also announced an agreement with SanDisk to jointly develop and manufacture Multi-chip Packages. Additionally, the company hopes to leverage its product and market diversification strategy to increase DRAM average selling prices (ASPs), profitability and return on capital.

Last week, Qimonda and Elpida, both top-5 DRAM suppliers, signed final contracts for a strategic technology partnership on joint development of DRAMs. Primarily a move to gain scale, this agreement encompasses a broad cross licensing of Intellectual Property that gives both companies higher design freedom while aligning their development interests. Elpida’s CEO is also quoted as saying that he was open to a share swap with Infineon.

Infineon wants to get out of the memory business. It announced recently that it wants to reduce its current 78% stake in Qimonda to below 50% by the 2009 Annual General Meeting. While not many will pay cash for this stake, share swaps with companies like Elpida may help constrict the supply and stem the free-fall in DRAM prices. With private equity unlikely to pick up Qimonda due to its unattractive cash flow, such share swaps may be the unfortunate reality that Infineon has to face today.

In summary, Infineon is unlikely to relieve itself of the memory business overnight. The huge write-off in the last quarter demonstrates that the company has realized this hard fact. It will have to swallow more losses despite its valuable R&D and manufacturing capabilities. From a valuation perspective, Qimonda will continue to have a considerable negative impact on Infineon’s share price.

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Posted by Vijay Nagarajan at 4:21 AM 0 comments Links to this post  

Infineon - Financials

[Originally for Sramana Mitra's site]

In the first part of this series, I presented an overview of the company’s various business segments. With that as the background, let us look into the company’s recent financials.

For the fiscal year ending September 30, 2007, Infineon reported net revenues of 7682 million Euros at a gross margin of 20.7% and operating loss of about 3.5%. This is a decrease of 3% from the 2006 revenues of 7929 million Euros. The gross margin for 2006 was 26.2% while the corresponding operating loss was about 3.4%. Much like its European competitor STM, Infineon is also struggling well behind the industry average gross margin of 50.5% and operating margin of 18.6%.

The automotive and industrial business segment contributed 39% of the revenue while the communications segment accounted for about 14%. Qimonda, the struggling subsidiary producing memory chips, contributed close to 50% of Infineon’s 2007 revenues. Almost one third of Infineon’s products are consumed within Europe while Asia-Pacific accounts for another third.

Much of Infineon’s woes are tied to the struggling Qimonda. The commoditization of memory chips has caused their prices to fall considerably. While the cost of owning and operating memory fabs is high, the RoI is just not there due to unfavorable market conditions. Severely impaired in its ability to generate shareholder value, Infineon recently declared its interest in Qimonda as ‘assets held for sale.’ To give more clarity on its core business, the company will now report revenues only from its continuing operations. The potential gains or losses due to the change in the fair value of Qimonda will be reported as discontinued operations. In accordance with this practice, the company wrote off 1.3 billion Euros last quarter.

In the recent quarter that ended March 31, 2008, the company reported net revenues of 1049 million Euros from its core segments. This is an increase of 7% from the corresponding quarter in 2007. The gross margin for the quarter was 35% while the operating margin was about 4.5%.The Qimonda write-off in the balance sheet demonstrates the quandary that Infineon is in. It wants to dilute its stake in Qimonda and get out of the memory business. But apparently, the loss-making subsidiary does not have many takers. Infineon’s handling of Qimonda in the next few years will be an important component of any valuation analysis. It will hence be illustrative to take a look at this relationship in the sequel.

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Posted by Vijay Nagarajan at 4:00 AM 0 comments Links to this post  

Infineon - Company Overview

Tuesday, June 17, 2008

[Originally for Sramana Mitra's site]

We have, over the past year, presented detailed valuation theses for various mobile chipset vendors namely Qualcomm, Texas Instruments, Broadcom, InterDigital, Marvell and STMicroelectronics. This matrix will not be complete without Infineon – the German Chipmaker.

Infineon shot to the spotlight in the wireless world as it was discovered to be at the heart of the sensational first generation iPhone. I also think that Infineon will continue to hold this socket in the 3G iPhone to be released on July 11th. I am betting that Infineon’s XMM6080 platform and its PMB8878 chip (formerly known as S-GOLD3H and now marketed as X-GOLD608) will be in Apple’s darling product that was announced amidst much fanfare and expectations recently.

While the iPhone has been Infineon’s public face around the world for the last year or so, its business interests are much broader spanning automotives, industrial applications, and memory among others. The company was founded in the summer of 1999 as a wholly owned spinoff of Siemens AG following the latter’s huge losses in the fiscal year 1998. Infineon Technologies AG was listed as an IPO on the Frankfurt and New York Stock Exchanges in 2000. Today, iSuppli ranks Infineon 10th in the list of worldwide semiconductor suppliers.

The company is broadly divided into three business segments –

Automotive, Industrial and multimarket segment designs, develops and manufactures and markets semiconductors and complete system solutions for automotive, industrial, security applications and customer-specific applications. The continuing demand for high power products for industrial applications, increased sales of energy efficient products and an increased demand for government ID applications are attributed as growth drivers for this segment.

The Communication segment offers a range of ICs, other than semiconductors and complete system solutions for wireline and wireless communication applications. Wireless chipsets are a mainstay of this unit. Beaten up over the past two years by the insolvency of BenQ’s German subsidiary, the company is trying to recoup by building its IP and product base mainly through acquisitions. Besides Apple, Infineon phone platform customers include ZTE, Panasonic and LG.

Qimonda was legally separated from Infineon in May 1, 2006 into a stand-alone company manufacturing memory products. This segment has been Infineon’s Achilles’ heel from the day one. In fact, Infineon’s inception was forced because memory price erosion led to a $674 million pre-tax loss posted by Siemens Semiconductor in 1998. Even in 2007, a drastic 29% decrease in DRAM prices hurt Infineon’s prospects. The German chipmaker, realizing this bottleneck is starting to dilute its ownership in Qimonda.

With this brief overview of the company, we will look at the company’s financials, business segments, strategy and valuation in the sequels.

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Posted by Vijay Nagarajan at 6:45 AM 0 comments Links to this post  

More 3G iPhone observations

Tuesday, June 10, 2008

Forgive me for the barrage of posts, but I feel it would be better to put my thoughts down here before they either become obsolete or irrelevant (or both.) So here are a few more points to think about.

Firstly, AT&T is subsidizing the iPhone for us. This means that AT&T is paying Apple for the iPhone. Some estimates run up to an extra $200. Apple, in turn, has given up its cut from AT&T service contracts (contrary to my earlier speculation here). AT&T has increased the data plan by $10. So, the total cost of the new 8GB iPhone will still be $199+$240 = $439 for a 2-year contract. But most consumers will look at this increase as a premium that they will pay for 3G. For them, the bottomline will be that they are getting a very cheap iPhone at $199. VentureBeat has a nice post on this topic here.

The second point I wanted to make was on the 3G comparision demo. Apple showed that the iPhone was 36% faster than two competing 3G phones. I posted that this may reflect the capabilities of the modem design. As it turns out, that theory is not bullet-proof. In response to Om Malik's question on AT&T's 3G network capabilities, the company's mobility chief, Ralph de la Vega said that he is confident of being able to deal with the demand. Further, he said " We have a maximum throughput of 3.6 Mbps and soon it will be 20 Mbps. The core of the network is going to run faster as well." This piece escaped my earlier analysis. If the AT&T network currently runs at a maximum of 3.6 Mbps, then an advanced receiver in the iPhone (that supports up to 7.2 Mbps) should have minimal impact on the results. So, now I am left wondering where, if outside of the US, Apple captured this demo that shows the improvement in performance? Or, as unlikely as it seems, are the OS and the browser really making that much of a difference?

I will post more thoughts as I think through this further. Perhaps, I will consolidate these observations into a single post in the future. Until then, I hope you find these tidbits and commentary useful.

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Posted by Vijay Nagarajan at 8:30 PM 1 comments Links to this post  

A note on 3G iPhone's GPS

In my 3G iPhone predictions, I had mentioned Broadcom as the GPS solution provider. Here is why I think so -

My first premise is that Infineon's XMM6080 platform will be in the 3G iPhone. Now, if we look at the product brief of the XMM6080 here, the block diagram clearly states that the GPS capability of this platform comes from "Infineon/Global Locate A-GPS Hammerhead PMB2520/25." As we all know, Broadcom acquired Global Locate last year.

This is my simple argument that Broadcom owns the GPS slot in the 3G iPhone. Counter arguments, anyone?

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iPhone 3G - $199 wins my support (UPDATED)

Monday, June 9, 2008

The 3G iPhone is here. Well, almost here! Steve Jobs announced the latest avatar of the iPhone in his WWDC keynote today. Unfortunately for the users and technology enthusiasts, the phone is not out until July 11th. In any case, let us quickly look at the tidbits thrown at us during Steve's talk.

The 8GB 3G iPhone will indeed come with the $199 price tag. Other models are also lower cost than before. This is perhaps an industry changing move by Apple which has sought to bring smartphones to the mass market. It has, in the process, also shed the exclusivity tag that accompanies most of its products. The $199 tag is likely below the phone's manufacturing cost. So, it looks like AT&T is subsidizing it for us. Besides, I am sure that Apple will make money through the plethora of applications that are lined up for the iPhone apart from the AT&T service contract itself. Essentially, there seems to be a change in its iPhone business model. Apple, while choosing volume over margin with this move, will have to be cautious not to repeat Motorola's mistakes with the highly successful yet unprofitable Razr line of phones.

The 3G iPhone will be GPS-enabled. This clearly puts gadgets like Garmin's Nuvifone at a disadvantage. The phone also boasts good battery life. It has 5 hours of 3G talk-time, 5 to 6 hours of data browsing, 7 hours of video, 24 hours of audio. Not to mention the highly anticipated enterprise support that will have RIMM gritting its teeth.

OLD: This is the old version of the paragraph. I have updated this with more accurate information and have it below. Please read that......[The 3G data speed demo gave clues about the iPhone's modem capabilities. Steve showed that the iPhone was about 36% faster than the Treo 750 and the Nokia N95. The caveat is that these popular phones are based on slower WCDMA and are not HSDPA-enabled. For the uninitiated, WCDMA stands for Wideband Code Division Multiple Access and is the 3G migratory path for GSM carriers. HSDPA stands for High Speed Data Packet Access (HSDPA) and is a higher speed data optimized evolution of WCDMA. So, while not being a fair comparison, it demo showed that the iPhone supports HSDPA. I would personally have wanted to see how the iPhone performed against other HSDPA phones. That would have given me a better metric to evaluate the modem and also obtain clues about the baseband supplier.]

UPDATED: The 3G data speed demo gave clues about the iPhone's modem capabilities. Steve showed that the iPhone was about 36% faster than the Treo 750 and the Nokia N95. Nokia's N95 is HSDPA-capable. Palm also unlocked the Treo 750 to support HSDPA. (I am still a little hazy about the Treo specs. and would welcome additional information that you can provide me on this.) For the uninitiated, HSDPA stands for High Speed Data Packet Access (HSDPA) and is a higher speed data optimized evolution of 3G. So, Discounting any improvements provided by the OS and the browser, the demo suggests that the iPhone has a higher capability HSDPA receiver. A friend suggests that the difference in performance may be because the N95 uses a category 6 HSDPA receiver capable of download speeds upto 3.6 Mbps. The iPhone looks to be having a Category 8 receiver capable of 7.2 Mbps. This does give me clues about the baseband supplier. While multiple vendors including Qualcomm and InterDigital have Category 8 receivers, this comparison gives me more confidence that Infineon's X-GOLD-608 is central to the 3G iPhone.

The $199 tag is great news to me. I was looking to get the iPod Touch and a GPS device anyways. I will wait for my Sprint contract to expire and quickly grab one of these from an Apple store. I am not alone. All colleagues and friends I talked to today are quite bouyant. People who don't have the 2G iPhone are waiting for July 11th. Those who paid a high premium for the previous iPhone are still willing to trade theirs for a newer, sleeker and faster big brother. The 10 million iPhone target will now be a rather conservative estimate.

In summary, the keynote confirmed rumors that a lot of imagined were outrageous. The $199 iPhone is the mother of all deals and is bound to put other smartphone makers in a spot while giving great leverage to AT&T.

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Posted by Vijay Nagarajan at 11:00 PM 3 comments Links to this post  

How to look for IDCC in 3G iPhone?

Sunday, June 8, 2008

The 3G iPhone is expected to launch soon at the WWDC. One of the primary component winners likely is Infineon. The company’s cellular chipset is expected to drive the iPhone. As we wait for the teardown, I was asked by a good friend how we would know if IDCC is in the iPhone. He specifically wanted me to address the issue with respect to the latest IFX 3G product announcements. Here is my take on it.

Firstly, IDCC will get licensing fees from Apple as per agreements signed last year. The agreement covers 2G and 3G iPhones to be sold in the near future. So, irrespective of whose 3G components are in the iPhone, IDCC gets money from Apple.

Secondly, there will be money coming if Infineon’s 3G baseband is in the iPhone. In light of the recent product announcements by Infineon, I need to be careful when I make that statement. So, let me step back and reflect on the impending 3G iPhone. I wrote in the past that I expect to see the MP-EH platform with the S-GOLD3H baseband chip in the 3G iPhone. The company has rechristened its products since. The HSDPA capable MP-EH platform is now the XMM 6080 while its 3G baseband chip - PMB8878 - previously known as the S-GOLD-3H (H indicating HSDPA capability) is now the X-GOLD 608. Read more on this subject here and here.

Further, the 3G software stack that will be used in the MP-EH/S-GOLD3H combination was jointly developed by InterDigital and Infineon’s subsidiary Comneon. So, IDCC will get per-unit royalty from Infineon for use of the stack. While the software collaboration is public, I am inclined to speculate based on recent modem performance data that IFX 3G chips use some baseband receiver design IP from IDCC. This can be an additional source of per-unit royalty for IDCC.

Recently, Infineon announced an array of X-GOLD61x HSDPA/HSUPA products that drastically reduce on power and space apart from catering to multiple phone market segments. Furthermore, the company also announced specifically that the stack for the X-GOLD61x solutions is internally developed. While this announcement gives more design control to Infineon, it implies that IDCC will not receive per-unit royalties for the software stack on the 61x series. On the other hand, I am still bullish (read speculation) about the use of IDCC’s physical layer receiver IP in all of Infineon’s 3G offerings. Also, while I think these new products are part of Infineon's push to hold on to Apple for future designs in the face of increasing competition, I would be greatly surprised if I see any of these 61x chips in the first 3G iPhone.

In summary, look to see if the iPhone teardown reveals Infineon’s PMB8878/X-GOLD 608/S-GOLD-3H baseband. So, the best case scenario for IDCC is for the iPhone to have a heart of Gold! Even otherwise, the King of Prussia-based company will gain from Apple’s licensing fees.

[Long IDCC at the time of writing]

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3G iPhone predictions recap

Thursday, June 5, 2008

We are less than a week off from the Apple Worldwide Developer's Conference 2008 (WWDC) in which the 3G iPhone is expected to make its debut. I have, over the past year, covered the 3G iPhone in great detail. As we head to the WWDC, I thought it will be nice to compile my iPhone predictions about some component suppliers. Take them for what they are - just predictions!

3G Baseband: Infineon will be at the heart of the iPhone. The Infineon 3G chip will have a software stack that is jointly developed with InterDigital. The King of Prussia-based InterDigital is also likely to have a good portion of the baseband IP if my guess is right. I am basing this last speculation on the performance of the IFX chipsets in recently conducted tests.Essentially, InterDigital will earn a per-chip royalty for the software stack and possibly for the baseband IP. For more details on the 3G baseband supplier analysis, I will direct you to my article here.

Application Processor: Samsung will perhaps continue to own this part. Marvell has an outside chance.

WLAN: For platform stability issues, I will bet on Marvell grabbing this socket again. Broadcom may spring a surprise with its WLAN-BT-FM integrated solution.

Bluetooth: If WLAN belongs to Marvell, CSR, which is in the current iPhone, will likely own the Bluetooth socket again.

GPS: The next generation will have GPS and it will likely belong to Broadcom. This was recently ratified by a GigaOm report.

Touchscreen: Broadcom

I cannot hypothesise on other components. But if I were to guess, I will bet on Apple retaining most existing suppliers. While I have been talking about these component suppliers for around a year now, some of these predictions may appear matter-of-fact to readers today. In any case, now that I have put it all in a list, let us see what my hit-rate is!

[Long IDCC at the time of writing]

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Nokia to use IDCC products in future?

Wednesday, June 4, 2008

With Nokia and InterDigital (IDCC) engaged in a prolonged legal battle over licensing issues, the title of this article is sure to raise more than a few eyebrows. I think that recent industry events make this an interesting but overlooked possibility. Here is why –

The IDCC-NXP connection: NXP has licensed IDCC’s 3G HSDPA ASIC design for its PNX6712 chip. The companies entered into this agreement for integration into NXP’s Nexperia cellular chipsets as early as August 2005. Talking about this during InterDigital’s 1st quarter 2008 conference call, its CFO Scott McQuilkin said, “We also completed our delivery of HSDPA technology to NXP and ASIC is now moving into production.”

The NXP-STM connection: STM and NXP entered into a JV last month merging their wireless businesses to acquire scale. You can read my extensive coverage of this event here and here. The formation of a solid number three player stints IDCC’s abilities to sell its SlimChip solution directly. But in the bigger scheme of things, it spells good news for the King of Prussia-based company as the JV widens its footprint. In the most recent quarter conference call, IDCC’s CEO William Merritt resonated this point saying, “Frankly we looked at the combination of ST Micro and NXP and said, ‘Great, they’re getting stronger and they have our IP’ and we love our licensees to be strong and pushing hard into the market..”

The STM-Nokia connection: Nokia last year decided on a multi-vendor sourcing strategy. It now sources 3G from both TI and STM. Additionally, it also transferred about 200 chipset design engineers to STM. This not only signals Nokia’s move away from chipset design, but also presents STM with the opportunity to grab more 3G business at Nokia. It is devoting R&D resources to baseband design and NXP’s team and product are an active part of the equation.

The performance conundrum: Data communication necessitates a better receiver design. Despite the design resources from Nokia, STM will take time to build a competitive solution on its own. On the other hand, the design that NXP has licensed from IDCC is one of the top-performing receivers today. Nokia cannot afford to lag in 3G performance especially considering its high-end mobile market competitors have good solutions. Samsung sources from Qualcomm and Infineon while Apple is expected to have an Infineon chipset in its impending 3G iPhone. So, for the moment, the IDCC design seems to be the most accessible ‘best’ 3G solution for Nokia.

In summary, as STM continues its 3G ramp up, it may use NXP’s design in its platform in the short-term. IDCC, by virtue of its license agreement with NXP, will directly benefit from this move. What is more, this will give IDCC a chance to be part of Nokia phones. Now, that begs another question. Are IDCC and Nokia factoring this in their licensing discussions?

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TXN and STM - The Analog Wireless trade-off

Tuesday, June 3, 2008

In the last part of this series, I looked at the contrasting manufacturing strategies of STM and NXP. In this concluding piece, I will look at their product decisions, more specifically with respect to the wireless analog trade-off.

Wireless: With Nokia and EMP sourcing from multiple vendors, TXN’s strategy of using their baseband along with its application processor and RF modules for the mobile platform seems to have backfired. It has not pursued a 3G baseband product strategy and is hence in danger of losing its market share.

STM, on the other hand, has infused substantial R&D into baseband development as it revamps its product lineup. Nokia transferred its chipset design team to STM late last year. The Italian company has also created a JV merging its wireless business with that of NXP. NXP brings with it, complementary wireless connectivity solutions and a suite of baseband products (including 3G.) STM now has all the components to build mobile platforms for 3G and beyond and can compete effectively against Qualcomm and Broadcom.

So, while TXN appears to be losing its grip on wireless, STM has emerged as a strong player with the backing of the European handset vendors who command around 50% of the worldwide market. STM seems to be benefiting from its geopolitical alignment and is well-positioned to supplant TXN from its second position in wireless.

Analog: TXN has made the conscious decision to aggressively pursue analog as part of its strategy to maximize margins. The analog semiconductor leader understands that a substantial portion of the analog TAM still remains for it to tap into. The High Performance Analog (HPA) segment has been TXN’s champion growth driver. This segment, generating around 40% operating margins has grown at an average of 28% over the past two years. The analog business overall has grown by 11% over the same period. STM, on the other hand, has not focused as much on its analog business as it could. If it makes the right acquisitions, it can grow its analog share too.

In summary, the two companies have identified different niche areas to focus for growth despite directly competing in multiple markets. The strategic directions are meant to capitalize each company’s strengths. For STM, it is the geopolitical clout it carries with the European wireless players. TXN, on the other hand, is becoming a more nimble manufacturer by the day. It hopes to leverage this to dip further into the HPA market. Finally, while STM is looking to create more value through higher revenue, TXN’s value proposition comes from its impressive margins.

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Marvell revamps executive team

Marvell followed up a strong quarter by shaking up its management team. The company, it seems to me, is taking pains to demonstrate that the bad times are behind it.

The company has a new CFO in Clyde Hosein who starts on June 23rd. Clyde brings about 25 years of finance and operations related experience in technology industries. Clyde replaces George Urioste who was Marvell's interim CFO since January 2008. George takes over as the acting COO to relieve Pantas Sutardja. Pantas will now focus on his role as the company's CTO.

Weili Dai, wife of CEO Sehat, is back in the executive team as the VP sales for the Marvell's communications and consumer business unit. Weili resigned as the company's COO last year due to stock backdating issues. She was relegated to a non-executive Director's role until the issue was resolved. As she and the company agreed to pay fines related to the SEC charges, Weili was presented with the opportunity of taking up an executive role again. The CEO wasted no time in executing on this opportunity praising Weili for her “great business acumen, strategic thinking and endless passion” while offering her the new role.

Sehat also seems to assure his employees that the bad times are over for Marvell as he mentioned this in a note to them - "Weili and I also want to take this opportunity to
thank all of you for your loyalty and support over the past 18 months. This has been a
challenging time for Marvell - and for us personally - and we truly appreciate your continued trust and all of your hard work.”

Maybe the bad times are indeed over. The company has had a good quarter, has demonstrated its commitment to expense management, has the stock backdating issue behind it, has good mobile products and design wins lined up, and has a full-fledged executive team in place. Let us wait and see if it is able to maintain this momentum.

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Posted by Vijay Nagarajan at 10:00 AM 0 comments Links to this post  

Infineon, Marvell and the iPhone

Monday, June 2, 2008

Apple is expected to announce the 3G iPhone this month. Based on a reasonable set of assumptions, I have speculated that Infineon will continue to be at the heart of the iPhone. Clues that ratify this scenario have also been uncovered in the recent months. Recently, however, there were two industry events that made many question this theory. Here, I will take a look at these events and what they signify for the iPhone.

Firstly, Sehat Sutardja, Marvell’s CEO, had this to say in the company’s F1Q09 conference call –

“During the first quarter we achieved what I believe to be a very important milestone as we began volume shipments of our HSDPA communication processor to a key smartphone customer. We expect a steady ramp to high volume production throughout the remainder of the year.”

With the name of this ‘key smartphone customer’ not revealed, Apple and iPhone immediately got tagged to this remark. To me, the matter-of-fact statement appeared to reflect Marvell’s continuing relationship with RIMM.

The latest Blackberry Bold 9000 features Marvell’s Tavor platform. Tavor is a single-chip solution that combines a HSDPA baseband processor with a 624 MHz applications processor. The timelines of the Bold launch and Marvell’s shipment dates seem to corroborate as well. The RIMM angle, coupled with the difficulty in launching and testing a new platform with Marvell for the existing form-factor iPhone makes me believe that the Santa Clara-based company will not displace Infineon in Apple’s darling phone.

I will, however, not dismiss the possibility of Apple launching a second, smaller form-factor 3G phone with Marvell’s solution. Marvell’s Tavor may be ideal for a low-cost phone from Apple. The single chip will eliminate the need for a separate application processor. It will save space and power. Hence, it (or any single chip solution for that matter) will be a preferred solution a low-cost iPhone, if there is one. I also anticipate that Marvell will be able to bundle Tavor with its WiFi solution giving it a price advantage. So, in the eventuality of two iPhone models being launched, it is possible that both Infineon and Marvell have design wins at Apple.

This brings me to the other iPhone related news – the Infineon warning. The German company recently warned that it has received lower than anticipated orders for a project to supply HSDPA chips. Going with the premise that Infineon is indeed the 3G supplier for the iPhone, it is hard to tell if this warning pertains to Samsung or Apple or another customer. If it is for Apple, then, contrary to what is being written elsewhere, I don’t think it signifies any major delay in the anticipated launch of the 3G iPhone.

This may, however, signal one of two things. The first possibility is that Apple may not market the 3G iPhone as widely as anticipated (at least initially.) The second possibility, which ties up with the Apple angle to the Marvell statements is product mix. Apple may be planning on a staggered, complementary launch of two 3G iPhone models. This, in turn, could be the reason behind the lower volumes shipped by Infineon and the perceived secrecy associated with Marvell’s ‘key smartphone customer.’

In summary, I think Infineon will be in the 3G iPhone. While I feel that Marvell’s statements pertain to RIMM, I also see the company as a very good candidate for a second iPhone design that may also launch soon.

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Posted by Vijay Nagarajan at 8:00 PM 0 comments Links to this post