Wireless Industry Analyst

[Originally for Sramana Mitra's site]

In the last part of this series, we looked at STM’s strategic initiatives that are aimed at making the company more nimble and profitable. A very important part of this strategy was unveiled last month when the company decided to form a Joint venture with its wireless business and that of NXP. Before moving on to STM’s wireless business and outlook, it is important to understand the dynamics behind this move.

In my previous article on convergence, I discussed the mobile baseband radio. While the WAN capability is most important, it also needs to be complemented by the so-called connectivity solutions. WiFi, bluetooth, GPS, FM and mobile TV have increasing penetration in the higher-end phones and will be a part of the convergence devices of tomorrow.

WiFi can facilitate seamless mobility for your voice call while also offloading internet browsing from the cellular network when you are near a wireless hotspot. WiFi can be used in conjunction with cellular systems today to enable fixed-mobile telephony convergence (FMC). There are dual mode handsets that can offload the burden on cellular networks, address in-building coverage issues and also switch your call seamlessly between the Wide-Area Network (WAN) and the Local Area Network (LAN).

Bluetooth as a short-range wireless technology has carved itself a niche, especially in the headset market. Legislations mandating in-car hands-free driving is one of the trends that will drive bluetooth penetration into mobile devices. The bluetooth standard has been improved to handle more sophisticated use cases such as stereo audio and high-speed data transfer. While some use cases overlap with those of WiFi, the audio profiles of bluetooth will find a unique place in the convergence movement.

GPS will help enabling location-based services (LBS). Like the GPS companies would like to say, tomorrow will not just be about when but also about where. GPS will be part of most if not all mobile devices in five years. Qualcomm has been bundling GPS with its chipsets for a while now with the hope that LBS will become more important that the mandatory E911 services. You can also look at GPS in your convergence device as the merger of the PND with the mobile phone. Garmin is attempting just that with its Nuvifone.

Mobile TV, for me, is perhaps the least exciting of the major convergence devices components. The reason is display. Display technology today is a far cry from enabling a good TV experience in your hand-held. Realizing this impediment, companies like Qualcomm are investing in display technology. High quality displays such as Qualcomm's Mirasol along with features such as retractable thin screens and a wide network coverage can help change the picture (pun intended).

FM will also become a staple. Besides these technologies, we can also think of Zigbee, RFID, UWB as other candidate radios that can convergence in your mobile device. These may come as part of a second wave that will seek to converge home networking as well.

Michael Canning resigned last week as the CEO of SiRF, the leading GPS silicon provider. Besides the events leading up to it, the announcement itself reaffirms my belief that SiRF’s end-game, whether it likes it or not, is to merge or get acquired.

As early as last summer, when SiRF’s shares were soaring, I questioned its strategy of focusing on stand-alone GPS solutions unmindful of the bigger trends towards integration and convergent connectivity solutions in the mobile world. Mobile companies like Broadcom and NXP (which recently got acquired by STM) acquired smaller GPS companies. SiRF, on its part, did not attempt to pair up with WLAN or Bluetooth solution providers but instead focused on a DVB-H product for mobile broadcasting. Contrast this with Atheros, a WLAN provider with comparable market cap last year, which has expanded its portfolio to have Bluetooth, GPS and Ethernet over the past couple of years and you will notice a flaw in SiRF’s thinking so far. You can read my thoughts on the Broadcom’s Global Locate acquisition here and Atheros’ GPS moves here.

Despite the booming GPS market and its acquisition of Centrality last year, SiRF may have just let the mobile market slip away from its hands. Broadcom especially seems to be doing a stellar job in stealing customers away from SiRF. The loss in market share led to bad quarters and the company’s share price has since tumbled to its nadir. While I think that this price drop is a little harsh, it does surprise me that most people did not see this coming. More insights and explanations about the SiRF strategy can be found here and here.

Now, with Qualcomm, Broadcom, STM-NXP and TI having GPS capabilities, SiRF has limited room to maneuver in the mobile space. Additionally, companies like Atheros and CSR are broadening their portfolios to fill in the gaps. Faced with the increased possibility of being marginalized, it looks like SiRF will have to align itself with the others who have a realistic chance in the mobile space or with a microprocessor/computer chipset company to sell with laptops.

So far, the deterrent for most companies trying to get SiRF was the latter’s huge market capitalization. That is not true any more. Besides, the company is now on its back-foot. A company like Intel can easily grab the company. But of late, I feel that a merger with Marvell is a good possibility as well. I will let you think about this for a day. Check this space tomorrow for my reasons why.

[Long SiRF at the time of writing]

[Originally for Sramana Mitra's site]

As we continue to analyze the company’s wireless products, it is illustrative to look at its connectivity solutions strategy. In the last segment of this series, we discussed Marvell’s WLAN business. In this piece, I will analyze its Bluetooth and GPS strategies, which I consider as vital elements of tomorrow’s convergence devices.

Marvell hardly has any presence in the Bluetooth market. However, its Bluetooth, WLAN and FM single chip solution, the company claims, is gaining traction. While this will help Marvell retain its WLAN customers, it is unlikely to draw Bluetooth customers away from the incumbents, most notably Broadcom and CSR. Broadcom is in a position to exploit the high Bluetooth attach rate in mobile phones to increase the WLAN uptake through a combined product. Marvell will likely find it more difficult.

Marvell announced a single-chip Bluetooth 2.0 + EDR solution last summer. Marvell is hoping to capture some of the lucrative headset market with this product but may be a little late to do so. I am, however, encouraged that it is pursuing an active R&D effort for Bluetooth which is imperative if it wants to be a successful mobile chipset vendor.

Marvell’s GPS strategy is more interesting. While most of its competitors either already have a good GPS solution or have quickly acquired its capabilities, Marvell has not made any tangible acquisition move as yet. When questioned, CEO Sehat Sutardja did acknowledge that GPS will be imperative for a number of mobile applications in the next two years or so. But he continues to make the point that the company’s GPS roadmap will be cost-driven. Marvell’s strategy is to internally develop GPS solutions that will add incrementally minimal cost to its platform. The company thinks that the success of GPS-based services will hinge on its large-scale adoption in the low-end mobile phones. While this may be posturing to discount its obvious handicap at this juncture, I do acknowledge that it is interesting out-of-box thinking from the company.

Marvell is unlikely to make an impact in the stand-alone Bluetooth market. From the looks of it, it is also not pursuing the GPS stand-alone market. Both efforts are directed towards bolstering the mobile platform components instead. Whether these will pay off entirely depends on the scale of the design wins Marvell can get for its XScale based mobile platforms.

ST Microelectronics (STM) and NXP announced last week that they were going to combine their wireless chip manufacturing capabilities to form a joint venture. This is an industry consolidating event that may well define the direction in which the mobile value chain is headed.

As per the deal, structured as a merger, STM will have control on the JV with about 80% stake. The company will pay NXP $1.55bn to close the deal in the third quarter. The merger combines two of the bigger wireless chipmakers, which together had about 10 percent of the global market in 2007, according to iSuppli. STM CEO Carlo Bozotti claimed that the JV will create a global leader with a more optimistic 14% market-share in wireless chips.

The companies’ combined wireless revenue for 2007 was about $3bn. They reported that the synergies are expected to save up to $250mn in 2011. Nokia, Samsung and Sony-Ericsson are among the customers for the JV. The company will primarily compete with Broadcom , and to a lesser degree with Infineon and Freescale, hoping to take market share away from TI. You can read more about TI’s precarious position in the mobile space and how such events aggravate this situation from my valuation series here, here and here.

Bozotti justifies the JV as a move to compete with the giants (Qualcomm and TI) on scale. “This is a business where scale is fundamental,” he says. The economy of scale, both in R&D and manufacturing, gives the leaders substantial ASP gains. The JV will also have a stronger IP position than either STM or NXP. This, in turn, gives it greater negotiating power in IP cross-licensing discussions further increasing its margins.

Besides establishing a strong R&D team to develop 3G solutions and beyond, the joint venture has what I would call a complete portfolio of connectivity solutions. These technologies – WiFi, Bluetooth, FM and GPS - will be integral to tomorrow’s convergence devices. This allows the company to chalk out a product roadmap that integrates these solutions into a state-of-the-art single stop platform that will be attractive to handset vendors.

The wireless industry, especially the 3G chip vendor space, will consolidate and the stronger players will pick themselves out of the crowd. The JV is STM’s statement of arrival. Over the last couple of years it has made tremendous strides culminating in design wins from Nokia and Sony Ericsson. The JV will perhaps not make an immediate impact in its product line. It, however, expands its customer base and also positions STM to exploit the convergence market over the next few years. The need now is to make use of the synergies and deliver on its design wins. The need now is for agility and execution.

[Long Qualcomm at the time of writing]

[Originally for Sramana Mitra's site]

I mentioned in the last segment of this series that I was not happy with TI's wireless and mobile market strategy. Let me try to explain why.

My bearish feeling about TI’s wireless business stems from what I think has been a flawed baseband strategy. The company seems to have grossly misjudged both its primary customer and its competitive landscape. Nokia and Ericsson’s multiple vendor strategy is a stark proof that TI can no longer leverage on its strengths such as manufacturing excellence either. The company, realizing this, has recently pursued a hybrid manufacturing strategy (moving towards a fabless model for digital), but it may be late to counter aggressive competition. So, while not being able to compete on baseband with Qualcomm, Interdigital and iCera, TI is also being handed design losses at customers it would consider its childhood buddies by the likes of Broadcom.

Another fact that cannot be ignored is that all the major baseband providers either have their own application processor product or an active development program running. There is also a move towards integrated application processor plus baseband processors. This, until now, was perceived as another TI strength that is fast eroding due to smarter competition. TI’s answer which ought to have been a 3G OMAP-Vox chip is conspicuously absent from its product-line.

Thirdly, the fortunes of its connectivity solutions - WLAN, Bluetooth and GPS – are tied with the mobile chipset design wins compounding the company’s wireless woes. Though independent of the OMAP or custom chips, these are often bundled in the mobile chipsets. TI has spent substantial resources on these technologies with cutting edge R&D work. But it has made a conscious decision to focus on the mobile market though each of these connectivity solutions presents a wider prospect. This dependence on mobile not only drastically reduces their total addressable market, but also implies suboptimal utilization of the related advanced research and development work.

In summary, TI’s competitors are carving shares for themselves with niche products and the company seems all but a muted spectator. In the sequel, I will take a brief look at the financial impact of the wireless reverses for TI and the impact of its focus on the application processor segment.

I have, so far in this series, looked at Broadcom’s Enterprise Networking business and also its Broadband Communications business. In the next few articles, I will present a discussion of the various components of its mobile and wireless business unit before proceeding to its valuation. This piece focuses on Bluetooth.

Broadcom is a leading Bluetooth semiconductor vendor with 25-30% market share. The company’s solutions are used in mobile phones, PCs, notebooks, gaming devices and headsets among other gadgets. I also estimate that about $500 million of Broadcom’s 2007 revenues came from its Bluetooth solutions primarily driven by the cellular market. The company has also been the ‘first-to-market’ here with products such as its integrated FM plus Bluetooth solution. Besides, it has been helped by new-found traction with the headset OEMs.

Bluetooth, with its rapid adoption as the low-power wireless standard, presents a good opportunity for Broadcom. I estimate that the total addressable market (TAM) of Bluetooth will grow at a CAGR of 10% from about $1.7 billion for 2007 to $2.7 billion in 2012. This corresponds to around 2 billion Bluetooth chips sold in 2012. This growth will benefit from the 50% growth in Bluetooth penetration in mobile phones. About 75-85% of future phones are expected to be Bluetooth-enabled. Also, hands-free driving legislations will provide a boost to the sale of headsets and embedded Bluetooth-units for cars. Gaming devices (Nintendo Wii, Playstation, X-Box, etc.) and portable media devices (iPod, Zune) which are looking to embrace Bluetooth will also be key drivers accounting for almost 20% of the Bluetooth semiconductors in 2012. Finally, these devices also provide good opportunities for high-quality Bluetooth stereo headsets.

Broadcom’s position in this lucrative market has to be seen in the context of some future trends.

Firstly, there is a trend towards consolidated devices and chips. Broadcom is looking to expand its leadership here through its triple play product with a 65 nm FM, WLAN and Bluetooth chip.

Another key development in recent times is the announcement of the BT3 AMP (Alternate MAC/PHY for next-generation Bluetooth). This allows Bluetooth to piggyback on the high-data rate capabilities of WLAN. This will allow Broadcom, one of the WLAN leaders, to consolidate its hold in the Bluetooth space potentially taking market share away from CSR, the current leaders.

The market, however, is extremely competitive. Companies such as Marvell and Qualcomm have plans for integrated products as well. Atheros has also made recent strides in this space. Along with Marvell, Atheros is perhaps better positioned to exploit BT3 AMP. Both of them have lower power WLAN solutions that are more suited for all mobile and gaming devices. So, though 65 nm looks a jazzy proposition along with the integrated solutions, Broadcom will have to work on low-power WLAN chips to effectively tackle the growing competition. Besides, a substantial portion of its mobile Bluetooth sales will also be dependent on its own success as a cellular mobile chipset vendor. This component adds to the risks associated with this business.

In summary, it appears that while this business is a shining star today for Broadcom, it comes with inherent risks and a more aggressive competitive landscape. If Broadcom works on the ‘right’ innovations (not necessarily the ‘eye-catching’ ones), then it will continue to maintain its market share while the competition will encroach into CSR’s market share, especially if BT3 AMP takes off. This, in my mind, is a reasonable assumption despite the fluidity of the company’s mobile chipset business.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

In my last article on Broadcom, I took a look at its Enterprise Networking Business and concluded that it is a steady revenue source for the company. I will now proceed to dissect the Broadband Communications business.

The Broadband Communications business is Broadcom’s biggest revenue generator today. Its 2007 revenue of $1.42 billion represents 37.66% of the company’s overall revenue. This also represents a 2.67% increase from the 2006 revenues of $1.38 billion. Discounting an anomalous drop in the 2005 revenues, this division also appears to be solid and growing at a CAGR of 8.2% between 2004 and 2007.

The strength of this business is clearly the diversity of its product offerings. The company produces silicon for all key broadband modems, High-Definition (HD) and Personal Video Recorder (PVR)-enabled set-top boxes (STB), DVD players, etc. The comprehensive and bullet-proof portfolio allows Broadcom to use competing technologies to its advantage. For example, it has chipsets that process both HD-DVD and Blu-Ray. Similarly, it leverages its competencies to enable STBs for the three pervasive television mediums today namely cable, satellite and IPTV.

The Broadband Communications business has and will continually benefit from upgrade cycles of the installed base of products. A good example is the conversion from HD-MPEG2 to MPEG-4 STBs. Besides, with the penetration of its products into new places, especially the emerging markets will be growth driver for this sector. India, for example, is warming up to the idea of digital cable STBs. I also anticipate PVRs to pick up there in the next few years. For that matter, as CEO Scott A. McGregor pointed out in the 2007 Q4 conference call, “in the United States, only 17% of cable, satellite, and IPTV subscribers have HD service today and only 25% have a PVR. Worldwide, the numbers are even lower.”

Additionally, in the short-term, the analog turn-off will help buttress this business further. Essentially, we will not have any analog TV transmissions in the US beyond April 7, 2009. This generates a market for digital-analog STBs that will enable the end-user to retain his analog TV beyond that date. The cable industry is also investigating similar options to make more efficient usage of the analog bandwidth. Also, the convergence of devices and home services will fall right into Broadcom’s lap. The consumer seeks integration of WLAN, Bluetooth, Ethernet and broadband modems into STBs. The company’s broadband modem business is also seeing a demand for integrated switching and WLAN in its products. Broadcom is positioned to tap its expertise in each of these areas to catalyze a unified growth of these communication products.

With the plethora of products in this business, the task of managing timelines seems rather daunting. More crucial for this business’ future is its ability to see the synergy in these various areas (customers, convergence etc.). As it is working towards these various focal points, Broadcom has announced 65 nm STB products in Q4 2007. We will see such products regularly timed to help the company stay ahead of the competition. The risk, of course, is the possibility that a ‘cool’ innovative product catches the consumer’s fancy to pretty much destroy Broadcom’s calculations. Otherwise, apart from the 65 nm process conversion, I see this as a relatively low maintenance business unit with high reward potential.

I follow Broadcom for at least three reasons. The first factor is its aggressive campaign to be right behind Qualcomm and TI in the mobile chipset business. Second is the spate of legal battles it has been involved in with Qualcomm. Of course, my final interest is its ‘big-brother’ competitor status to my company, Atheros Communications.

In my previous piece on Broadcom, I had discussed its strengths and weaknesses. There is one more factor that amazes me about this Irvine-based company: its truly broad portfolio of communication products. Broadcom’s product offering spans Ethernet, DSL, WLAN, Bluetooth, GPS and 3G mobile phones among others. The target markets range from carriers, networking, retail, to cellular mobile communications covering both wired and wireless telecommunications.

What does this mean? This diversification brings in resilience. It can sustain a big hit in any one of its product segments and still retain a substantial portion of its value. Also, it can take a radical technology decision with a long-term vision and afford losing market share. A good example is its latest transition to 65 nm technology. The company incurred substantial losses last year primarily due to its migration to this new process technology. Besides, the associated logistical issues involve inherent product delay risks. But the diversity of its product line and its market penetration should help it wade through such periods.

A wide portfolio also helps ‘bundle’ products. Laptop manufacturers, for example, are happy if Broadcom offers a ‘bundle’ of Bluetooth and WLAN chipsets at a discounted price. Of course, this strategy reduces margins but the volumes and the increased market share will offset it. In fact, Broadcom has married this concept with its integration and system-on-chip expertise to come up with a single chip Bluetooth-WLAN chipset. It is easy to see this being taken further by integrating GPS solutions as well.

The positives of a broad portfolio work well for Broadcom. Not even Qualcomm, its prime adversary, can challenge its breadth. I will complete the picture in the sequel by looking at the drawbacks of its broad portfolio.

• The touch-screen that was the iPhone's identity
• Wi-Fi, allowing internet access through the 'Safari' browser with custom yahoo and google functions.
• Music download from Wi-Fi hotspots at Starbucks locations
• Digital Radio
• Flash drives of 8 or 16 GB

The 'No' list

• Of course, the phone part of iPhone
• A microphone
• Bluetooth
• A bigger hard-disk

The Analysis

• Wi-Fi had to come: The iPod has to compete with Zune features and allow for wireless download of music
• Flash Drive, the power saver: The flash drivehas been used to compensate for the power-hogging Wi-Fi feature. The 'Touch' advertises 22 hours of music playback or 5 hours of video playback. Makes sense!
• Wi-Fi browsing: The Safari browsing experience is likely to be a paid service. If so, then the primary use will be limited to the business population and the intended reach of the device will not be as fast. On the other hand, the easy-to-use interface along with the mobility may have people willing to spend if affordable.
• The microphone: With a microphone, it can be used as a VoIP phone along with the Wi-Fi feature. There were perhaps 2 reasons for its absence. Apple, wants to maintain a good relationship with the carrier community, especially considering it is yet to globalize the iPhone. Secondly, my suspicion is that the GSM chip from iPhone is still in place in the iPod touch. Although it makes economic sense for Apple not to spend design cycles for an iPod that is essentally an iPhone clone, the presence of a microphone will let hackers enable the phone feature as well at no cost.
  

Looking ahead, the next generation of iPod touch (not knowing when that will come) will have -

• Free browsing on Safari, or at least cheaper and more affordable services with a wider range of applications
• Bluetooth 2.0 or higher, perhaps integrated with Wi-Fi chips
• The microphone will come once the iPhone obtains a stronger foothold. VoIP calls from home or hot-spots will become popular, especially when integrated with a sleek iPod.

On a personal note, I am undoubtedly thrilled. I wanted to get an iPhone but did not think the phone part was worth it. So, apart from the Flash drive, the VoIP feature looks attractive for the future, but I don't think I can wait to get 'touched' by this new gadget from Steve Job's garage.