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.

[Originally for Sramana Mitra's site]

I value Marvell at $21 per share. As we have evaluated in this series, the company draws its strengths from the stable revenue coming from its storage, ethernet and WLAN businesses. Its primary weakness is its perceived inability to control its expenses that have resulted in a poor profit/loss record despite growing revenues. The growth driver is its application processor business that will benefit from 3G and smart-phone market growth.

If Marvell plays its cards right, its wireless business can grow to contribute around 40% of its revenues in five years. This will come at a CAGR of up to 30% supported by a sustained market share in the application processor space. The communication processor and the connectivity solutions businesses will help sustain the application processor market share. This requires Marvell to actively develop competitively priced high-performance solutions and in-house platforms in the future.

‘Tavor’ is a very good strategic initiative. It also needs to successfully ship its WLAN, Bluetooth and FM combo-chip. If it can deliver on its envisioned low-cost GPS solution, perhaps as a single chip with the other connectivity solutions and also integrate these in a platform, then it will be a force to reckon with. Perhaps, as I have alluded to here, a merger with SiRF may work out well for the company.

These strategic initiatives will not make much more financial sense if Marvell fails to trim its enormous expenses. I have assumed that it will be able to turn around and cut its operational expenses to about 35% of its total revenues. If the company fails to do so rapidly to achieve nominal expense targets, then the valuation will fall down to $9. Today, its operational expenses are significantly higher resulting in a loss for fiscal 2008. It is true that the agreements to source from the Intel foundries have resulted in some efficiency loss. But I don’t think they alone account for the high expenses. It is becoming clearer to me that Marvell has to further trim its work-force to at least demonstrate a commitment towards making itself more nimble.

In summary, if Marvell keeps a tab on its expenses, its value will double up. If it can also gain baseband communication processor market share, its value can increase further. The aggressive management’s iron-hand administration and the Sutardja family’s personal stake in the company will drive both efficiency and business development. So, while $10 is a good price to pick up the stock, the realization of my valuation will depend on how quickly Sehat and his team can achieve this turnaround. For those who own this share, be ready to let go between $15 and $20 if you don’t hear of design wins for its single-chip XScale solution or if you don't see efficient expense management. For those of you hoping to make a quick buck, I would suggest looking elsewhere despite this stock’s undervaluation just given its uncertainty.

In my last post on SiRF, I mentioned that SiRF will likely merge or get acquired. For those of you missed it, you can read it here. I finished with a teaser suggesting a merger with Marvell as one of the options. Let us look at why this is possible. Before you read on, I should warn you that this is just a speculation. So take it with a pinch of salt and more of a synergy analysis.

To reassert my point on SiRF, the company might have stayed a little too long as a GPS company without acquiring other connectivity solutions or pairing up with a complementary solution provider. With mobile driving GPS growth, SiRF may find itself marginalized in this space despite its leadership. You can find earlier coverage on this topic here, here and here.

Marvell, on the other hand, lacks GPS capabilities. Sehat Sutardja, Marvell’s CEO, suggested that GPS has to be commoditized to have only an incremental cost impact on the mobile phone silicon. All said and done, if it cannot have a competitive GPS solution in the next couple of years, it will lose its baseband communications processor customers. The integration of application and communication processors also implies potential share loss in the application processor market. You can read more on Marvell’s connectivity solutions capability in my valuation series here and here.

If SiRF merges with Marvell, the latter will have a complete portfolio of connectivity solutions complementing its WLAN, Bluetooth and FM capabilities. It will also get DVB-H for mobile broadcasting. This will allow the Santa Clara-based Marvell to develop its own mobile platform if it finds relevant demand. I agree that Marvell already has enough financial headaches and operating expense issues to take care of. These will certainly be deterrents against any new merger. But we should note that SiRF is a fairly nimble company. So, Marvell should get favorable margins from the fabless SiRF.

The combined entity can definitely benefit from synergies. Both companies have RIMM as its customer. But in the future, this position will be challenged given aggressive pricing and bundling from the leading vendors. Broadcom, both companies’ main competition, has the potential to displace both of them from these accounts. A merger can help ward this situation off. Marvell’s efficiency can help lower the costs of GPS as it envisions. Besides, SiRF’s strong IP position in GPS will give the company good leverage during licensing discussions.

Finally, while I don’t want to read too much into it, I cannot ignore the Banatao connection. Diosdado Banatao, is now the chairman and interim CEO of SiRF. Given his reputation as a successful serial entrepreneur, his appointment as the interim head itself seems to point to an M&A. it also makes the Marvell angle more likely. He was intimately involved with Marvell as an early stage investor and as a board director until 2003. He knows the Sutardjas very well. He knows Marvell’s work culture, strengths and product portfolio and should have a better sense of the synergies between these companies than anyone else out there. So we can trust him to at least give this idea a good thought.

In summary, it is possible that SiRF and Marvell may merge. It may not be a bad strategy for either company. I will leave the price of such a deal to a SiRF valuation analysis that I am planning to do soon.

(For the interested reader, I have done an extensive valuation analysis of Marvell which will complete this weekend. You can read the first few articles of this series here, here and here)

[Long SiRF at the time of writing]

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.

[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.

We have so far looked at Broadcom’s Enterprise Networking business, Broadband Communications business, and the Bluetooth and WLAN components of its Mobile and Wireless Business. I will now look at its cellular mobile business which, in my mind, is the make-or-break component for the company.

The cellular space is Broadcom’s avenue for growth today considering that all its other businesses are mature. With these turning into flat, stable revenue streams, the move to challenge Qualcomm, TI and the others in the cellular IC market was a necessary gamble. Broadcom is approaching the mobile space rather aggressively. Just last year, it broke into the top-5 mobile merchant IC suppliers according to an iSuppli research report. It also announced a string of products including a single-chip 65 nm EDGE chip, a complete HSDPA reference design and its much publicized ‘3G-phone on a chip’. This single chip 3G-phone design, which Broadcom claims is a year ahead of competition, combines baseband and RF functionalities along with FM and multimedia processing capabilities and has been priced at $23 for early customers.

The company has also been involved in an extended legal battle with Qualcomm over intellectual property. From Broadcom’s standpoint, wins here will reduce the pricing advantage that Qualcomm has in the 3G business. Also, it helps project the company as the new champion in the mobile world. If we add the extensive PR campaign through the last two years, it is easy to appreciate the strides Broadcom has made in this space recently.

Broadcom also spent a substantial portion of last year’s revenues directed to this business. This includes its migration to 65 nm (the process technology employed by leading IC vendors in the mobile space) and its purchase of Global Locate for GPS capabilities. Both these are seen as imperatives for the company to stay amongst the top vendors each of whom have a complete portfolio of wireless products to complement their mobile chipset solutions. With these moves and the product announcements, Broadcom is targeting 10% market share by the end of 2009.

While the product and marketing strategy cannot be faulted, it now boils down to execution. In the sequels, I will take a brief look at what this means and also on the expected revenue growth from this division.

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

Over the last two parts of this series, we discussed the advantages and disadvantages of Broadcom’s wide portfolio at length. It is also illustrative to look at a key strategy that the company has been following for a while now: Growth by acquisition.

The breadth of Broadcom’s offerings comes from the various strategic acquisitions that it has invested in. Between 1999 and 2007, Broadcom acquired 36 companies spanning its three target markets. Broadcom has used these acquisitions to fill gaps in its product-lines, to reduce time to market, to carve a niche and also perhaps, to eliminate competition. These acquisitions have also allowed rapid enhancement of the company’s engineering expertise efficiently.

The 2005 acquisition of Sandburst Corporation is a good example of how Broadcom has rounded up its product portfolio through this strategy. The Massachusetts-based company’s semiconductor solutions for enterprise core and metropolitan Ethernet networks have helped Broadcom offer complete end-to-end Ethernet switching products.

Among its other ventures, Broadcom acquired Zyray wireless, a company that developed WCDMA baseband co-processors, in June 2004. The San Diego-based company came at a reasonable $96 million (paid in stock). Not bad considering that its SPINNER chip was Broadcom’s entry-point into 3G. At the time, Zyray’s product complemented Broadcom’s GSM/GPRS/EDGE capabilities and enabled the Irvine-based company to have a cost-effective WCDMA solution. Zyray’s solution, engineering team and its intellectual property have been important value-additions to Broadcom, whose future rests on its delivery and design wins in the mobile space.

Broadcom’s most recent acquisition, Global Locate also deserves a mention. Global Locate, acquired for around $146 million, developed GPS and Assisted-GPS (A-GPS) semiconductor solutions and software. Given its foray into 3G and mobile wireless which is migrating towards convergence devices or highly integrated communication devices, I was expecting Broadcom to make the GPS move much earlier. On the other hand, I am glad it has done it before the impending 3G boom. Adding GPS capabilities to its portfolio not only enables stand-alone solutions but also provides a path towards integrated Bluetooth, WLAN and GPS chips that can go into Personal Navigation Devices and mobile chipsets. Besides, GPS and location-based services are quickly becoming integral to tomorrow’s mobile-phones. Broadcom, through this acquisition, hopes to tap its System-on-Chip (SoC) capabilities to obtain design wins for its now-complete mobile portfolio.

Perhaps the best thing about these acquisitions is that they are well-calculated, strategic moves that did not dent its cash coffers outrageously. While most of these acquisitions have contributed to Broadcom’s mainstream product-line, their relatively cheap price tags allows the company to shed them off if found superfluous. Of course, this is not a desirable outcome. But the point I am making is that Broadcom should not hesitate on tough decisions, since it will provide more focus, and as Michael Kanazawa puts it, lesser corporate A.D.D.

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

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.

• interest shown by cellular companies in GPS: This was even before Atheros made a smart move picking up U-Nav (incidentally, I had stated then that U-Nav would be acquired too) and NXP got GloNav. I also mentioned that SiRF with its $2 billion market cap (then) was too big to be acquired. Now the company finds its value almost reduced to a fourth of that valuation.
  
• Other companies wanting to grad more silicon: That left SiRF as more of a one-trick pony!
• 'Keep the Bill of Materials low' dictum: Effectively, with more competition comes lower margins. This was something I saw as a critical issue that faced SiRF. Today, this has shown its ugly face with a reduced gross margin that has got the Street scampering.
  

• The 3G version, as I have already mentioned, suffers from a costlier chip also. The average price per 3G chip is closer to $25 as against single digit numbers for the Infineon chip in the iPhone today. Besides, the royalty structure for 3G amounts to about 28% of the average selling price of the 3G phone. Apple typically keeps its cost constant for more features. This will imply reduced margins from iPhone V2
• The power consumption issue does open up the question of who the baseband supplier will be. Will it be QualComm (QCOM), which has made strides in power management since iPhone V1? Will it be Infineon that has been confirmed to be developing UMTS (3G) baseband chipsets for atleast 2 companies? And if so, where does the recent licensing deal between Apple and Interdigital (IDCC) fit in?
• Who will supply the A-GPS capability for the iPhone?
  
• Would iPhone V2 be HSDPA-enabled?
  

In my previous article, I had mentioned that Sirf will have to re-invent itself and align with a cellular or WLAN chipmaker to have a more secure future. I had, however, missed this press-release on that same day.

http://www.sirf.com/PressRoom/Press.aspx?PressId=132

Sirf has inked a deal with Intel to license and co-develop GPS solutions for "Intel-inside" laptops. This is significant for the same reasons I had enlisted in my previous article. Bundling with a WLAN solution would help the marketability of Sirf's products. Besides, most laptops coming out today have WLAN in them and are likely to have mobile-chips in the future (dual-mode 3G/WLAN card and the likes). If Sirf can get something similar inked on the mobile-side, then it would be a more interesting future for them.

From Intel's perspective, this is almost a no-brainer. BroadCom purchased Global Locate and is sure to look at bundling the GPS receiver with their WLAN offerings for laptops and mobiles. Though the two companies' products don't compete directly in the WLAN market, any non-Intel laptop with an additional feature can be a market-grabbing product. Besides, QualComm is definitely targetting the data-card market for laptops. So, Intel had to fill in that feature deficiency.

Intel's move now adds pressure on other WLAN providers to deliver on the GPS front. It remains to be seen if these other WLAN providers will be pro-active and find a way to support GPS in their future products.

Two pieces of information over the past two days may spell some more bad news to QualComm. First came in the news that the European Union has decided to go with DVB-H patronized by Nokia. The EU wants to stick by it and maybe even make it a law to only use DVB-H for broadcast. This means that QualComm's MediaFlo is virtually out of Europe. Of course, this is not all bad since MediaFlo has gelled well with the U.S. carriers. With this news, also watch out for Sirf Technology Inc. which through the acquisition of TrueSpan has positioned itself to expand beyond the GPS market to get into the DVB-H market as well. Though their market cap is around $1.5 billion now, with GPS taking center-stage as one of the big features of tomorrow's mobiles and with DVB-H gaining traction, the company can go places, especially if it can ink some prudent GPS bundling agreements with cellular and/or WLAN chip-vendors. Another thought, as outrageous as it may seem, is that QualComm may make a bid for Sirf just for the synergy and the complementary technology that the latter can bring in. Of course, this would be at least around 3x bigger than the Flaarion acquisition.

Another piece that is most talked about today is the Sprint-Clearwire agreement to merge their WiMax networks. This is good for the WiMax proponents but is most likely a set-back for QualComm. A good possibility however is that Sprint sees this as a way to de-couple it's WiMax business (which is currently only a small proportion) and its more pervasive CDMA business. If this merged-unit is being treated as a new independent entity, then Sprint is implying a commitment to keeping alive and hence enhancing its CDMA2000 network with EV-DO and other capabilities along the 3GPP2 evolution path.