Wireless Industry Analyst

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.

[In this two part series, I will compare the strategies of TXN and STM]

Texas Instruments (TXN) and ST Microelectronics (STM) are leading semiconductor companies. They are second and third respectively among wireless semiconductor solution providers. As I completed my STM valuation series recently (read here), I noticed the divergent strategies the two companies employed despite broad similarities in their business models and markets addressed.

For a while now, I have been detailing Texas Instruments’ [TXN] failure to capitalize optimally on the impending wireless boom. In my valuation series, I pointed out that in addition to all its analog initiatives, if TXN had managed wireless better, my valuation would have increased from $32 to finish closer to the $40 mark. Nothing has changed since. But I am tempted to comment on a couple of recent analyst reports.

Citigroup’s Glen Yeung raised his rating of TXN to BUY from HOLD. Increasing the price target on the stock from $31 to $39, he replaced Intel (INTC) with TXN in Citi’s “Top Picks Live.” His report seems to be primarily based on TXN’s delay in wireless market share loss at Nokia. This in turn relies on recent comments from Broadcom indicating a delay in its EDGE ramp-up with the Finnish handset vendor. Glen seems to think that this “increased optimism in TXN’s handset revenue opportunity” will sustain TXN longer than consensus estimates.

With due respect, I think this is a very short-sighted opinion. This does not rightly reflect TXN’s longer term position in the wireless space, its overall strategy, its growth drivers and hence the intrinsic value. Share losses getting pushed out by a quarter or two merely increases its net present value but does not warrant this dramatic shift in the target price. Besides, as I have often mentioned, Nokia’s multi-vendor sourcing and TXN’s lack of a viable baseband roadmap are clear indicators that TXN has not dealt its wireless cards as well as it could have.

I find the valuation report from Thomas Weisel Partners’ Tore Svanberg and Brian Williamson much more credible. The report takes a longer term view of TXN. Their sum-of-parts analysis and their argument that analog will be TXN’s growth driver resonates better with me than the Citi report. Though the company is the analog semiconductor leader, it only has about 13% share leaving a big portion of the $35-40 billion TAM for it to exploit. As TWP notes, the analog growth should be strategized and executed through acquisitions.

While I agree on the analog aspects of the TWP analysis, I am not as sure if decreasing wireless contribution is good or was intended. (More detailed coverage here and here.) Assuming fixed resources, it is possible that TXN has consciously let go of its wireless business in exchange for the much higher margin analog business. The high performance analog segment generates operating margins that are greater than twice the average semiconductor industry margins. But does this warrant throwing away its leadership position in wireless? Couldn’t the company have pursued both businesses actively?

In summary, analog, and not wireless, will be TXN’s growth driver. While I am disappointed with TI as an industry observer, I also think that the company has compensated for this loss to a certain extent through its aggressive pursuit of the analog business. For now however, with the bird in hand slowly escaping, I think TXN’s stock price continues to hover around its intrinsic value.

As highlighted in our discussion of ST Microelectronics financials, the company has not been very profitable in the last few years. More importantly, it has been growing lesser than the semiconductor industry and losing market share. It is therefore appropriate to peek into the steps that the company has taken to address this situation.

In my Texas Instruments (TXN) valuation series, I pointed out that the company did not have a strong 3G product strategy. I subsequently also discussed in detail the synergies that existed between InterDigital and TI. I had also noted that if not InterDigital, TI could consider Icera also as a viable option to buttress its 3G roadmap. Let us take a quick look at this possibility.

InterDigital announced its First Quarter 2008 results yesterday. The King of Prussia-based company beat analyst expectations this quarter, addressed the Nokia and Samsung litigations and also hinted about its 3G iPhone presence.

Recently, I looked at Qualcomm’s 2008 fiscal second quarter earnings results. Subsequently, I also talked about the various mobile chipset opportunities that Qualcomm was positioned to exploit. Let us first look at how Qualcomm seeks to address some of these market areas.

Qualcomm’s 3G baseband chipset strategy is very comprehensive. The company is targeting low-end phones in emerging markets with cheap single-chip solutions. It expects QSC6010, which is driving CDMA growth in India, to be strong moving forward. Additionally, the company has invested heavily on its QSC6240 single-chip UMTS solution. With this low-cost product offering, the San Diego-based Qualcomm is hoping to drive the transition from GSM to WCDMA, especially in the high-volume markets.

Complementing these low-end 6000 series chips are the 7000 series of convergence platform chipsets. These chipsets combine the baseband functionality with an on-chip ARM-based processor to enable multiple smart-phones in mature markets. Additionally, the integration of the application processor allows Qualcomm to grab more of the handset ASP.

By addressing both the baseband and application processor markets, Qualcomm provides the most complete and powerful product portfolio among mobile silicon vendors. Besides, it is evident that Qualcomm is the only player to address all market segments – low, middle and high-end – efficiently.

Other players compete with Qualcomm in a subset of these segments but no one has either the technical acumen or the deep-pockets to make a difference across the board. They also have their deficiencies. Marvell, for example, focuses on low-cost, high volume chips but is currently behind in testing and development does not have a critical mass of design wins and also lacks a full-portfolio of connectivity solutions. InterDigital has set its sights only on the high-end smart-phone segment fully understanding that performance differentiation is the key to its success. TI lacks an in-house 3G roadmap that is detrimental to its dominating market share. If you are interested in understanding the competitive landscape in the chipset vendor space, I will direct you to my detailed valuation series on TI, InterDigital, Marvell and Broadcom available in my blog. I have also covered other vendors such as STM-NXP, Infineon and Icera to present a fairly complete picture of the chipset vendor space.

In summary, Qualcomm has the right ammunition to sustain and grow in the mobile phone and the data-card markets. Its business model has allowed it to develop a broad portfolio of solutions that dwarfs competition. As 3G grows, Qualcomm will grow with it, not just from this product mix but also the IP that forms the core of these technologies.

[Long Qualcomm at the time of writing]

In my last article on the STM, NXP merger, I analyzed the JV from STM’s perspective. The merger is a clear sign of further consolidation in the 3G space. To understand this further, it is also illustrative to look at how other players in the vendor space can be impacted by this merger.

The importance of this merger primarily comes from my thesis that Texas Instruments has fumbled in its 3G strategy, leaving its huge market share wide open for other vendors to steal from it. Especially at risk is its huge Nokia account. The Finnish handset maker has already moved towards a multiple vendor strategy sourcing 3G chips from STM. Last year, it committed about 200 engineers to STM for the latter’s 3G chipset development program. Nokia is essentially focusing away from chipset IP and development. This has worked against TI and into the hands of STM and Broadcom (whose EDGE solutions are now being sourced by Nokia.) You can get further insights into TI’s wireless strategy and its potential pitfalls in my valuation series here, here and here.

The JV can further consolidate this relationship between Nokia and STM. Further, the complete portfolio of connectivity solutions will make it very attractive for the future smartphones from Nokia and the others. So, the JV will likely add to TI’s wireless woes. The impediment that I see is performance. The JV will still be behind Infineon, InterDigital, Icera and Qualcomm on performance. The hope is that a renewed R&D thrust will help narrow the gap in future designs.

Broadcom is perhaps another vendor for whom the merger can cause headaches. The Irvine-based company has in the past made its ambitions apparent – to work diligently towards the coveted third spot in the mobile vendor matrix. Broadcom has been very aggressive in its mobile campaign, not just with product announcements but also in its legal battles with Qualcomm to defend its IP position. The bottom-line is that it is also looking to grab market share from TI. If the JV can improvise on the connectivity solutions and build a stable and complete platform, it will give Broadcom a run for its money. But Broadcom will still have the time-to-market advantage for now. You can read more on Broadcom’s wireless outlook and my valuation analysis here, here and here.

Qualcomm is less likely to be threatened by the JV though the latter now has access to Samsung. Qualcomm’s technology leadership, its support network and its longer-term view of the mobile space places it on firmer ground. Infineon, which is likely to be at the heart of iPhone 3G, will now be a distant second in the European vendor matrix. InterDigital, Infineon’s 3G partner, will have to rely on performance as it tries to gain in the smart-phone market. Marvell and Icera among others will also come up with niche selling points to counter such consolidation.

So, while the price STM paid for the merger can be debated, there is no doubt in my mind that it is a consolidation that will send some vendors scampering. I have a lot of questions in my mind now. Will someone pick up Freescale as well? Will TI target an acquisition that will give it 3G baseband capabilities, perhaps InterDigital or Icera? Will InterDigital and Infineon further formalize their strong alliance to gain scale? Well, there is consolidation in the air. I can’t wait to see how the vendor matrix ends up a couple of years from now.

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]

Marvell provides application-specific standard products (ASSPs). The company has substantial expertise and intellectual property in the areas of DSP, embedded ARM-based microprocessor, analog and mixed-signal integrated circuit design. These strengths are responsible for Marvell’s phenomenal rise in the storage market. Today, the Santa Clara-based company (incidentally, Atheros’ back-door neighbors and competitors) leverages this expertise to develop high-performance System-on-Chip (SoC) solutions for various markets.

Marvell’s product portfolio includes solutions for data storage, Ethernet, cellular, wireless networking, personal area networking, video-image processing and power management solutions. Marvell serves a variety of markets including convergence of voice, data and video in consumer electronics goods. Marvell’s customers include storage companies such as Samsung, Toshiba and Western Digital, networking companies like Cisco, Juniper Networks and Foundry Networks, and cellular companies including Research in Motion (RIMM), Motorola, and Palm.

Marvell, in the words of its CEO Sehat Sutardja, is “inherently a product cycle company.” He continues to say that the company’s growth rate is directly related to new product adoption and transition. The strategy is to look at long-term investments that can grow on a top-line basis at 15-20% y-o-y. In the context of the current situation, this directly relates to Marvell’s thinking behind the acquisition of Intel’s applications and communications processor business.

We can divide the company’s products into three broad business areas namely storage, Ethernet and wireless. Besides these, other major products include solutions for VoIP, printing, digital video processing and power management. With this as a background, we should be able to take a deeper look at Marvell’s fortunes moving forward

Bristol-based Icera Semiconductors announced today that it was acquiring Sirific Wireless for its complementary mobile RF capabilities. With this all-share merger for an undisclosed sum, Icera now hopes to offer a more complete 3G+ mobile chipset. (Read earlier coverage of Icera here and here.)

Sirific, founded in 2000, is a fabless semiconductor company developing CMOS RF transceivers for various mobile technologies including 3G and beyond. It boasts of expertise in digital RF, one of the more difficult design problems in mobile circuitry. It has raised around $60mn till date.

With a series C funding closed recently, Icera has now raised a little over $140mn in venture funding. So, the combined entity has over $200mn in venture money – an impressive amount demonstrating the VC confidence in this startup. Icera plans to raise a further $100mn later this year positioning itself for an IPO at the London stock exchange in 2 years.

Is it justified in dreaming big? Why go for Sirific?

Well, Icera has a niche product with its soft modems. Soft modems are highly customizable and upgradeable. The technology and the concepts involved, if rightly done, can be used for any wireless standard allowing for easier integration that is vital for tomorrow’s convergence devices. Icera’s thinking is that Sirific’s RF frontend and digital RF expertise will complement its revolutionary Livanto soft modem solution. This will not only allow Icera to come up with more complete, in-house platforms and reference designs but also offer a roadmap to highly integrated baseband + RF products in the future.

Icera is beginning to gain traction in the wireless data card market that it is currently targeting. It has signed a deal with Option, Europe’s laptop wireless data card leader and aims to capture 33% of the global data card market by the end of next year. But with the move towards in-built wireless broadband capabilities, products such as Qualcomm’s Gobi and the convergence devices phenomenon, data cards will become superfluous in the future. So to create a larger impact, the company has to make it big in the higher volume mobile phone space.

It has, however, not gotten nearly as much traction in the mobile space. What it needs is a strong alliance with a company like TI that offers application processors. Like I mentioned for InterDigital, such an alliance will allow it to piggyback on TI’s support network and economy of scale to win market share for its baseband (now baseband + RF) business. In turn, this will also help TI retain its 3G market share.Earlier coverage on this topic can be found here, here and here.

Icera has the technology to take it into the future. It needs to however sustain in the fiercely competitive mobile vendor space. The data card market will help on that front in the short term. Besides positively approaching the mobile phone market with the strategic acquisition of Sirific, Icera has certainly made a bold statement indicating that its IPO ambitions are real. The flotation valuation of such an IPO will be determined much by the design wins it secures in the mobile broadband space and perhaps on a few other strategic alliances.

[Originally for Sramana Mitra's site]

In the previous article, I discussed what an acquisition of InterDigital can do to TI. What then will happen to the cellular industry and the 3G value chain?

If TI acquires InterDigital, I think there will be further market consolidation in the 3G space. Firstly, Nokia and Motorola will be happy that they can compete with ‘Qualcomm inside’ phones from Samsung and LG. Until Nokia and Qualcomm cool off on all their IP issues, it is unlikely that the Finnish company will get chips from Qualcomm. So, the entire Nokia business, which until now was TI’s monopoly, is now wide open. An InterDigital acquisition is one way for TI to retain this market. Also, Samsung and LG may also get a viable alternative to pursue a multiple vendor strategy.

If TI acquires InterDigital, its main competitors will feel added pressure moving forward. Qualcomm, the undisputed performance leader so far, is now being challenged by InterDigital, Infineon and Icera. The Qualcomm advantage still comes from its unsurpassed support network and the scale of operation. But TI can complement InterDigital to match Qualcomm on these two fronts as well, thereby erasing its competitive advantage.

If TI acquires InterDigital, Broadcom will take a bigger blow as its wireless strategy seemingly rests on capturing TI’s market share both in baseband and in the application processor market. Infineon, which currently has a strong alliance with InterDigital, and which I suspect has key elements of the latter’s 3G advanced receiver IP, will run the risk of being marginalized in 3G. Similar arguments can be made for Marvell, Freescale and ST Microelectronics among other chipset vendors.

If TI acquires InterDigital, it can potentially generate up to $10 billion of additional revenue over the next five years. The handset vendors like Nokia will be happy to see crucial 3G patents in the hands of ‘one of them.’ This will be an important factor securing TI design wins into the future. Assuming that a deal is closed at my $75 valuation of InterDigital, the sale price will be around $3.5bn. Under this condition, I will value TI between $36-$37.

Clearly, the two companies have distinct cultures and business model. But if these issues are dealt well, the combination can be explosive. What amazes me about InterDigital is the immense value it offers to companies with completely different business model. If it considers being acquired, it will be hot property. While I am not predicting an acquisition here, I think this is an option that TI should think about. Perhaps it is thinking about InterDigital, or even Icera, or has an accelerated in-house 3G/HSDPA program. Or it is just waiting out for the 4G promise, dodging the 3G curveballs thrown at it in the interim.

[Originally for Sramana Mitra's site]

In my recently completed series on Texas Instruments, I pointed out that TI was not in a great position as far as 3G is concerned. I subsequently also suggested that the company ally with InterDigital to prevent further damage. Let us take this a step further and examine what it will mean for TI to acquire InterDigital. I understand it takes much more than a 500 word essay to make an acquisition happen, but a quick look in this direction will give some new insights into the wireless industry as well.

If TI acquires InterDigital, it will have a viable path towards sustained 3G baseband market share. It will have a quicker time-to-market for advanced HSDPA products. An OMAP-Vox Solution with the 3G HSDPA baseband receiver from InterDigital and its own OMAP can be a competition killer. Even a bundle of IDCC’s SlimChip solution with OMAP will sell well. The new product can marry TI’s manufacturing excellence with the SlimChip’s proven performance. The interested reader can find a more detailed analysis on the combination product here in my blog.

InterDigital’s ASIC business is a small portion of its value. But for TI, the combination of 3G intellectual property (IP) and a competitive product is most appealing. In contrast to InterDigital, TI has never had an aggressive IP strategy. It has, however, leveraged its IP to obtain favorable cross-licensing deals with Qualcomm and the others. If it acquires InterDigital, TI can use its new-found IP position to further improve its margins by getting even better licensing deals. More importantly, it will have the handset vendors once again queuing at its gates for their next designs.

An acquisition will work well for TI. In the sequel, I will look at how the industry value chain will take it if TI made this strategic move to get InterDigital and also give some numbers for such a deal.

[Long IDCC, QCOM at the time of writing]

Recently, Signals Research Group published an independent performance report comparing HSDPA solutions from various vendors. The test results, coming as they did from a credible firm, surprised many by concluding that InterDigital(IDCC), Infineon (IFX) and Icera were the winners. I was not surprised though.

Over the past few months, I have extensively covered InterDigital and its SlimChip solution. The SlimChip’s advantage comes from its advanced baseband receivers with firm theoretical underpinnings. Much like Qualcomm, InterDigital has a strong systems team that designs the optimal system first and then seeks to make the cost-performance trade-off. The SlimChip is well-positioned to complement the market-leading applications processors such as TI’s OMAP to break into the smart-phone market. For more coverage on InterDigital, I will refer you to my earlier articles here, here and here.

Infineon is also not a surprising topper at least for two reasons. Firstly, I am betting that Infineon will be in the impending 3G iPhone. The Apple angle implies that Infineon has to match the former’s push for innovation with a high-performance, low power chipset. Secondly, Infineon has a very friendly alliance with InterDigital. The Infineon chipset uses InterDigital’s 3G stack. Besides, I suspect that InterDigital has provided substantial baseband IP for this chipset including the advanced receiver algorithms that have made SlimChip superior. You can read my iPhone suspicions here and here.

Icera is a Bristol-based startup which has raised over $100 million in venture funding till date. Its Livanto solution is the world’s first wireless soft modem. Along with the Adaptive Software solution, Livanto supports HSDPA,WDCMA, GSM and EDGE. The software solution implies that very high precision advanced algorithms can be programmed without spinning a new chip. This not only allows for extremely good performance, but also implies that the Icera chipset can handle any improvements in the standard or receiver algorithm. You can find earlier coverage on Icera here.

I had suggested earlier that an alliance with InterDigital will do TI a world of good. Watch out for Icera as well. Soft modem is the future. This company founded by Broadcom and ST Microelectronics founders already has a pioneer status and can come at a much cheaper price than InterDigital if TI wants quick 3G capability.

In summary, the three companies are not surprising winners, after all. But the test results have challenged Qualcomm’s Unique Selling Proposition (USP) – its baseband performance. Qualcomm, for the moment, can rely on its economy of scale, service and support to stay ahead. This may also be broken if, for example, TI throws its weight behind InterDigital or Icera.

[Long Qualcomm, InterDigital at the time of writing]

I value Texas Instruments at $32 per share. As we have seen in the last few weeks, the strengths are a good management, its analog strategy, the HPA growth and manufacturing efficiency. Its weakness is the wireless business. The growth drivers do not have the ammunition yet to drive the company out of the rut caused by the wireless world. This means that the share price will continue to hover around the $30 mark for quite sometime into the future.

TI has made the conscious decision to pursue analog vigorously. This has certainly paid off, especially with HPA growing phenomenally in the last few years. The company benefits further from the higher margins from HPA which I anticipate will grow at about 15% over the next few years. In keeping with this push, TI has diverted all its manufacturing capabilities towards analog slowly migrating towards the fabless model for digital manufacturing. This move away from the Integrated Device Manufacturer (IDM) model to a more hybrid strategy has allowed TI to become more nimble.

On the other hand, TI also seems to have made a conscious choice to stay away from mainstream wireless development. As I pointed out, it appears to be a miscalculated strategy that has come back to bite it. A healthy 15% CAGR in its OMAP business will help maintain stable revenue from the wireless business as it compensates the loss in digital baseband and chipset business to its competition. The company is trying hard, however, to explain that all is not lost on the 3G side claiming that its most recent Ericsson deal’s “revenue potential is very, very significant over the course of time.” But it really appears that the company has missed the 3G bus and is trying hard to catch up with a soap-box car.

Overall, I estimate that TI will have a modest 4% growth in revenue for the next five years. The $32 valuation would not have been possible without TI’s constant push for a higher margin product portfolio, manufacturing agility and the laudable margin targets. If it can somehow transform its wireless fortunes, either through partnership deals or an accelerated development effort and complement it with regained design wins, then we may see the stock inch towards the $40 mark. In the interim however, I am going to stay away from this stock for I don’t see any promising ROI here.

In the past two segments on TI, I have presented my perspective of TI’s wireless strategy. Let us now look at how this will impact the company’s revenue outlook over the next few years.

With the current indicators, it appears that TI’s wireless business will not grow appreciably over the next five years. I expect the growth to be between 1-2%. The connectivity solutions will also lose their overall market share. This number just does not seem right considering the opportunity that 3G presents. But then, a combination of TI’s flawed (IMHO) baseband strategy and the competition will likely take the teeth off TI’s wireless program.

The savior, however, will be the OMAP business. Though the company’s market share will likely reduce from its current 65% to about 40-50%, the volumes achieved by the growth in 3G will reduce the impact of this loss. I expect OMAP-related revenue to double in the next five years. Note, however, that retaining the high market share will also be contingent on EMP, Nokia and Motorola using OMAP for a majority of their 3G platforms. Further, if TI can work out a partnership agreement with someone like Interdigital, for example, then perhaps it can leverage its complimentary OMAP solution to provide a very competent bundle for smartphones that Nokia may pounce at. More on this thread of thought can be found here.

Thanks to the OMAP business, I estimate that wireless will continue to contribute around a third of TI’s revenues into the next decade. But this will not yield anywhere close to what could have been obtained had TI played its cards right. If TI maintains its current market share, the wireless revenues will have grown at a much higher rate (around 10%).

Wireless, it seems to me, is a missed opportunity for TI today. In the concluding part of this series on TI, I will provide my valuation of the company and briefly discuss its future outlook in the context of all the details that I have laid out so far.

[Long IDCC at the time of writing]

I have, in the past, discussed the synergies that existed between Qualcomm and InterDigital. As I completed penning my Texas Instruments (TXN) series on Sramana Mitra’s site, I noticed that even the Dallas-based semiconductor giant could benefit immensely from an alliance with InterDigital.

TI is the market leader for 3G application processors with its OMAP product-line. But it does not currently have a standard 3G baseband solution. The company’s OMAP roadmap merely has placeholders for future merchant ICs with 3G baseband. Its mammoth market share comes from custom chips it develops for Nokia and Motorola among others. This position is, however, challenged by the multiple sourcing trend that the handset vendors are now adopting. Left behind in the 3G baseband race, not only by Qualcomm but also by Broadcom, Infineon, InterDigital etc, TI is finding itself losing mobile share. The aggressive strategy and the niche product positioning by the competition is not helping its cause either.

On the other side, InterDigital sells its SlimChip 3G solution with a fully equipped software stack both as an IC and as intellectual preperty (IP). Besides, in a recently conducted independent study by Signals Research Group, InterDigital’s SlimChip came out as one of the top performing baseband solutions along with iCera and Infineon. That InterDigital finished high among very competitive solutions establishes the company’s credibility. Also, this complements its positioning as a top choice for the smartphones segment for bandwidth intensive data services.

Now, here is a part of a recent press release from InterDigital that forms the basis for my thesis –

“InterDigital's SlimChip products feature a "slim" modem architecture where the modem - which provides core wireless connectivity - is separated from the applications processor and peripheral functions. This approach allows wireless device manufacturers to customize the pre-certified modem, in a rapid and cost-efficient manner, …”

My thesis is that if TI can negotiate a deal with InterDigital to sell a bundle of the SlimChip IC with its own OMAP, or perhaps incorporate InterDigital’s IP in an OMAP-Vox solution, then both companies can benefit. For TI, it will be a chance to retain and even grow 3G market share by marrying its manufacturing excellence to performance, an area in which it has always been behind Qualcomm. For InterDigital, any such alliance will not only imply SlimChip sales levels it can never get to otherwise but also a chance to change industry and Wall Street perceptions.

TI’s executives have mentioned that they are watching the market and are prepared in case they see a trend away from its custom IC products for 3G. They also perceive a good position if the industry does not sway from separate baseband and application processors in the chipset. If not, they suggest a quick ramp up in 3G baseband integration. While not discounting TI’s capabilities, I think that the time to market will disadvantage it considerably given the lengthy product cycles. The alternative is to go with someone like InterDigital. This will have both parties laughing their ways to the coffers.

[Long Qualcomm, InterDigital 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.

In the prequel, we discussed TI’s growing analog semiconductor business. Digital Signal Processors (DSPs) is an equally big business for the company contributing 40% of its semiconductor revenues. TI dominates the DSP market with 65% share and its products are preferred in a variety of applications ranging from communication infrastructure, automotive navigation, imaging systems to HD video products.

The main drivers for TI’s DSP business are wireless handsets and infrastructure. The company’s DSP play in the cell phone market primarily comes from its OMAP business. The company enjoys between 65 and 70% of the application processor market share. OMAP processors are used for streaming video, 2D/3D gaming, video conferencing, high resolution still image, video capturing in 2.5 and 3G handsets and in PDAs.

The OMAP platform is a mix of its OMAP processors, software and support that deliver real-time applications with low power consumption – the two key components of tomorrow’s cell phones. TI offers stand-alone OMAP processors for use in smart phones. The customer can pick from a range of OMAP products for high performance and basic multimedia functions.

The company also offers integrated communications and application processors through its OMAP 730, 850 and OMAP-Vox modem technology. The OMAP-Vox platform integrated the baseband modem, the OMAP processor and the Digital RF Processor (DRP) together with analog and power management functions to provide a complete solution targeting the feature phone and the smartphone markets. The solution is currently available for GSM/GPRS/EDGE technologies only.

TI’s OMAP also pictures in the custom 2G and 3G products that it manufactures for the likes of Nokia and Ericsson. In these cases, TI integrates the customer’s baseband IP with its OMAP processor, DRP and power management functions to design customized chips. It does not however have its own 3G baseband chip or IP. While the company does not view this as a deficiency in its product-line, this strategy may well turn out to be its Achilles heel (I will discuss its mobile strategy in a sequel). Interested readers can see TI’s OMAP product roadmap here.

To summarize, TI is looking at DSP to open new growth markets in diverse areas like public safety, medical and automotive. Its OMAP processors are in most smartphones in the market today. The company is also buoyant about its prospects here. Though no other competitor has so far got wide traction in the application processors market, this position may be challenged due to newer entrants and TI’s own strategy to shun 3G baseband development. In turn, this will determine the fortunes of the DSP business and the extent of influence that the mobile market will have on its future.

[Originally for Sramana Mitra's site]

In the last part of this series, I presented a brief analysis of TI’s 2007 Financials. As I mentioned before, the company’s semiconductor business has two pillars – namely DSP and analog. While DSP has been TI’s traditional strength, analog, which is one of the largest semiconductor markets, is fast becoming its future mainstay.

TI is the world’s largest supplier of analog semiconductor solutions. The statistic to note here is that its $5.29bn revenue represents just under 15% of the total addressable market of $36bn, presenting a huge opportunity for the company to grow.

TI has an increasingly strong presence in the high-performance analog (HPA) semiconductor market. The company has successfully grown its market share in HPA every year since 2001. HPA is driven by power management chips and precision high speed data converters and amplifiers. It contributes to 45% of TI’s analog revenues helped by stable pricing and the company’s technological acumen. Besides, as the product mix gets skewed to HPA, TI will be able to achieve its margin targets.

TI is taking steps to consolidate its position in the analog market and to have sustained growth in excess of the fragmented analog market growth. It has been investing heavily in analog since the past decade. A substantial portion of the company’s R&D expense has been spent in activities such as increasing analog field applications engineers to bolster its world-wide support network. Also, its CFO Kevin March said recently that acquiring smaller companies to grow market share was always in the cards. TI believes that this strategy will allow it to rapidly leverage its sales force and customer contacts to complement the acquisition’s product offerings. In keeping with this mindset, the company acquired integrated circuit designs and POWERPRECISE solutions last year.

TI’s increased attention to this market has resulted in impressive financial results. Analog revenues have grown by 11% over the past two years. The corresponding HPA growth has been about 28%. The company has continued to broaden its analog portfolio to bring differentiated custom, standard and commodity analog products to the market. It is well-positioned to exploit the continued thrust towards efficient power management, especially in mobile communications. If it can continue to skew its product mix towards HPA products, TI can further the already market share in the analog space with impressive margins despite falling prices. This will also drive its future growth.