Wireless Industry Analyst

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

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

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

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

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

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

Touchscreen: Broadcom

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

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

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]

[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.

[Originally for Sramana Mitra's site]

In the last two parts of this series, we looked at Marvell’s position and strategy in the wireless connectivity solutions market. These solutions serve another important purpose - to make Marvell’s cellular and handheld products competitive and complete. In this part, we will take a look at whether Marvell can successfully leverage its acquisition of Intel’s XScale business to create another line of business that will see the 20% growth that the management envisions.

Marvell offers the Monahan family of application processors based on the XScale architecture. It also offers baseband communication processors that are capable of GSM, GPRS, EDGE and WCDMA. Its solutions are part of the Motorola Q, Motorola ROKR2 and RIM Blackberry Pearl among other phones. Another notable product is the Samsung i780 that features its PXA310 application processor with Qualcomm’s MSM6200.

Marvell today commands about 25% of the mobile application processor market next to TI, but does not have as much of a play in the baseband market. The Santa Clara-based company sampled an integrated single-chip solution with HSDPA data capabilities and an application processor last year. Marvell hopes to see ramped up volume production and revenue in the second half of this year.

‘Tavor’, as this single-chip solution is code-named, will hold the key to Marvell’s ability to retain the RIMM account moving forward. Moving forward, Marvell hopes to grow with RIMM that commands around 50% of the smart-phone market share. This will be contingent on RIMM retaining its market share and also Marvell delivering competitive baseband solutions. You can read about competing baseband solutions here. ‘Tavor’ will also help Marvell retain its application processor market share as competitors move towards similar single-chip solutions.

Marvell also aims to bring smart-phones into low-cost mainstream leveraging its core competencies. CEO Sehat’s comments on the company’s GPS strategy further ratify this line of thought. The ASUS 3G smart-phones branded as Vodafone 1210, which use Marvell’s communication and application processors, is a good example. The synergy in this relationship comes from the fact that both Marvell and ASUS are committed to low-cost products. (Incidentally, this low-cost philosophy is one solution to bring the convergence movement to the emerging markets. You can view this as complementary to the elitist band of phones from Apple, RIMM or Palm like Ms. Mitra points out in her recent post here.)

At the moment, Marvell is relatively behind the leading chipset vendors in its development efforts. It may hence not get a favorable look from existing handset vendors as it seeks a meaningful baseband communication processor market share that will justify its XScale acquisition. However, it will look to establish new relationships (like ASUS) to grow with its customers’ market share gains. Much like Broadcom, Marvell has a good relationship with PC/laptop vendors like Dell. This positions the company to understand and help these vendors enter the mobile space should they decide to. Bolstered by stable application processor sales, this risky strategy has huge upsides with relatively minor downsides.

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]

[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]

So far in the Marvell series, we have looked at the storage and Ethernet business areas. We also briefly touched upon the overall company strategy. As we move on to dissect the company’s wireless business, we will start with its position in the WLAN market.

Marvell has a good presence in the WLAN market buoyed by the success of its low-power embedded solutions. These products primarily targeting the mobile segment have enabled Marvell’s penetration in the gaming devices and music player markets. Marvell is in Microsoft products, RIMM phones and in the iPhone, of course. Unless Broadcom can steer Apple towards its WLAN/Bluetooth/FM product, perhaps together with a bundled GPS chip as well, Marvell will continue to be in the rumored 3G iPhone. You can read the rest of my iPhone 3G analysis here.

Marvell does not, however, have as big a presence in the PC segment dominated by Broadcom and Atheros. The company is looking to change this situation with its Top Dog^TM product that is advertised to give throughputs up to 600 Mbps. Though it is presumably targeting the high-end laptop market with this product, Marvell also claims traction and design wins in the enterprise and retail access point markets. The company has 10-12% of the WLAN market share today. Most of this comes from the high-growth cellular and mobile consumer electronics product segments. I estimate that the WLAN business, that has grown around 20% y-o-y recently, contributed about 10% of the company’s fiscal 2008 revenues.

WLAN as an enabling technology will grow at about 15% CAGR for the next few years. So, Marvell’s ambitions of retaining its current growth in WLAN depend on its ability to retain and grow its market share. This, in turn, will depend on four things.

Firstly, the company’s 11n strategy of going for performance vis-à-vis price should pay off. The incumbents, Atheros and Broadcom, have very competitively priced products and in my mind understand the price-performance trade-off much better than Marvell. Then, you have relative newcomers Ralink coming up with low-cost solutions.

Secondly, even in the embedded space, its sustenance is in question with Atheros coming up with equal or better products both in terms of throughput and power consumption.

Thirdly, of course, is its ability to get design wins for its cellular platforms so the connectivity solutions can be bundled with the baseband chips.

The final factor is its ability to keep pace with the changing demands from both the PC and mobile customers. The Bluetooth, WLAN and FM single chip, for example, is almost imperative for the company to stay ahead of its competitors in the embedded space. The concept is great, but it also demands an equally good execution. The company claims positive traction for this product with product ramps in the second half of fiscal 09. I am anxious to see how this will play out for the next two years.

In summary, it appears that Marvell has betted on some of its new product strategies to sustain its growth. With the competition getting tougher, the company may find it difficult to maintain status quo here. But it has a good presence in the cell-phone and mobile consumer electronics segments. It also has a great track record of delivering on its growth so far. So, if the company executes on its WLAN product roadmap, I am willing to conclude that the company will still be able to achieve about 20-22% growth y-o-y from that business.

[Originally for Sramana Mitra]

In the previous articles in this series, we looked at Marvell’s product strategy, briefly reviewed the fiscal 2008 financials before dissecting the storage business area. Let us now take a look at Marvell’s position in its Ethernet semiconductor business.

The Ethernet business is yet another strong-point in Marvell’s product portfolio. The company is a strong second place finisher behind Broadcom in this market with a share of around 20%. Marvell’s switching solutions enable voice, video and data traffic for the enterprise networking, carrier access and small office/home office (SOHO) networking markets. This is well complemented by the Gigabit Ethernet transceivers, communication controllers, the Yukon^TM family of Gigabit Ethernet PC connectivity products and the Link Street Gateway^TM products.

The stability of the Ethernet market and the company’s strategy to pick up accounts which will tap on the company’s operational excellence has together helped it grow its market share so far. The Ethernet business area has been growing steadily at about 20% for Marvell in the past few years. I estimate that this business area contributed to around 20% of Marvell’s fiscal 2008 revenues.

Well equipped with one of the most rounded product portfolios in this business area, Marvell is looking to acquire more market share from Broadcom. With some aggressive pricing and bundling strategies, the company appears to have made some inroads into key Broadcom accounts over the last couple of years.

The competition has also widened and threatens Marvell as much as it does Broadcom. However, the competitive landscape is such that there will be design ‘steals’ going back and forth resulting perhaps in a stable aggregate market share for its leaders. So, moving forward, I expect Marvell’s Ethernet business area to grow at about 9%. With the Ethernet business itself growing modestly at 5.5-6%, this translates to slight market share increase. For the interested reader, I will recommend reading my piece on Broadcom’s enterprise networking business area where I have detailed the Ethernet market and the competitive landscape.

In summary, the Ethernet business area will continue to provide another stable revenue stream for Marvell. I do not, however, expect this to be a bigger than average growth driver for the company.

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.

[Originally for Sramana Mitra's site]

In the prequel, I looked at Marvell’s fiscal 2008 financials focusing especially on the company’s expenses. As we move ahead, let me dissect its position in the storage industry in general and the hard disk drive market in particular.

Marvell offers a wide variety of storage products for hard disk drives, tape drive electronics, optical disk drives and storage subsystems technology. The portfolio consists of discrete components such as the preamplifier, read channel, hard disk controller, and tape drive controller and also System-on-Chip solutions efficiently incorporating multiple components into a single integrated circuit.

Marvell is one of the leaders in the storage industry. It has about a third of the hard disk drive silicon market share supplying solutions to Western Digital, Samsung, Toshiba, Hitachi among others. All credit to the company’s management for having successfully gotten Marvell this far despite starting as rank outsiders in this area. I estimate that storage products, revenue from which have grown over 30% y-o-y for Marvell, today account for over 50% of its revenue. The company also seems to have made the right moves with the mobile 2.5 inch hard drives. The mobile hard disk drive business has thrived in recent quarters increasing sequentially by 39% in unit shipments due to favorable market share shifts.

Though the competition has consolidated with the 2006 merger of LSI and Agere and the more recent move by the former to purchase Infineon’s storage assets, Marvell’s success story in storage will continue. Helping it is the ASP expansion coming from the transition to SoC products from discrete components. Besides, the market share shifts among the hard drive vendors, especially in the 2.5-inch mobile drives, have helped Marvell’s customers. Thirdly, the mobile drive market is itself accelerating rapidly. These should come together with the 10% y-o-y HDD unit growth rates and Marvell’s R&D efforts to sustain growth.

In summary, despite the cyclical nature of the HDD market and the consolidation of the competition, Marvell has mastered the space enough to lead the way. In the medium term, this business will continue to grow at 20% y-o-y helping provide Marvell a stable revenue source.

[Originally for Sramana Mitra's site]

In my previous article on Marvell, I provided a brief overview of the company strategy and product portfolio. Before we move on to dissect the various business areas, let us take a brief look at the fiscal 2008 financials. Marvell’s total revenue for fiscal 2008 is $2.9bn at a gross margin of 48.7% and an operating loss of 3.6%. This represents a 29% increase from fiscal 2007’s revenue of $2.24bn. The net revenue increase is due to increased volume shipments of storage SoC, a full year’s revenue from the Intel acquisition and the printer business from the Avago acquisition.

The gross margin decrease from 2007’s 50.8% is primarily due to the lower margin cellular and handset products acquired from Intel. Marvell was contractually obligated to purchase from Intel under a supply agreement. With the terms of this agreement being met, the company has partly transitioned to its fabrication partners and is looking to get incrementally higher margins this year.

The operating loss was incurred mainly due to the 50% increase in the R&D expense. The company spent $971mn on R&D as compared to fiscal 2007’s $645mn. This comes directly from the additional salary and related costs of $161mn (about 5.5% of revenue) incurred in fiscal 2008 related to the Intel and Avago acquisitions. Fiscal 2007’s R&D expenses were also 80% higher than the fiscal 2006 numbers due to the personnel increase coming with the Avago, UTStarcom and Intel acquisitions. While the lay-offs and restructuring measures may bring the R&D expenses back to the 30% range, the total operating expense will be about 47%. This is alarmingly high as compared to the semiconductor industry average about 32%.

Marvell’s current cash and cash equivalents stand at about $600mn, 20% of its annual revenue. Broadcom, its similar-sized competitor has a cash position of about $2.3bn or 60% of its annual revenue. Western Digital accounted for 17% and sales to Asian customers represented 84% of fiscal 2008 revenues.

While Marvell has a broad portfolio, a significant portion of its revenue comes from the highly cyclical and competitive hard disk drive industry. Besides, even for a fan of long-term vision and strategic spending like me, the expenses and their outlook are staggering and out of proportion. But for fiscal 2006, when the OpEx was about 38% of the revenue, the company has in recent years had 45% or greater OpEx. It seems that Marvell’s growth comes with very high associated costs. Sehat reiterated in the recent conference call that the company is committed to a reduction of costs. I wonder how quickly and efficiently this can be put in place.

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

The web is abuzz with the news that the latest iPhone 2.0 beta software revealed whose chipset was at the heart of the impending 3G iPhone. The fairly innocuous and cryptic word ‘SGOLD3’ embedded in the code points to Infineon’s SGOLD-3H baseband processor. While this is news for many enthusiastically expecting the 3G iPhone, it is only a confirmation of what I have been saying since last fall – Infineon and InterDigital will be at the heart of the next iPhone.

The Infineon SGOLD-3H together with the MP-EH platform is a natural solution for Apple. Infineon’s SGOLD2 and the MP-EU platform form the basis of iPhone V1 and Apple has spent considerable time and energy optimizing it for performance, stability and power consumption. It makes sense to carry the good work forward with MP-EH which looks very identical to MP-EU rather than reset it with another new platform. You can read the rest of my prediction analysis from last fall here and here.

While Infineon’s SGOLD-3H appears to have been the default solution for the 3G iPhone, Apple definitely will not regret its choice. The Infineon solution is a Category 8 HSDPA solution, meaning that it supports incoming data rates (equals download speeds) of up to 7.2 Mbps. It has a fractionally spaced equalizer implementation of the receiver (which I think is predominantly InterDigital’s IP) that allows the realization of nominal data rates in mobile conditions. Not surprisingly, Infineon was one of the three companies picked as the 3G performance leaders by Signals Research. You can read more of my SGOLD3 musings here.

It is also important to acknowledge the other winners if the MP-EH and SGOLD-3H are in the next iPhone. First and perhaps the biggest will be InterDigital. Infineon’s 3G solutions use InterDigital’s stack. InterDigital is bound to get per-unit royalty and its deal with Apple last summer is a good pointer towards this direction. The King of Prussia company is Infineon’s behind-the-scene partner for 3G. My extensive coverage of the InterDigital connection can be found here and here.

Marvell, I think, will continue to supply the WiFi provided the interoperability issues it faced with its previous offerings are ironed out. With the Garmin Nuvifone round the corner, it is quite possible that iPhone will have GPS too. Broadcom is in a nice position to offer a bundle of its WiFi, Bluetooth and GPS offerings and may come out a big winner despite losing on the baseband front. As with the chipset itself, I expect Apple to retain most current component vendors who have met Apple’s serious performance expectations last time around. More on the iPhone 3G potential features can be found here.

I am glad that my iPhone 3G predictions are expected to be true. While the actual winners will not be determined until a tear-down, this is good intermediate information. Infineon is trading close at $7.37, close to its 52-week low of $6.26. InterDigital is trading around $20 today. If you have not read my InterDigital valuation series, this is perhaps a good time to do it from here. With the details of the iPhone 3G consolidating, now is perhaps a good time to pick this stock up even if you are looking at some quick short-term profits.

[Long InterDigital at the time of writing]

Broadcom series continues on Sramana Mitra's site.

In the last article, I talked about Broadcom’s Bluetooth business and its co-dependent relationship with Wireless Local Area Network (WLAN). In this article, I will take a deeper look at the WLAN market and Broadcom’s position in it.

Broadcom is a leader in the WLAN market as well with around 25% of the market share. In 2007, WLAN accounted for around $500 million in revenue for the company due to the penetration in notebooks/laptops, and the strength of its 802.11g line of products. Broadcom’s WLAN devices are found in non-Centrino laptops, gadgets like Nintendo Wii and various wireless access points found in your local Fry’s store.

The total addressable market (TAM) for WLAN is expected to double to $4 billion in the year 2012. This growth will be driven by a variety of factors. Firstly, the migration to the faster data-rate 802.11n standard will enable more wireless applications and networking. Secondly, the convergence devices movement will result in a steady increase in WLAN-enabled handheld devices, growing to over 20% penetration. Thirdly, portable consumer electronics devices will also offer WLAN as a value-add. This in turn will be driven by the rapid adoption of WLAN in Portable Media Players. Microsoft Zune and Apple iPod Touch are good examples of where the industry is headed. Similarly, WLAN will have a 100% penetration in the gaming devices market. Fourthly, stationary consumer electronics gadgets like printers are increasingly becoming wireless. Finally, the current market for Access Points, Routers etc. will also grow in strength with the increasing number of applications.

The WLAN market is fairly mature and so the leaders will retain their shares in the future. With mobile devices being important growth drivers, the key to sustained leadership will be integration, smaller form-factor and lower power. Broadcom is working on integrated products. It is leveraging its 65 nm migration towards smaller form factor (though this relationship is not straightforward). Its combined Bluetooth, WLAN and FM chip, if found hassle-free, is a sure winner. However, I am not as confident about its push towards low power. As I mentioned in my previous article, Marvell and Atheros are way ahead in terms of low-power designs. As a result, the company may not be able to exploit the penetration of cellular and portable devices optimally. This situation is accentuated by the flux surrounding the company’s cellular mobile business.

Overall, the WLAN business is yet another strong revenue stream for Broadcom. It will grow to yield a billion dollars in revenue for the company early next decade growing at a CAGR of 15%.

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

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 the previous articles in this series, we looked at the strengths and weaknesses of Broadcom. We also looked at the pros and cons of its broad portfolio of products and its growth by acquisition. Going forward, I will start to dissect the company’s enterprise networking products business.

The enterprise networking business is driven by the stability of the Ethernet market and the company’s insurmountable leadership position in it. Broadcom is the leading Ethernet semiconductor vendor with about 30-35% market share. Its nearest competitors, Marvell and Intel have less than 20% of the market share each. Broadcom’s well-integrated and low-power switching and Ethernet controllers are part of various computers, VoIP phones, wireless access points and network infrastructure products.

2007 saw the overall revenues for the enterprise networking business drop slightly. The revenues decreased 5% from the 2006 figure of $1.18 billion to $1.12 billion. The revenue from this business represents about 30% of the total. However, the revenue drop also signifies a reversal of trends for this business which grew 11.2% between 2005 and 2006. The prime reason appears to be a loss of market share in the Gigabit Ethernet controller product-line attributed to some aggressive marketing and pricing strategies by its competitors.

Looking ahead, the Ethernet semiconductor market will grow at around 5.5-6% CAGR. This modest growth number will be driven by the continued transition to Gigabit Ethernet across all product lines like switches and network interface cards. This being said, the competitive landscape has also widened. While Marvell, Vitesse and Agere continue to make Broadcom work to maintain its leadership here, Atheros, its chief WLAN competitor has also made strides in this market. In its first year in the Ethernet business, Atheros, announced the industry’s smallest PCIe Gigabit Ethernet controller last November. Then there are the smaller players and startups stacking further pressure on Broadcom by reducing the price-points and giving the OEMs more options.

Despite the stiff competition, Broadcom continues to innovate ahead of its competitors. It is leveraging its 65 nm migration as the key to its future success. In Q4 2007, it announced multiple 65 nm products – a Gigabit controller, a Gigabit switch and a 10-Gigabit switch. By integrating WLAN and security features and by also offering customer value-add features, the company has sought to differentiate itself from the smaller players.

As Broadcom takes measures to counter the new entrants who threaten to rock the boat, I anticipate that Broadcom will continue to maintain an average of around 30% market share over the next few years. Its positive spin on its 65 nm move is expected to help. However, with the Ethernet market itself growing rather modestly, I estimate that the Enterprise Network business revenue will grow only at a CAGR of about 3.85% over the next five years. In summary, this business will offer a steady but relatively flat revenue stream for Broadcom.

In the sequels, we will dissect the Broadband Communications and the Mobile and Wireless businesses, followed by a valuation analysis.