Your browser is not supported. Please update it.

17 September 2007

Qualcomm comes under new pressure as Motorola does 3G U-turn

Qualcomm may have gained some respite in its legal battles (see separate item), but it has suffered a major blow at the hands of Motorola, which has turned its back on its much vaunted UMTS chipset deal with Qualcomm and turned instead to Texas Instruments and Freescale. Psychologically if not financially, this can be seen as worse news than Qualcomm’s recent legal setbacks, because it affects the business where the US chipmaker’s capabilities can scarcely be questioned, whatever the controversies surrounding its IPR model ‘ actual handset chip design and execution.

Having said that, Motorola sources indicate strongly that there were no technological reasons for the U-turn ‘ indeed, it is clear that Motorola engineers remain strongly in favor of the Qualcomm platform ‘ but that the change is down to ‘business’ factors. These are widely assumed to center on pricing and/or royalty rates, especially given the newly strengthened negotiating position that Motorola has gained with TI, following Nokia’s loosening of its ties with its former alter ego (see Wireless Watch August 13 2007). Following a deal announced in February, TI is already said to have reallocated significant resources away from Nokia and towards Motorola, in a major bid to take pole position with the number two handset maker and compensate for possible future reductions of revenue from its Finnish primary customer (see Wireless Watch February 5 2007).

Last November, Motorola announced its first major deal with Qualcomm outside the CDMA sector ‘ where it will, of course, continue to work with the only significant chip vendor (see Wireless Watch November 20 2006). The agreement was for UMTS chips, and to partner on future 3G designs. At that time, Qualcomm CEO Paul Jacobs insisted that he saw Intel, not Texas Instruments, as his key challenge, regarding the latter as too driven by the Nokia business to lead market trends or to be truly broad brush. These are words he may now regret, given the sea-change in the handset baseband processor market since, largely driven by Nokia’s decision to anoint a second source, alongside TI, in each handset category (STMicro for UMTS/HSPA, Broadcom for EDGE, Infineon for GSM). The change has not only made TI freer, and more hungry, to offer strong commitment ‘ and good financial terms ‘ to Nokia rivals, but has strengthened several chipmakers that aim to eat into Qualcomm’s market lead, but have previously lacked the clout in the cellular market to do so to any major degree (Broadcom in particular).

All this appears to have driven Motorola towards TI, and provides damaging evidence that Qualcomm’s stance – that it justifies relatively high pricing with cutting edge and functional products ‘ will carry less weight as the handset makers come under unprecedented financial pressure. Motorola, in particular, has suffered for several quarters now from the margin squeeze on its handsets, and will be looking for any possible way to reduce its costs in future.

The loss of the Motorola deal is serious for Qualcomm. Financially, it could have made an estimated $700m from the handset giant in 2008, assuming the company ships about 35m 3G phones next year. Wall Street reckons this translates to 10 cents per share in lost earnings. Beyond that, the agreement represented just the kind of endorsement that it badly needed in UMTS, where its IPR revenues have flourished, but where it has lagged behind TI in actual tier one silicon contracts. Ironically, Motorola’s stated motivation for choosing Qualcomm was to take advantage of the cost advantages of its advanced integration and its system-on-chip technology. At the time, Richard Windsor, an analyst at Nomura International, wrote: “The single chips should help whittle down Nokia’s cost leadership in 3G devices, making Motorola much more competitive in 3G as long as it can get the user experience right.’ Now, it seems, TI’s claims to have caught up with its arch-rival in this respect have convinced Motorola.

According to a research note from American Technology Research, which broke the news (still not officially confirmed by the two parties, though Motorola sources have commented widely): ‘Motorola’s decision was purely business. Our checks reveal that Motorola found Qualcomm ‘hard to do business with’.’

A Motorola spokesperson said: ‘We are moving to a controlled architecture for silicon and a multisourced approach to our vendors. As for Qualcomm specifically, they are a strong CDMA supplier today and we will continue to use them on next generation 3G devices opportunistically.’ ATR lowered its rating on Qualcomm from ‘buy’ to ‘neutral’.

Internal sources say Motorola has already begun the shift away from Qualcomm to TI, although officially the latter does not get on to its roadmap until mid-2008. Designers are being encouraged to minimize Qualcomm content in new products. In the interim, Motorola will use Freescale 3G products too, leading to a slower than feared reduction in revenues from the chipmaker’s former owner, which accounted for 25% of its total revenue in 2005. However, it does not appear to affect Motorola’s overall strategy to reduce its dependence on Freescale dramatically.

Freescale gains a temporary boost, while Motorola could lower its cost base, though it also risks cutting off its nose to spite its face by excluding itself from some of Qualcomm’s more advanced developments in HSPA, multimode chipsets and SoC. The company for which this is unmixed good news is, of course, TI, which now faces the happy prospect of expanding the deal it did with Motorola in February, and positioning itself to be primary partner for the company, in addition to its other important recent deal, with Ericsson Mobile Platforms. The February agreement allowed for TI to create customized chips for Motorola for upcoming 3G handsets, to be available from next year, and to supply WiMAX handset chips, also from 2008. It will develop custom WiMAX chipsets, including baseband DSPs and analog/RF components, for Motorola, as well as offering process, foundry and design expertise. Perhaps most importantly, it will provide products built around its key application processor architectures, OMAP-2, OMAP 3 and OMAP-Vox, and its affordable platform, eCosto, currently for GSM/GPRS but planned for future 3G models. These are the type of chips that TI most wants to sell, balancing a general shift of mobile chip business towards lower cost handsets, which it has warned will depress its results in 2007. Although the Motorola deal will not generate revenue until 2008, analysts believe TI’s revenue per phone from the type of deal outlined with Motorola will be $25-30 ‘ about three times the amount it could expect from low cost phone categories – and with Qualcomm virtually out of the non-CDMA picture, the volumes could be far higher than anticipated. TI has supplied lower end chips to Motorola for years, but has been largely excluded from high margin products like application processors by the company’s links to Freescale.

For Qualcomm’s part, the race will be on to extend its reach in key customers like Samsung, moving beyond CDMA to HSPA and multimode, and also to generate new revenue streams from technologies like the Snapdragon digital media platform, MediaFLO mobile television system and its software activities. But for all its engineering capabilities, which should lend it resilience against the loss of one customer, however large, it will now come under greater pressure than ever to rethink its licensing structures in order to become a more ‘friendly’ supplier to device makers, enabling its technologies to compete on a level playing field with those of TI and others, rather than constantly overshadowed by the manufacturers’ suspicions of the royalty model.