In the Chinese calendar the animal that sits on the first day of the year is what defines the nature of the year ahead. In 2011 it is the year of the rabbit, so we come straight from a year of the Tiger, a glorious predator, to an animal that can only conquer through rabid reproduction. In technological terms we don’t think this really represents 2011.
No, instead 2011 is going to be the year of the Shark, when big sharks eat little sharks and there is no better example than the negotiations that came to a head yesterday morning with Qualcomm closing out a deal to acquire Atheros.
Qualcomm had earlier owned up to Wall Street Journal report that it was close to an agreement to buy Atheros for $3.1 billion in cash, at $45 a share, a significant premium of around 25% to the Atheros stock price prior on the day the story broke. Details of the deal were announced early Wednesday.
Much of 2010 has been about the health of chip makers like Broadcom and Qualcomm and their rampant growth in their respective markets. Broadcom really cut its teeth in the WiFi wars in the middle of the last decade, when it not only survived a Chinese manufacturing onslaught on WiFi technologies, but reveled in it, and took the entire WiFi market by storm. Broadcom flourishes when markets are about to commoditize. It throws enough resource into chip markets which are about to scale, and has enough ideas about integrating multiple functions onto complex SoC chips, that it has been able to push literally hundreds of would be fab-less chip makers to the wall. It is the master of commoditization.
In our view the Atheros buy has been triggered because Qualcomm has felt threatened by Broadcom and this is for two main reasons ‘ the first is that Broadcom led the assault on what was perceived as its invincible intellectual property position, something that resulted in 2007 in Broadcom picking up just $20 million for its legal efforts on chip power management, but also it showed others, including Nokia, that Qualcomm was no longer quite so invincible in the IP courtroom.
In fact as a result of that trial, the Qualcomm legal team was decimated after the judge said that many of the Qualcomm team had held back evidence, which amounted to legal misconduct throughout the trial. It’s chief counsel resigned and the company took a fresh look at how it would go about intellectual property matters.
Indirectly it has led to a slight de-emphasis on Qualcomm IP as a revenue stream, but a healthy re-emphasis on making better cellular chips, making them first and integrating as many functions as possible onto a design. The other issue is that Broadcom has repeatedly tried to enter the market for cellular chips, and one of the levers that it uses is its dominance of Bluetooth, video and WiFi technologies, integrating them onto SoCs in a manner that even Qualcomm finds hard to emulate.
They are both consummately professional when it comes to making chips, but Qualcomm is really rooted in innovating in spectrum usage, while Broadcom is all about driving down chip costs.
Which is why Broadcom has taken the lead in WiFi, while the IP for OFDM modulation, which is now at the heart of WiFi, is actually partly owned by Qualcomm (after its purchase of Flarion for $600 million back in 2005, something that has leveraged its ability to claim more LTE IP which also uses OFDM).
Broadcom holds no such fundamental patents, but has many patents in putting radio technologies on chips.
This then is the basis for Qualcomm buying Atheros. It is a $12 billion giant, trying to stave off an encroaching $7 billion growing giant, by buying out the second placed US WiFi chip maker, which has around $1 billion in revenues.
The rest of Broadcom’s revenues are also in Bluetooth, DSL and Cable Modem chip technologies, in H.264 video demodulation and video acceleration, TV set tops and Blu-ray processing chips, as well as Gigabit Ethernet. And now Broadcom is forging, full steam ahead, into cellular. The straw that broke the camel’s back at Qualcomm may well have been the acquisition of Beceem Communications by Broadcom for $316 million late last year.
The disadvantage for Qualcomm is that Broadcom keeps putting more and more of these technologies on the same SoC, which is a skill that Qualcomm is also brilliant at, more often working out how to put multiple radios onto chips without having them interfere with one another. In a well-integrated Atheros, this edge is diluted and among Atheros cognoscenti, there are many veterans of wars with Broadcom who would gladly support Qualcomm in opposition. Atheros managed to survive the commoditization which Broadcom brought to its markets, by staying on the leading edge, and its WiFi chips are known for strong MIMO capability and extending the WiFi envelope into things like HD video, beyond anything that others originally thought it was capable of.
So does this mean that the recent acquisitions in the digital home space, both by Broadcom and Atheros, will be continued in this new chip ecology? We think so because Qualcomm is talking up this deal as an invasion of neighboring markets.
Atheros bought Intellon, the chipmaker behind the homeplug powerline success, and has pledged to merge it with WiFi chips to create a general purpose digital home landscape. Broadcom countered by buying Gigle Semiconductor to cover moves into G.hn multi-phy networking and has also begun bundling MoCA capability on its set top chips. In the weeks running up to Christmas, Broadcom also came out with a monster set top chip, to prevent Intel’s further encroachment into the top end of the set top space, taking App stores and the internet to TV sets.
Atheros only brings the WiFi part of this equation, plus Intellon to Qualcomm, and its strategy will be to not only use Atheros know-how to supplement its cellular chips, but to also open a far wider front against Broadcom and hope to halt it in its tracks. The message is, ‘If you invade our turf, we will invade yours.’
This is the right way to keep Atheros relevant, and Atheros designers on-board, and it means that Qualcomm will almost certainly have to follow up this acquisition with further moves into many of the businesses that Broadcom has come to dominate.
And that’s why we think that this will really be the year of the shark, as Qualcomm and also Broadcom get fatter and need to eat bigger and bigger meals in order to achieve global domination of the major growing chip markets.