A number of companies—and one in particular—are going after this global semiconductor company with 80% of the smartphone chip market and MoneyShow's Jim Jubak questions how long it will take before these competitors really start eating into that market share.
Everybody is gunning for Qualcomm (QCOM). That's what happens when you have 80% of the market for the chips at the heart of 4G mobile devices.
Although, if you own Qualcomm—which I do in my Jubak's Picks portfolio—what you really want to know is how long it's likely to be before any of those competitors start seriously eating into that market share.
On the evidence of the recently concluded Mobile World Congress in Barcelona, I'd say that the degree of danger doesn't significantly increase until 2016.
Take the chips that Intel (INTC) introduced in Barcelona.
It's no secret that Intel wants a bigger piece of the mobile chip market than it has right now. Estimates from IDC put Intel's share of the 4G phone market at just about 1%. But the company is spending a big piece of its huge cash flow to break into mobile tablets and phones. Thanks to massive subsidies to manufacturers, Intel sold 46 million mobile chips, most of those for tablets, in 2014, and recorded a loss of $4.2 billion in its mobile division because of the cost of those subsidies to manufacturers.
Intel's goal is to sell more chips and to reduce subsidies at the same time.
To do that, of course, Intel will have to eat into the technology advantages enjoyed by Qualcomm and by competitors such a Taiwan's MediaTek.
In Barcelona, Intel noted that it has begun to ship its Atom3X chip, the company's first chip for mobile devices with an integrated modem. That's a step in catching up to Qualcomm.
A new chip—the ZMM 7360—will offer a modem that operates at 450 megabits per second. That also closes the gap with Qualcomm's 4G modem chips, which already offer the capacity of downloading data at 450 megabits per second.
Of course, Qualcomm isn't standing still. At Barcelona it introduced a modem chip operating at 600 megabits per second.
And, to keep pace with trends toward hybrid networks that combine standard wireless with WiFi, the company showed off chips that can operate across those networks, so that a phone that begins on WiFi can hand off a call to a cellular tower and then back to WiFi or to another cellular tower, depending on availability.
To me, despite all the pressure from Intel—and from Taiwanese and Chinese chipmakers—Qualcomm's technology lead at the top end of the market looks solid into 2016 at least.
But in that time frame what worries me most—on top of worries that cheaper Chinese and Taiwanese chips are steadily moving up market—is a chip from Intel named Cherry Trail. Expected to start showing up in mobile devices next year, Cherry Trail builds on Intel's best in the world—Samsung might argue—chip making technology to yield longer battery life and faster processing. With the quality and speed of graphic displays being seen by smartphone makers as the key differentiator, Cherry Trail will be able to record sales even with reduced subsidies from Intel. And since Qualcomm outsources the manufacturing of its own chips, it really doesn't have the ability to leapfrog Intel's manufacturing edge. (Although foundries from manufacturers such as Taiwan Semiconductor Manufacturing (TSM) are doing a good job of keeping up with Intel for their customers.)
Which raises an interesting question for investors: Do you stick with Qualcomm because it owns 80% of the top end mobile market (even though that market share is under attack) or do you switch horses to Intel on the grounds that the company won't stay at 1% of the market for too much longer (and simply reducing subsidies would drop billions to the bottom line)?
For the next six months—or somewhat more—I'd say stick with Qualcomm (depending as I've written previously on how quickly Chinese chipmakers can cut prices and move upstream). Beyond that, Intel looks like the more profitable horse to ride.
