The fortunes of semiconductor businesses can ebb and flow very much like the tides. In the mobile arena, the semiconductor providers and handset manufacturers exist in a fragile business arrangement, where decisions by the larger handset manufacturers can have a large impact on the System-on-Chip (SoC) providers. In the case of Qualcomm, the loss of the 2015 Samsung flagship smartphone deal (whereby Samsung used an in-house chipset for the Galaxy S6 family rather than the Qualcomm flagship SoC) had a significant impact on the business; we’ve seen Qualcomm announce job layoffs and a reduction in expenditure. However, Qualcomm are far, far more than a one pony house: in addition to their flagship processor line (currently the Snapdragon 810, which will be replaced with the Snapdragon 820 at some point in the not too-distant future), Qualcomm also provide a number of other manufacturers with various SoCs from lower down in the price range. These low and mid-range chipsets offer the same baseband (modem), Bluetooth, WiFi and location technologies as their high end cousins. The story today is that Xiaomi’s push into developing and using their own chipsets could cause considerable upset at Qualcomm, because the low and mid-range chipsets are a staple part of their business.
Let’s explore some of the reasons why Qualcomm have been such a success over the years. Partially, the reason for their success is because they have been able to produce their own custom processor architecture and optimize the blend of performance and power efficiently, and partially because Qualcomm do not simply sell application processors, but offer an integrated solution for smartphone and tablet manufacturers. By this, I mean that when a manufacturer buys a Qualcomm System-on-Chip, it is in fact a “solution,” offering the necessary connectivity (including the baseband, or modem, Bluetooth, GPS / GLONASS and WiFi subsystems) for the device in question. The manufacturer needs to provide the antenna but does not need to integrate these wireless technologies into their chosen processor. This has the obvious advantage that there is less work required by the manufacturer but another side effect in that it offers a simple way to reduce power consumption: the Qualcomm chipset is able to easily power up and down various subsystems on the device depending on what the device needs. We have seen other chipset manufacturers catching up with this approach, in particular MediaTek: but currently, even the low end Qualcomm Snapdragon 210 offers onboard LTE connectivity. Essentially, Qualcomm’s leaders realized many years ago that device manufacturers did not necessarily have the expertise to efficiently integrate the the appropriate technology for smartphones.
This fact has not been lost with the major manufacturers around the world, which leads me to Xiaomi, the largest Chinese manufacturer and a major customer of both Qualcomm and MediaTek’s System-on-Chips. Xiaomi have increased their use of MediaTek technology in order to keep prices down: the business deliberately sells its smartphones at an inexpensive, low-margin price as it sees itself as more of an Internet business rather than a device seller and seeks to make money off bundled and optional services. As such, a small reduction in component prices has a relatively significant impact on the underlying price of the device: it may be that the shift from the more expensive Qualcomm chipsets to the relatively less expensive MediaTek SoCs is a short term tactic, because in 2014 Xiaomi released the Xiaomi Redmi 2A, which had a price of $96 and was based around a processor developed partially in-house. This in-house processor had a unit price of $4 rather than the $8 of the equivalent Qualcomm chipset.
There is another reason why Xiaomi may seek to built its own chipsets into their devices, which is that of tighter integration with the software. Xiaomi are sure to have taken a close look at how Apple control the hardware and software of the iPhone and iPad, including the design of their own System-on-Chips (as a point of interest, Apple use Qualcomm for their modem technology). This may allow the business to further differentiate its products from the competition: Apple’s iPhone has used a potent set of chipsets, but the only way to utilize these was to buy an Apple product. Similarly, if one wants to buy a device based around the Samsung Exynos 7420 (considered to be one of the finest chipsets used in mobile devices today), one currently needs to buy a Samsung-branded product.
What could this mean for Qualcomm? In short, it mean that a major world smartphone player may end up buying fewer of its System-on-Chips. This does not just mean Xiaomi’s Chinese operations, but the manufacturer has announced plans to push into both the North American and European markets, where currently it only has a limited exposure. This could open up a significant new market for Xiaomi and Qualcomm could miss out on a significant line of revenue. For a business already feeling the pressure from losing a significant source of revenue thanks to the Samsung deal, this is not good news. Qualcomm channels much of its revenue into developing future generations of chipsets.
In the short term, Xiaomi are likely to concentrate on the lower and mid-range devices, where customers are less fussy about the branding on their devices. Currently, customers seeking a high end device are happier knowing that there is a well known System-on-Chip inside the chassis. Having a Qualcomm Snapdragon inside a device still carries a certain kudos. However, is Xiaomi are able to build their own chipsets and add value to their smartphones this way, this is a significant threat to the current Qualcomm business. As for Qualcomm, they appear to be caught between a rock and a hard place: they need the cash generated by their lower and mid-range chips in order to fund development of their high end products.
However, Qualcomm have shown great acumen in the past. We have seen evidence that Qualcomm recognize the threat of losing significant device manufacturer customers and the business has worked on alternative sources of revenue, such as the push into the Internet-of-Things. Smartphones have rapidly become a staple part of society and Qualcomm’s integration of graphics chipset and radio technologies has been steadily eroded over the years as the technology has become commoditized. Qualcomm’s chipset business is likely to evolve rather than erode in the coming years, moving away from smartphones and tablets where it could be less able to add value for customers, and more into the refined area of specialist low power, connected devices and wearables.