With the acquisition of Infineon's wireless unit, Intel (Nasdaq: INTC ) has narrowed the gap with Qualcomm (Nasdaq: QCOM ) , though it will still take some time for the chip giant to become a threat.
Intel, whose chips power over 70 percent of the world's PCs, has struggled to produce those low-power-consuming processors that are vital for smartphones and tablet PCs.
In late August, Intel agreed to buy German rival Infineon Technologies AG's wireless unit for $1.4 billion -- a move that will help Intel diversify away from its core business of producing microchips for PCs and secure better footing in the smartphone market.
Intel is the market leader in providing chips for desktops and laptops, but by bagging the wireless unit of Infineon, the chip giant is making a giant leap into the smartphone processor market, which is currently dominated by Qualcomm, Texas Instruments (NYSE: TXN ) and ARM.
Qualcomm is known for its wireless modem chip sets, which are primarily deployed in 3G smartphones, while Intel has been working on its Atom chips for netbooks and tablets.
With the Infineon acquisition, Intel hopes to cash in on Infineon's key client, Apple (Nasdaq: AAPL ) , whose iPhones and iPads have become runway hits in smartphone and tablet markets. Intel could also follow the Qualcomm strategy by offering an integrated chipset to the phone makers.
Qualcomm, which competes with Broadcom, Freescale, Marvell, MediaTek and Texas Instruments, sells its Snapdragon integrated chip that comes bundled with a cellular baseband -- the chip that handles voice and data communications -- and an application processor.
The Snapdragon processor has been deployed into over 120 devices, including smart phones and tablet computers, and Snapdragon customers include phone makers like Nokia, Motorola, Samsung and LG, which favor integrated chipsets because they simplify the phone manufacturing process.
Currently, Infineon doesn't make chips. Customers who use Infineon's radios buy processors from other suppliers, and phone makers do the integration themselves. Intel could bundle its Atom chips with Infineon's cellular baseband to offer an integrated chip. Intel would be able to improve the security features of its chips using expertise for McAfee, another of the comanies it owns. But analysts say it will take some time for Intel to make this bundled chipset.
Potential Downside to Qualcomm Stock
"We don't see Intel posing a significant threat to Qualcomm in the short term. However, there could be an 8% downside to our $48 stock price estimate for Qualcomm if Intel manages to snatch a significant share of the mobile chipset market by the end of the forecast period," stock analysis firm Trefis said.
Qualcomm dominates the CDMA mobile phone chipset market with a market share of 69 percent as of last year. Due to increasing competition from MediaTek and Texas Instruments, Trefis expects Qualcomm's share to decline over the next few years, reaching 60 percent by the end of the Trefis forecast period.
"There could be a downside of 8 percent to the $48 Trefis price estimate for Qualcomm's stock if its CDMA market share declines to 50 percent by 2016, instead of the 60 percent that we currently forecast," Trefis said.
In the Intel-Qualcomm rivalry, Apple could play a significant role as the gadget maker currently buys PC processors from Intel and iPhone chipsets from Infineon.
Following the Intel-Infineon deal, Apple may want to diversify its supplier base to reduce dependency on a single supplier.
"At least in the short term, this could be a net positive for Qualcomm," Trefis said.
Moreover, Qualcomm could make big bucks if Apple's iPhone comes to Verizon, which uses Qualcomm chips.
Rumors have been doing the rounds that the iPhone will come to Verizon's CDMA network next year from AT&T's GSM network. AT&T currently uses network technology that works with Infineon's chips.
"The logical choice for this kind of phone is a Qualcomm chip, since Infineon's wireless unit doesn't offer chips for CDMA technology," Barclays Capital analyst Andrew Gardiner said.
But there could be one roadblock for Qualcomm: If Apple chooses Qualcomm chips for its CDMA iPhone, it will have to redesign the iPhone to gel with the Qualcomm's components.
For Apple, it may not make sense to entirely overhaul the phone once again for iPhone 5, so it may revert back to Infineon.
International Business Times, The Global Business News Leader