This article is part of our Rising Stars Portfolio series.
In May, NVIDIA (Nasdaq: NVDA ) set its sights on its largest takeover target in its corporate history, a $367 million purchase of baseband specialist Icera. The move immediately gave NVIDIA some skin in the connectivity game, a space that Qualcomm (Nasdaq: QCOM ) had leveraged to make itself the leader in mobile processors. In the past years, both Intel (Nasdaq: INTC ) and Broadcom (Nasdaq: BRCM ) had further pushed into this market with major connectivity acquisitions as well. Intel spent $1.4 billion buying Infineon's wireless unit. Broadcom spent $316 million acquiring 4G specialist Beceem wireless.
I talked with Jeff Herbst, NVIDIA's VP of business development, shortly after the acquisition to establish what the deal meant for NVIDIA, and what opportunities the company saw in the mobile market moving forward.
Here's an edited summary of our discussion, followed by the company's views on where mobile computing trends are moving it forward.
Eric Bleeker: With increasing consolidation in the baseband (mobile modem) space, why is NVIDIA getting aggressive now?
Jeff Herbst: NVIDIA believes that it can improve time to market by including not only a reference design on an applications processor [Like Tegra] but also a baseband processor.
Secondly, the baseband market is huge in terms of market size. This allows us to double our TAM [Total Addressable Market] or market opportunity in each handset we are in.
Thirdly, we clearly, we see the long-term trend toward these two processors integrating over time. We don't have any current plan to build them on a single piece of silicon right now, but there are no technical impediments for us doing so in the future, and that is something we will clearly look at as time goes on. But for right now, we are going to sell them as two separate processors, but enjoy the opportunity to sell within the same customer base that Icera was filling in to and pull through essentially, more of their product sales along with Tegra, so it makes total sense.
Bleeker: So to discuss that synergy a bit more, you had mentioned Icera has almost $300 million funding, but they sold for $367 million, so obviously a great product here, but probably some difficulties bringing it to market. What kind of advantages do you think -- under NVIDIA -- you guys will be able to push to kind of move them on to that next level?
Herbst: Yeah, there are huge advantages. The smartphone and the tablet business is a big, top business now. It is already dominated by big-time companies, both to build the chips and who make the products. I think for a company like Icera to try to come to market as a small, I wouldn't necessarily call them "underfunded company," but clearly they don't have the kind of backing and funding of an NVIDIA or a Broadcom or a Qualcomm. For them to do it alone and without a complete solution was going to be very difficult, yet they had great technology and great people, and all that was missing was the right partner.
I think there is a huge synergy in putting them together with NVIDA because automatically overnight, when these people now hold NVIDIA business cards and can sell a complete solution meeting Integra applications processor plus their baseband, they are going to be taken much more seriously in the market, not necessarily because people will view their technology any differently, but they will view their ability to support, sustain, and complete a roadmap much more credibly than they would have before. That is really what they get being part of NVIDIA is it is a complete roadmap, a complete ability to support the massive needs of customers who demand speed, quality, and full assurance of solution viability.
Herbst and I were able to discuss NVIDIA's acquisition more in depth, but I was struck by what an ideal solution Icera seemed to be relative to other available buying opportunities. Herbst mentioned other possible acquisitions, like Sequans (NYSE: SQNS ) , a predominately 4G company that went public earlier this year to exploding demand before falling off a cliff this week. The company closed down 45% on Thursday after it announced tepid demand next quarter. Despite Sequans' promise, a more balanced strategy that involves older technologies is needed as well.
NVIDIA's baseband target -- Icera -- offers a programmable solution that spans low-end 2G and cutting-end 4G technology. While NVIDIA might be playing coy on integrating Icera's baseband designs directly into Tegra chips, I see integration as a necessary endgame to compete against market-dominating Qualcomm. Qualcomm currently not only integrates baseband chips but also other areas like Bluetooth and GPS into its market-leading Snapdragon processors.
NVIDIA's acquisition of Icera comes late into the game. In fast-moving markets like mobile, market leadership often rapidly coalesces around a leader, and the clear mobile leader is Qualcomm. In my opinion, NVIDIA either needs to make itself a differentiated high-end offering on tablets, or push heavily into integrating features like baseband into its mobile chips, which would make it more appealing to smartphone manufacturers.
With its purchase of Icera, NVIDIA has a leg up against applications processor-specific companies like Texas Instruments. More to the point, along with market leader Qualcomm, NVIDIA is the only major company that has managed to create mobile graphics processing technology that doesn't utilize Imagination Technologies' designs. Especially in the tablet market, where high performance on games and high-definition video is key, this could give NVIDIA a continuing advantage against aspiring rivals like Marvell (Nasdaq: MRVL ) , which has licensed similar ARM Holdings (Nasdaq: ARMH ) designs, but lacks the graphics oomph that NVIDIA brings to the table.
In the long run, NVIDIA's focus should be firmly set on beating key competitors Qualcomm and Texas Instruments to market this holiday season, and capturing the tablet opportunity. Whether or not Android designs are hot right now, their popularity should inevitably grow. Under that situation, NVIDIA's Tegra is much more competitive in tablets, which require raw horsepower, than in smartphone designs, which place more emphasis on efficiency factors like battery life.
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