Apple (NASDAQ:AAPL) supplier Broadcom (NASDAQ:BRCM) took a long time to realize that selling basebands isn't its cup of tea. Apart from a few devices here and there, Broadcom's baseband business never took off as rival Qualcomm ruled the market with an iron hand.
In fact, Broadcom commands only 3% of the mobile application and baseband processor market, way behind Qualcomm's 66% share. Moreover, the emergence of Chinese peers such as MediaTek and Intel's foray into basebands hurt Broadcom further. So, the company decided that it will be wise to throw in the towel, sell the baseband business, and instead focus on areas where it can do better.
Broadcom will save around $700 million a year in research and development expenditure associated with basebands once it sells the unit. Instead, the company will invest aggressively in its infrastructure and connectivity businesses, and this is the right move.
The company has made some progress to benefit from concepts such as the Internet of Things (IoT), wearable devices, and software-defined networking (SDN). It has rolled out products targeting these areas, and exiting the cellular baseband business will give it greater freedom to make stronger headway in these markets.
IoT is the way to go
Last year, Broadcom released a couple of chips for Internet of Things applications. Its BCM20732 Bluetooth Smart system-on-a-chip is compatible with Google's Android-enabled mobile devices.
Based on ARM's Cortex M3 architecture, the chip can connect to objects such as pedometers, heart rate monitors, door locks, lighting, and proximity alarms. The chip is powered by a coin-cell battery and can run for one year before the power source needs to be changed.
In addition, Broadcom had also launched another solution, the BCM4390 Wi-Fi system-on-a-chip, that is a more generalized version and is not constrained by the requirement of the Google Android platform. Both chips are now in volume production and have found their way into appliances from companies such as Haier.
Going forward, Broadcom's chips will find more applications like this as the IoT is a big opportunity. According to Cisco, there will be 50 billion connected devices by the end of the decade, and these devices will need specialized connectivity chips to connect to the Internet. However, one sticking point holding the Internet of Things back is data security. But Broadcom is trying to address this concern with its BCM20737 solution.
This new chip includes Bluetooth capabilities, encryption, decryption, and also supports Apple's iBeacon technology. Broadcom is trying to accelerate the adoption of the Internet of Things by delivering water-tight security, so that its customers can focus on developing innovative applications for the IoT ecosystem.
Assisting Apple's moves
Moreover, moves such as these can help Broadcom gain business from Apple in the connected home space and location-based services. For example, Apple's iBeacon is a Bluetooth-enabled low-energy wireless technology that provides location-based information and services to iDevices. Since Broadcom is supporting iBeacon with its new chip, it might find greater adoption in the beacons that transmit signals to iDevices going forward.
On the other hand, as Fool contributor Adam Levy pointed out, Apple's home automation platform, HomeKit, can also be a driver for Broadcom. According to Craig Federighi, the senior VP of Software Engineering at Apple, the company is working with Broadcom to develop the HomeKit platform.
Using its Wireless Internet Connectivity for Internet Enabled Devices (WICED) platform, Broadcom can manufacture a chip that's compatible with Apple's HomeKit. Now, this is another terrific opportunity for the company in the Internet of Things space. In the U.S., 42% of smartphone users are on an iPhone. This means that HomeKit might see strong adoption right out of the box as it will be compatible with iPhones that are already present in large numbers in the U.S.
The bottom line
These are just some of the examples as to how Broadcom can benefit from new trends in technology. The company has made a good move by exiting the cellular baseband business as it was too crowded. The focus on new applications, such as IoT, will help Broadcom gain a head-start over other chip makers and allow it to tap growth in the long run.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.