The mobile chip biz is about as brutal as it gets. Exploding growth tends to do that to industries. The promise of profits brings in the competitors in droves. Once a respectable player in the market for baseband processors and mobile applications processors, Texas Instruments (NASDAQ:TXN) has already decided to ditch mobile.
Just months ago, the company said it was abandoning the mobile sector and rolling its OMAP chip business into its embedded processor segment in order to focus on other industrial applications. Now TI has announced that it's looking to "reduce costs and focus investments" in these embedded markets where it sees more sustainable growth opportunities. Translation: competition in mobile is just too tough.
It's tough out there
TI officially gave up on basebands years ago, and that's a market that remains dominated by Qualcomm (NASDAQ:QCOM), with 50% market share. Even Intel (NASDAQ: INTC) has carved out a solid 12% slice for itself, thanks in part to its acquisition of Infineon's wireless segment a couple years back. In the mobile processor market, Qualcomm is again a mighty contender with its Snapdragons, and NVIDIA (NASDAQ:NVDA) is no slouch with its Tegras.
The top two global smartphone vendors are Apple (NASDAQ:AAPL) and Samsung, by a healthy margin. Those two giants accounted for nearly half of all smartphone sales in the third quarter. Of course, Apple now uses its own custom-designed A-chips to power its iDevices, and Samsung likes to use its Exynos processors whenever possible (it sometimes uses Snapdragons in LTE markets).
There's just less and less for third-party chip makers to fight over. Likewise, TI said it wants out of "the mobile market where large customers are increasingly developing their own custom chips."
Come to Cupertino?
As part of the cost reductions, TI is axing 1,700 jobs worldwide. That's a lot of chip talent being shown the door -- where will they go?
There have already been rumors that Apple has been "actively courting" TI chip engineers trying to coax them to Cupertino. The iPhone maker has been building its chip army, and it could easily bolster its ranks from the ashes of TI's mobile division. A-chips and OMAPs are all based on ARM Holdings (NASDAQ: ARMH) designs so it wouldn't be much of a stretch to redeploy these engineers.
What's an e-tail giant to do?
There were even rumblings that Amazon would acquire the OMAP business. That made some sense since the Kindle Fire has been the highest-profile spot for OMAP processors for years. Jeff Bezos even took the time to tout the OMAP 4's performance over NVIDIA's Tegra 3. If Amazon really wanted to take tablets seriously, building chips in-house is one of the most important components to vertically integrate.
However, the Kindle Fire is known for its mediocre hardware and excellent content, so focusing heavily on hardware expertise could risk being a distraction from the core e-tail and content businesses. With today's news, it's clear that these talks with Amazon didn't consummate into any type of sale.
Analysts still think that Amazon remains committed to its plans to bake the next OMAP 5 into the third-generation Kindle Fires, despite the fact that the business is being shuttered. Sooner or later, Amazon looks like it's going to have to transition to a different chip platform.
Make the call
For TI, this is a difficult but necessary transition. If a company is going to recognize that its prospects in an intensely competitive aren't too hot, making the tough call sooner is better than later. If it really wanted to take mobile chips seriously again, it would have to invest a ton of money into a less profitable business.
As it stands, the company is expecting to save about $450 million by the end of next year. The current quarter will incur most of the $325 million in charges. Sometimes, you just gotta do what you gotta do.
Fool contributor Evan Niu, CFA, owns shares of Qualcomm and Apple. The Motley Fool owns shares of Apple, Amazon.com, Intel, NVIDIA, and Qualcomm. Motley Fool newsletter services recommend Apple, Amazon.com, ARM Holdings, Intel, and NVIDIA. 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.