When Broadcom (NASDAQ: BRCM) was trading in the mid- to high-thirties on the back of the hype surrounding its next generation LTE-Advanced silicon, the speculation ran wild that Broadcom would finally emerge as the solid No. 2 player against Qualcomm (QCOM 3.06%). The speculation centered around the premise that Broadcom's solution would be so compelling that it would be a prime contender for the (highly lucrative) cellular baseband socket in Apple's (AAPL 0.71%) iPhone. Of course, with Qualcomm back as a Wall Street darling, everybody's now worried about Broadcom. Should they be?
Connectivity share loss fears perhaps overdone
At the UBS Technology Conference, one analyst mentioned that Qualcomm was pushing hard to get its connectivity solution into the iPhone 6. Of course, EVP of sales Michael Hurlston was quick to point out that while the company had seen some share erosion at the low end of the connectivity market, the company is able to fortify its position at the high end quite nicely. While obviously Mr. Hurlston wasn't about to confirm/deny whether it won the iPhone 6 socket, he did state that he did not see much of a change in the connectivity landscape (at least with the Tier-1 vendors) – this seems like a pretty strong hint that Broadcom's all set on the iPhone 6.
That being said, while it's encouraging that Broadcom is able to hold the fort at the high end, the erosion at the low end is an issue. The problem here is that at the very low end of the market, handset vendors like to buy turnkey platform solutions – apps processor, cellular, and connectivity combo – and then customize their handset designs on top of this platform. Unfortunately, since Broadcom does not yet have the complete platform for LTE handsets (and since the 3G market has turned into a low-margin wasteland), it has been difficult for the company to really compete here.
But that's why they bought Renesas, right?
Broadcom worked on an organic high end LTE-Advanced slim modem solution internally that ended up being on a timetable too late to really appease investors (interestingly Mr. Hurlston referred to this previous product as a "late 2014" part rather than the "second half of 2014" as expected – so it was worse than investors thought). However, this didn't solve the "mass market" problem of cheap integrated system-on-chip solutions with an LTE baseband, and the feature set – after the recent disclosures from Qualcomm and Intel (INTC 6.11%) – didn't look all that compelling.
Buying the defunct Renesas Mobile (which had plenty of patents, solid engineers, and a ready-to-go Category 4 LTE-Advanced modem) allowed Broadcom to get into the game quickly with an integrated, low-end and low-cost LTE system-on-chip. It's not the most competitive thing in the world, even in the low-end space, as a dual core Cortex A9 is thoroughly dated at this point, but for a cheap enough phone (and with the chipset sold at a cheap enough price) it should at the very least get the ball rolling.
Looking toward the future
It's going to be a tough landscape going forward. At the high end, it looks like Qualcomm will remain the top dog technologically and with respect to market segment share, with Intel in second place (just how distant a second remains to be seen). Broadcom has a good shot at being the third place vendor, although it's tough to ignore the competitive threats from the likes of NVIDIA and Marvell going forward. Broadcom's edge is that it is a leader in connectivity, but NVIDIA will likely have an apps processor edge and Marvell is already entrenched in TD-SCDMA handsets with its own solutions.
It's not clear what kind of future Broadcom's higher-end slim modem solutions will have in the market. Qualcomm's apps processors are very strong, so any high-end solutions that utilize Qualcomm's apps processor will probably be paired with a Qualcomm modem. Intel, too, should have a competitive applications processor pipeline, so any wins these get will also probably be paired with an Intel modem.
This means that Broadcom's strategic focus should be on the low end – exactly as it is doing with its first solution. While this market will also be tough, particularly as Qualcomm and MediaTek have scale working for them and, when it finally is in the game, Intel has both scale and vertical integration, Broadcom can still do well thanks to its connectivity edge.
Foolish bottom line
Broadcom's higher end connectivity chips are safe, but Wall Street is rightfully very cautious about both the technological and, more importantly, financial viability of Broadcom's cellular baseband venture. It is a path that the company needs to travel to protect its connectivity business, but it's not going to be easy.
