Qualcomm and Intel Could Be the Last Mobile Chip Players Standing

When it comes to mobile processors, it has become surprisingly easy for many companies to hop on board the bandwagon. After all, if you can license a strong CPU from ARM Holdings (ARMH), or high-performance graphics from ARM or Imagination Technologies (IMG), then much of the hard work is done for you. Well, except for the heart of any smartphone platform -- connectivity and communications. This is where Qualcomm (QCOM -0.20%) leads and where Intel (INTC 1.77%) must also lead if it is to be long-term viable in this market. 

While Intel is currently a bit player in the mobile apps processor market, it is making excellent progress with its cellular modems, which, in this Fool's view, could be the key differentiation in a very crowded market. 

There's a ton of players vying for mobile greatness
Here's a list of many of the (remaining) companies that are either building merchant silicon or are internal silicon for smartphones:

*Samsung has an internal effort but no recent deployments of Samsung baseband visible.

Most of the applications processor vendors do have internal modem strategies. As is pretty clear, there are plenty of challengers looking to capitalize on the $18 billion smartphone applications processor pie, but, unfortunately, given the investment level necessary to keep up, most of these companies will -- in the long run -- be unable to invest to keep up.

The modem is key
For a smartphone apps processor, ARM has done a good job of commoditizing the CPU, and ARM and Imagination have largely commoditized graphics (although companies that do custom CPUs and GPUs can sometimes do something a lot better than what can be licensed), leaving the modem as the last "hard" IP block that isn't so easily developed or licensed. The modem -- and the ability to successfully integrate the modem into a strong system-on-a-chip -- becomes the big differentiator. Long term, this becomes Intel's greatest weapon in becoming the No. 2 merchant vendor to Qualcomm.

If you look at what the other market leaders have today -- MediaTek, Marvell, and Qualcomm -- only Qualcomm is planning to ship an LTE-Advanced modem this year capable of category 6 speeds (300 Mbps downlink/50 Mbps uplink). Intel, which is still an up-and-comer, will also be shipping a category 6 LTE-Advanced discrete modem this year -- putting it firmly ahead in terms of cellular capability of everybody but Qualcomm.

Modems are hard, but that's a good thing (for Intel and Qualcomm)
Building a modem that needs to only support LTE on a single small carrier is probably not too difficult -- there are plenty of baseband vendors out there that will happily sell you a single-mode LTE modem. The problem comes in when all of a sudden you need to get your modem working properly and get it to pass certification at multiple carriers. This is difficult, painstaking, and not exactly cheap. There are a lot of players out there with cellular modems, but in the long run, very few will be able to keep up with the ever-increasing R&D costs required to stay at the leading edge.

Given that both Intel and Qualcomm are spending over $3.5 billion a year each on mobile chip development, it's difficult to see too many other players willing to fight that game long-term. However, the good news for both Intel and Qualcomm is that if they can capture the lion's share of the industry's revenue (Qualcomm already has over 50% of mobile apps processor revenue share) and not let up, then the other players will eventually be forced to consolidate or exit the market.

Foolish bottom line
At the end of the day, very few chip markets have had more than a handful of players, and right now the smartphone market is filled with players that ultimately won't be able to make much -- if any -- money at this in the long term. Only those with the biggest, most effective R&D budgets will thrive long term. Qualcomm's already in a good place, and given Intel's investment level, it seems poised to be one of the last companies standing.