Broadcom (UNKNOWN:BRCM.DL) has the dominant share of the connectivity combo chip market, but as the growth in the smartphone market has shifted away from the high end and toward the low end and the mid-range, Broadcom has lost ground to chief competitor Qualcomm (NASDAQ:QCOM). Qualcomm's big advantage is that it can sell the entire platform while Broadcom is trying to sell standalone connectivity chips. How can Broadcom fend off Qualcomm?
Defending the high end
Broadcom's objective in the mobile and wireless space will principally be to defend its share at the high end of the market. This means keeping its design wins in Apple's iPhone and iPad products, as well as in Samsung's flagship Galaxy products, since these are the really high-volume runners at the high end.
The strategy to "win" here is simple to state but of course requires solid execution -- Broadcom needs to continue to stay a step or two ahead technologically. While Broadcom is certainly ahead today, it would be unwise to discount Qualcomm's ability to push forward and try to close the gap. The best case is that Broadcom stays perpetually ahead, keeping margins intact, but a more likely scenario is that Broadcom can stay marginally ahead and may need to concede on margins slightly.
The low end to mid-range is trickier
At the very low end, Broadcom is likely to see its share suffer, as the apps processor vendor almost always provides the connectivity solution as well. Though Broadcom does provide the connectivity solution to platform vendors that don't have their own connectivity (think Spreadtrum or NVIDIA), those companies have lost -- and will probably continue to lose -- share in the low end and mid-range of the mobile space
Broadcom has signaled that the revenue that is at risk here is on the order of $500 million to $800 million, so conservative investors may want to assume that most -- if not all -- of this business goes away in the long run, though the attrition could be stretched out over many years.
What does this mean for Qualcomm?
This is generally a good trend for Qualcomm. Qualcomm has the widest portfolio of cellular products and has been gaining share nicely, so the opportunity for incremental connectivity content is robust. The primary risk that Qualcomm needs to deal with is the aggressiveness from MediaTek, has its own in-house cellular and connectivity solutions, at the very low end of the market.
The good news for Qualcomm, though, is that even its very lowest end Snapdragon processors tend to feature similar -- if not identical -- modems to what Qualcomm sells in its very highest end products. This means that even though MediaTek has access to comparable CPU and GPU IP as does Qualcomm, Qualcomm can differentiate with a better modem. If Qualcomm can do this, the connectivity sale is almost assured.
Foolish bottom line
Broadcom's connectivity business is in a bit of a tight spot. Without cellular, the lower end of the market becomes tougher to hang on to, and at the high end, there is risk of share loss if Qualcomm is able to catch up. That said, it is worth noting that even as Qualcomm has advanced its connectivity offerings, Broadcom has continued to hold on to its very sizable share of the high end -- speaking to the durability of Broadcom's competitive position here.