One product category that many consumer electronics companies have been trumpeting as the "next big thing" has been the smartwatch. Rumors that Apple (NASDAQ:AAPL) would be doing a smartwatch circulated for quite a while before the company actually launched its Apple Watch.
However, many other companies like Samsung, LG, and Motorola actually beat Apple to market with smartwatches (though the sales of these products seem mediocre at best).
Nevertheless, my expectation is that if the smartwatch market is viable, it will take Apple to lead the way. Whether the Apple Watch will ultimately be successful or not is a question that won't be answered anytime soon, but if the smartwatch market does catch on, I wonder if chipmaker Broadcom (NASDAQ:BRCM) will be at a long-term disadvantage to its peers.
The cellular question
Interestingly enough, the Apple Watch does not have a built-in cellular radio. It does, however have built-in Wi-Fi (which Chipworks suggests is a Broadcom BCM4334 chip).
However, the recently released Samsung Galaxy Gear S does, in fact, have a 3G modem built-in. I suspect that other competing wearable devices will sport cellular radios to allow them to operate independently of a smartphone.
At any rate, if cellular turns out to be a big part of the wearable/smartwatch equation over the long haul, then Broadcom, which back in June announced that it was shuttering its cellular chip business, might be at a disadvantage. This isn't necessarily due to the potential integration of the cellular baseband with the digital portion of the Wi-Fi solution, but rather due to a similar "platform-centric" phenomenon that the industry is seeing in the low-end and mid-range of the smartphone market.
Various current and former mobile processor vendors have stressed time and again that at the low-end of the smartphone market, device vendors want a "complete platform."
This means that a company like Broadcom can't just sell one of these low-cost smartphone vendors a Wi-Fi combo chip and call it a day; it needs to provide the connectivity chip, applications processor, and other chips.
If cellular becomes an integral feature of most smartwatches, then I could see Broadcom doing quite well with its connectivity solutions in the high end of the market (think Apple Watch), but it could find it more difficult to compete in the low-end and some parts of the mid-range.
A counterargument: why cellular may not catch on in smartwatches
There's an interesting set of arguments that one could potentially make for why cellular might not catch on in the smartwatch market.
Keep in mind that the same vendors that sell smartwatches seem to be the smartphone vendors. These companies have a vested interest in keeping customers buying the latest-and-greatest smartphones. Further, smartphone sales are very robust and global smartphone penetration is very high (over 1.2 billion smartphones are expected to be sold during 2015, per Statista).
Finally, odds are good that the vast majority of smartwatch buyers already have smartphones and pay their carriers a hefty fee for the privilege of having a cellular connection.
So, will customers really want to pony up extra to put yet-another device on their cellular plans? Even in the tablet market, Wi-Fi-only tablets outsell cellular capable tablets by a large margin, likely because most customers are fine with tethering their tablets to their smartphones if necessary.
The same dynamic could play out in smartwatches.
On top of the "people don't want to pay their carriers more" argument, note that any device sold with a 3G and/or 4G LTE connection leads to a royalty payment (which is usually calculated as a percentage of the device selling price) to Qualcomm (NASDAQ:QCOM). This means that if smartwatch vendors can get away with not building in a cellular radio, they probably won't include one.
Foolish bottom line
It will be interesting to see how the smartwatch component market plays out. I expect that if most smartwatches are Wi-Fi-only, then Broadcom will be in good shape to compete. However, if cellular modems become an integral feature of future smartwatches, then Broadcom could find itself at a bit of a disadvantage.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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.