Qualcomm (NASDAQ:QCOM) announced on Dec. 11 that its Snapdragon 810 processor, which was originally expected to feature category 6 LTE-Advanced speeds, has been upgraded to feature category 9 LTE-Advanced speeds. This means the Snapdragon 810 will be able to download data at a rate of 450 megabits per second, up from 300 megabits per second; maximum upload speeds remain at 50 megabits per second.
Interestingly enough, Qualcomm announced no such upgrade for its stand-alone MDM9235 cellular modem, upon which the modem integrated into the Snapdragon 810 is largely based. This is actually a very smart business move. Here's why.
Modems are cheaper than integrated applications processors.
Durng Qualcomm's most recent earnings call, management noted that its "implied revenue per MSM was down sequentially, reflecting an increased mix of thin modem chipsets in the premium tier." In other words -- as many investors probably expect -- Qualcomm generates lower revenue when it sells a stand-alone modem versus a Snapdragon processor with an integrated modem.
Today, most of Qualcomm's "premium-tier" customers use the company's integrated Snapdragon processors. A number of customers -- particularly those implementing the Snapdragon 805 -- will use a stand-alone Qualcomm applications processor, as well as a stand-alone Qualcomm modem, when the two are not integrated.
However, some of Qualcomm's major premium smartphone chip customers, such as Samsung (NASDAQOTH:SSNLF), LG, and potentially even Lenovo (NASDAQOTH:LNVGY), are looking to build in-house applications processors. Qualcomm needs to make sure these customers don't go the Apple (NASDAQ:AAPL) route and just buy stand-alone modems with lower selling prices.
Use the modem to sell the applications processor
While Qualcomm is known for its best-in-class cellular modems, it also develops some of the best, if not the best, smartphone applications processors. With the company including the upgraded category 9-capable modem inside the Snapdragon 810, but only enabling category 6 speeds on the corresponding stand-alone modem, customers might think twice before pairing a Qualcomm modem with an in-house applications processor.
This isn't always successful, though
The market and revenue share numbers from Strategy Analytics don't lie -- Qualcomm commands the lion's share of the smartphone processor market, and its position has only strengthened over time. That said, some of Qualcomm's major smartphone customers are testing the waters with in-house applications processors paired with stand-alone modems.
Take, for example, LG's recent G3 Screen phone. This isn't a particularly high-profile device, and it probably won't sell in huge volumes, but it is powered by an LG-designed processor paired with an Intel (NASDAQ:INTC) XMM 7260 LTE-Advanced modem.
Given the performance characteristics of that solution (particularly on the applications processor side), LG would likely have been better off with a Qualcomm solution. However, the purpose of using an in-house chip and a non-Qualcomm modem probably had little to do with the actual performance of the solution; it seems more like an attempt on LG's part to see if it can reduce reliance on Qualcomm over time.
Should Qualcomm worry?
Qualcomm has invested heavily in mobile chip technology, and this investment is not likely to be easily matched. The handset vendors will, of course, keep looking for ways to reduce Qualcomm's grip on them in the high end of the market. This means trying to diversify (either via other merchant vendors or with in-house solutions) from Qualcomm's chips.
However, Qualcomm's modem technology continues to lead the pack, and its ability to integrate that technology with best-in-class applications processors will likely serve as a critical competitive edge for the foreseeable future.
Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, 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.