Sony (NYSE:SNE) recently announced its plans to acquire Altair Semiconductor, a producer of low-power 4G LTE modem chips and RF modules, for $212 million. Altair's chipsets are mainly designed to upgrade low-power devices from 2G to 4G connections at comparable prices, but they have also been installed in tablets and Chromebooks.
Sony expects the acquisition to close in February but doesn't anticipate the deal to have a "material impact" on its financial results for this fiscal year. Nonetheless, Sony's investment in the 4G modem market could reshape its IoT strategy in the near future.
In addition to expanding Altair's existing business, Sony will research and develop new sensing technologies which will combine Altair's chipsets with its own GNSS (Global Navigation Satellite System) and image sensors. By doing so, Sony plans to "develop a new breed of cellular-connected, sensing component devices" for the Internet of Things, which connects objects like wearables, smart appliances, drones, and cars to each other and the cloud.
What this deal means for Sony
To understand why Sony acquired Altair, we should discuss its mobile business first. In the second quarter of 2015, Sony's mobile revenue fell 15% annually to 279.2 billion yen ($2.33 billion). However, the unit's operating loss narrowed from 170.6 billion yen to 20.6 billion yen ($172 million), thanks to its focus on improving profitability instead of pursuing market share gains. In the first half of 2015, the unit posted an operating loss of $360 million -- a considerable improvement from its loss of $1.8 billion in fiscal 2014.
In the past, many analysts called for Sony to exit the smartphone race, since intense competition from cheaper Android devices had whittled its market share to just 2% at the end of 2014, according to Gartner.
Yet Sony Mobile CEO Hiroki Totoki shot down those rumors in an interview with Arabian Times last year, declaring that smartphones were integral to the company's long-term IoT strategy. Totoki declared that if Sony exited smartphones, it "could lose out on a very important business domain" which includes "smart wear, smart products, and smart devices" which deliver data to mobile technology.
Expanding into the Internet of Things
To expand its presence in those "smart" devices, Sony launched smartwatches, fitness trackers, action cameras, smart glasses, and a prototype drone over the past few years. Many of those devices rely on Wi-Fi or Bluetooth connections, but other companies have since released devices with standalone 3G or 4G connections like Samsung's (NASDAQOTH:SSNLF) Gear S 3G smartwatch or BenQ's QC1 4G action camera. Based on this market shift, it makes strategic sense for Sony to produce its own 4G modem chips for standalone connected devices.
This expansion could help Sony tap into several growing markets at once. Cisco estimates that number of IoT devices worldwide could double from 25 billion in 2015 to 50 billion in 2020. IDC estimates that wearable shipments will soar from 76.1 million in 2015 to 173.4 million by 2019. The value of the global drone market could rise from $3.4 billion in 2014 to $27.1 billion in 2021, according to Market Research Reports. These are all fast-growing opportunities that Sony can pursue with Altair-powered devices.
What this deal doesn't mean for Sony
Last year, Samsung replaced Qualcomm's Snapdragon SoCs with its own Exynos application processor and Shannon modem. Samsung did that to avoid overheating issues, tighten up its supply chain, and cut production costs. It's tempting to think that Sony could follow the same path with the Altair acquisition to expand its mobile margins, but that won't happen for three simple reasons.
First, Altair's low-power chip designs, which the company claims can enable batteries to last a decade, aren't optimized for power-hungry flagship phones. Second, Qualcomm's Snapdragon SoCs, which power Sony's flagship Xperia devices, consist of an application processor and an integrated wireless modem. Unless Sony replaces the application processor with its own in-house silicon, as Samsung did, it wouldn't be cost effective to use Altair's modem. Lastly, Samsung has a foundry for manufacturing its own chips, which further reduces costs, but Sony doesn't.
Investing in a connected future
Sony's acquisition of Altair probably won't make a game-changing impact on its growth in the near-term. But over the long run, the investment will likely help Sony expand beyond mobile devices, game consoles, cameras, and home electronics into new markets like wearables, drones, and smart appliances. These new businesses can help Sony generate fresh sources of revenue, diversify its top line, and expand its digital ecosystem.
Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Cisco Systems and Gartner. 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.