Although Apple has decided to dip its toe into the high end of the cell-phone waters with its iPhone, other cell-phone makers continue to make strides at the low end.
The manufacturing cost for some models targeted at consumers in countries such as China and India has reached a new low of around $25. It makes me wonder whether I'll someday be forced to drag my kids, kicking and screaming, past disposable cell phones in the Wal-Mart checkout line.
The need for low-priced handsets is obvious if you look at the numbers. Last year, roughly a billion were sold, and that means that pretty much everyone who can afford a conventional cell phone already has one. For this industry to keep growing, it needs to draw in new users, but doing so requires reducing the cost of handsets. Obviously, cell-phone chip makers have had some success doing just that.
The primary reason the phones can be manufactured so cheaply is that the continuing reduction in process geometries allows semiconductor manufacturers to put ever-increasing functionality on a single semiconductor chip. According to a recent article in Investor's Business Daily, just 10 million cell phones -- roughly 1% of the total -- were based on single-chip designs in 2006, but that number should increase to 100 million this year. These chips integrate transceiver functions (responsible for the sending and receiving of the cell-phone signal), all baseband functions (the baseband handles most of the processing), and memory all in a single piece of silicon.
A number of companies, including Texas Instruments (NYSE:TXN), Infineon (NYSE:IFX), and NXP with its recent purchase of Silicon Labs' (NASDAQ:SLAB) wireless business, have single-chip solutions. Furthermore, QUALCOMM (NASDAQ:QCOM) announced last year that it should have a highly integrated chip ready this year. Broadcom (NASDAQ:BRCM) has also announced a new chip aimed at phones for use on EDGE networks, which is a speedier network than what entry-level phones use. It won't be surprising to see Marvell (NASDAQ:MRVL) and Analog Devices (NYSE:ADI) throw their hats into this ring as well.
A market as large as the one for ultra-low-cost handsets has space for a number of companies, but the competition is sure to be fierce, and you can bet that price will be a weapon. Will the coming fight over inexpensive handsets negatively affect the profitability of the chip makers? This is where superior management comes into play. We'll all have to stay tuned for the outcome.
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Fool contributor Dan Bloom has no financial interest in any of the companies mentioned in this article, although he does have a small financial interest in the cell phone that he and his wife share.
