Broadcom this week announced its intentions to explore options to either sell-off or shutdown its cellular baseband business. The key reasons being a highly competitive low- to mid-tier devices space in which Broadcom was competing resulting in higher price erosion and tending towards cost-erosion. Secondly, LTE design wins have been polarized across two big markets right now maturing US LTE landscape & upcoming LTE tsunami in China. Qualcomm has been forefront on the majority of design wins especially in high- to premium-tier across US and China, MediaTek is moving quickly with loads of LTE design wins in mid-tier in China for the upcoming LTE roll-out in China. On the other hand, the other big TD-SCDMA segment is well dominated by MediaTek, Spreadtrum & Qualcomm. So in summary, Broadcom has been stuck in an uncanny position where it is being attacked by Qualcomm at the high-end and MediaTek at the low-end.
If we rewind the current situation back a bit, the initial stable baseband business for Broadcom begun to dip with decline of Nokia which was its key customer then which led Broadcom to increase its dependencies on Samsung. But this was not enough considering the Korean giant’s multiple sourcing strategy, and hence Broadcom had to eventually go after highly cost-sensitive Chinese manufacturers and compete with likes of MediaTek & Spreadtrum. Though, during the period Broadcom registered good design wins with Samsung and others but it was not enough to generate permanent partnerships in the highly price-sensitive customer segment. Also, Broadcom didn’t have enough cutting-edge cellular IP to make it to the next high- to premium-tier level to increase its profile to compete with likes of Qualcomm in 4G and MediaTek in 3G to catalyze its 3G/4G LTE baseband business. So in 2013, Broadcom acquired cellular IP assets from Renesas Mobile to integrate multimode, multiband, LTE-A/HSPA+/EDGE modem IP into its SOCs as well as for standalone solutions. Broadcom paid a handsome $164 million in cash. The acquisition was good and the product roadmap shared with us looked fairly competitive as well as the time-to-market map. At MWC, Broadcom did demo its Cat 4/6 LTE solutions and looked fairly impressive. But where Broadcom gave up is on the tough integration part which has strained its current resources from R&D perspective with not enough scale being generated with comparatively lesser design wins than its bigger competitors to justify further investments. Broadcom estimates that divesting the baseband business would potentially save more than $600 million of annualized R&D expenses. While this looks like a desperate move but it would prove to be a potential strategic move which could stop burning out the company’s resources and allow it to focus more on non-cellular connectivity business which Broadcom is a leader in alongside broadband and infrastructure segments.
Broadcom chickening out from the tough cellular baseband business could potentially open up opportunity for Apple to acquire this important missing piece towards its ultimate vertical integration. Apple could more tightly control its hardware from silicon and cellular perspective with this acquisition integrating and building upon R&D efforts started by Broadcom. Also, since Apple is not a horizontal player like Broadcom it wont have to worry about selling the solutions to the industry and instead leverage its own massive scale by integrating its own 3G/4G solution into its own SOCs across its hundreds of millions of products sold every year. While R&D and integration would be tough initially but Apple has deep pockets to develop and integrate its own top-notch LTE capabilities into the products over the period of next two years. This could mean Apple will have to depend less on suppliers such as Qualcomm and can control its own roadmap by working closely with global carriers to shape its own product-cycles. Cellular IP is one weapon missing in Apple’s arsenal which it will like to acquire as mobile is the future and will power every other device.
We sense it is a big opportunity for Apple to acquire Broadcom’s cellular baseband business and have a much more tighter control over its hardware and ecosystem.