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Intense 3G Price Competition and 4G LTE R&D Took Toll on Broadcom Baseband Business

by Sravan Kundojjala | 6月 02, 2014

Today, Broadcom announced that it is exploring strategic options for its cellular baseband business, including a potential sale or shutdown. The company hasn’t identified any potential buyer yet. With this announcement, Broadcom joins the long list of players who exited from the baseband market including some high profile player such as Analog Devices, Freescale, Infineon, NXP, ST-Ericsson and Texas Instruments.  Broadcom is still a minor player in the baseband market and the company had less than 5 percent revenue share in the cellular baseband market in 2013, by Strategy Analytics’ quarterly cellular baseband tracker estimates. Broadcom has been investing in baseband technology for more than ten years with little success to-date. The company has had some success in 2G and 3G markets, but never really capitalised on its momentum with tier-one vendors such as Nokia and Samsung. Despite not having a major market share in the baseband market, we always viewed Broadcom as a capable player, thanks to its strong relationship with Samsung, proven integration capabilities, proven execution with tier-one OEMs and strong cellular IP. Previously we said that 2014 was shaping up to be an important one for Broadcom’s baseband business and only a successful LTE execution will secure the long-term outlooks for its Mobile & Wireless business.

We estimate Broadcom has spent over $3 billion on cellular baseband related R&D since 2007 without profit. The baseband market is quite R&D intensive. The rationale for Broadcom to invest in basebands had been to expand its connectivity business to mid-to-low range smartphones where a complete platform approach is relevant, allowing Broadcom to capture more dollar content while expanding in the high-end at the same time. Broadcom feels its connectivity share in premium smartphones is relatively secure, thanks to its technology differentiation, strong customer relationships and quality of its products. In contrast to its connectivity chip business, Broadcom’s baseband chips were neither leading edge nor first to market. This situation left Broadcom in catch-up mode in basebands and only upcoming LTE SoCs and thin modems would have made it a high-end player in the baseband market. Unlike Qualcomm, Broadcom viewed its baseband business as supplementary to its connectivity business. For Qualcomm the baseband modem comes first and everything else is a revenue expansion opportunity.

Broadcom’s 3G baseband shipment year-over-year growth fell to just 4 percent in 2013 after experiencing a buoyant 193 percent year-over-year growth in 2012. This can be attributed to intense competition in the 3G baseband market and the maturity of 3G baseband technology. According to Broadcom, the company is expected to have just $200-$250 million baseband revenue in 1H 2014. We believe that the barrier to entry in 3G basebands is low now and as a result the market has seen rapid price erosion in recent quarters, leaving vendors with very little margin.

In 2013, Broadcom acquired Renesas Mobile’s LTE assets to accelerate its LTE product introduction. Broadcom also announced that the company is targeting at least $100 million in LTE revenue in 2014. At least through Q1 2014, Broadcom appeared to be on track with LTE product and business milestones. During its Q1 2014 earnings call Broadcom’s CEO announced the company’s upcoming Cat 7 / Cat 9 / Cat 10 basebands and SoCs, which was unusual for a company that typically announces its products closer to launch. We view this early announcement of its long-term product roadmap as an indication that Broadcom was attempting to make its baseband assets more attractive to potential buyers.

Currently the LTE baseband segment is the fastest growing sub-segment of the baseband market with above-average ASPs. Qualcomm is the market leader in the LTE baseband market with over 95 percent revenue share. In 2013, revenue from LTE basebands accounted for over one-third of total cellular baseband revenue in 2013 and we expect this growth to continue for the next few years.

This announcement leaves Qualcomm, Intel, MediaTek, Spreadtrum and Marvell as the key players in the baseband market. It remains to be seen whether Broadcom will find a buyer for its baseband business as historically Freescale, ST-Ericsson, TI and Renesas Mobile all struggled to find buyers for their baseband businesses when they put them up for sale. ST-Ericsson and Renesas Mobile, however, found a buyer for a piece of their baseband business and we expect Broadcom’s attractive LTE roadmap could attract a player with market share expansion plans.

Sravan Kundojjala (@Skundojjala)

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