A mobile phone runs on the chips inside it, if an over-generalization may be permitted for simplicity’s sake. And the basic functions of a basic phone rely on four types of chips: the power amplifier, the RF transceiver, the analog baseband and the digital baseband. This simple notion, of course, ignores for the moment the advanced applications of feature-rich, broadband phones and the chips that drive them, as well as the complexity of the memory chip market-both discussions for another day.
To illustrate the functions and relationships of the basic chips, follow the signal chain.
As a signal is captured by the antenna, it passes through a transmit/receive switch to the power-amplifier chip, which steps up or down the signal strength as needed. The transceiver chip handles the reception or transmission of a signal. An analog baseband converts an analog signal to a digital signal, or vice versa, depending on whether the signal is incoming or outgoing. (This is sometimes combined with a power-management chip to regulate power spent on processing needs.) A digital baseband-composed of a digital signal processor, a microprocessor core and applications-specific logic-processes the signal into commands for further action.
As the asterisked qualifiers to the basic chip types reveal, chip vendors are combining the basic chips with added functionality such as power management and power amplifiers to add additional value and function to save space and drive down the cost of functionality. The ultimate use of this approach is often referred to as a “system on a chip,” or SoC, that also is referred to a “single chip” solution-a bit of a misnomer, as the “single chip” combines several chips. The purpose is to reduce the overall chip cost of a mobile handset to perhaps $20-$30 per unit. This enables vendors to make and sell low-cost handsets that may reach hundreds of millions of people in emerging markets.
SoCs and “single chip” solutions have been critical to handset vendors plying the low-cost handset market in developing countries. This is a low-margin, high-volume business that has driven commoditization of low-cost chips, creating a hyper-competitive market. It is on the opposite end of the spectrum from the many advanced application chips that enable the functions or feature-rich phones in the mid- and high-tier price ranges.
“Whenever you have commoditized products, there’s less differentiation between competitors’ products, and more price competition,” said Flint Pulskamp, a semiconductor analyst with IDC.
Pulskamp pointed to NXP Semiconductors, the former Philips Semiconductor unit of Philips Electronics. The parent sold the semiconductor unit to private-equity investors earlier this year in part because the unit excelled in low-margin chips that required aggressive investment in order to remain competitive.
At the high end of the market, specialized chips for advanced applications are driving the functionality of smart phones and feature-rich handsets that enable multimedia and broadband data use. That market offers chip vendors higher margins, but lower volume in the current market, still somewhat nascent in terms of 3G and smart-phone penetration. The chip portion of the bill of materials for a W-CDMA phone, for instance, can range toward a staggering $90 per unit, according to IDC.
“The challenge for chip makers is that this is all cutting-edge technology requiring a high degree of investment,” Pulskamp said. “Often your research and development work essentially pre-empts the market.”
That means profits lag behind investment, a classic difficulty of the high-tech industry, which often requires long periods-and multiple rounds of venture capital or, increasingly, private-equity ownership-to attain profitability.
“You can’t get too far ahead of yourself,” Pulskamp said. “You have to invest in R&D to stay in the game, yet you can’t forge too far ahead of the current market. For instance, WiMAX is two or three steps down the road, while 3G is just now coming online after all these years.”
