Nokia’s new chip strategy realigns space: STMicroelectronics gets 3G win, EDGE gives Broadcom boost

WHEN A BEHEMOTH SHAKES ITS TAIL, some rise, some fall. The behemoth benefits.
That appears to be the upshot of Nokia Corp.’s announcement last week that it had selected four main chipset suppliers for future business. The move boosted some fortunes and cast off others, while “chips will be cheaper” for the Finnish handset vendor, said Will Strauss, analyst at Forward Concepts.
The impacts on chip vendors’ bottom lines won’t hit until the second half of next year, giving those who lost out on Nokia’s volume business some time to re-evaluate their market strategy, Strauss said.
“This news will cause every chip player to re-examine their position in the market and determine how they’re going to play,” said Strauss. “However, the top five handset vendors control the bulk of the market, so the dream of every chip maker is to land one of those volume customers.”
Texas Instruments, for instance, has known for some time that Nokia planned to diversify away from its dependence on the American chip vendor. So TI has been developing 3G chips that are not dependent upon Nokia’s IP, and thus could be sold on the open market to keep the chipmaker’s hand in that segment beyond its largest customer.
Shakeout among 3G chip vendors is a likely result of Nokia’s actions, the analyst said, as some vendors drop their W-CDMA or UMTS efforts. (UMTS refers to 3G protocols in Europe; WCDMA is prevalent in the United States.)
The news, briefly: Nokia tapped STMicroelectronics for UMTS, Broadcom Corp. for EDGE and Infineon Technologies for GSM, while maintaining a long-standing relationship with TI for any and all of these technologies.
Broadcom found its EDGE technology validated and overall business boosted by the news. Qualcomm may find its UMTS market position challenged by the fact that Nokia will continue R&D in that area and will transfer half its 400-person chip development team to STMicroelectronics to boost the latter’s ability to deliver 3G products, Strauss said. One surprise, to the analyst, is that Infineon, which was tapped by Apple Inc. for EDGE chips in the iPhone, did not get the nod for EDGE from Nokia. Another surprise: NXP (formerly Philips Semiconductor) was “left in the lurch” under the new arrangement, the analyst said.
“This may lead Qualcomm to re-examine its pricing and possibly lower prices,” Strauss said. “And it will add a new element to the cross-licensing negotiations between Nokia and Qualcomm.”
The market for GSM chips currently is the largest by volume, Strauss said, but that technology is rapidly being replaced by GPRS/EDGE technology. EDGE is growing robustly, as the upgrade from GSM is fairly simple and cost-effective. The UMTS market is the fastest growing, but still relatively small and nascent, because the upgrade to network base stations is the proverbial “fork lift” change that is costly and time-consuming for network operators.
For its part, Nokia said its new approach will allow it to accelerate its R&D efforts in software to enable mobile Internet services while scaling back chip-related R&D. At the same time, Nokia will license its chip-related IP to all comers, producing a new revenue stream.
“We believe that our renewed strategy will allow us to concentrate on developing core chipset technologies, while increasing our R&D efficiencies,” said Niklas Savander, an executive vice president in Nokia technology platforms, in a prepared statement.
The message: Nokia is innovating on core competencies, while controlling R&D costs by letting suppliers shoulder part of the burden.
Financial analyst Mark McKechnie at American Technology Research said that Nokia’s plans to license its baseband technology and related software could “level the playing field among chip suppliers,” though the analyst questioned whether Nokia would find substantial financial success in this endeavor. STMicroelectronics is not likely to gain a material financial boost until 2009, according to the analyst. Meanwhile, McKechnie said, he expects further developments in Broadcom’s relationship with Nokia in HSDPA, giving that chip vendor a shot at providing future-oriented technology.