With the post-PC era upon us and smart mobile devices seeing strong adoption, Qualcomm (NASDAQ:QCOM) is looking to increase its stake in the ongoing mobile revolution by developing new low-power display technologies. Having initially flirted with a MEMS-based Mirasol display technology that did not quite meet expectations (Qualcomm decided to reduce its investments in the field in July), the semiconductor giant is now looking to accelerate the development of another MEMS-based technology known as IGZO through a $120 million investment in Sharp.
The first part of the investment, which will be made in two tranches, was completed on December 27th and gave Qualcomm more than 2.6% stake in the struggling display maker for a cash infusion of $60 million. Qualcomm will invest a further $60 million for a similar stake next year in a transaction that is likely to make it the single largest shareholder in Sharp. Apart from helping Sharp remain in business, Qualcomm is hoping that the cash transaction will accelerate the commercial release of a low-power display that utilizes both Sharp’s IGZO TFT and its own MEMS shutter system and ward off competition from rivals such as Samsung (OTC:SSNLF).
Developing a new low-power display technology for mobile devices will not only help drive the adoption of smartphones and tablets, but also see Qualcomm benefit from an increase in sales in its core mobile chipset business. Qualcomm currently is the dominant player in the mobile chipset business with about 65% share of the burgeoning CDMA device market. With smartphones seeing strong adoption, the mobile app processor market grew strongly by 61% in the first half of 2012 over the same period last year. We estimate that the rapidly growing mobile chipset market and Qualcomm’s dominance in the segment is helping it derive more than 40% of its value from the mobile chipset business.
Sharp Will Help Qualcomm Ward Off Rivals
Qualcomm’s chipsets currently find a place in two of the most dominant mobile ecosystems worldwide, Android and iOS. While Apple (NASDAQ:AAPL) uses Qualcomm’s baseband chipsets in both the iPhone and the iPad, many Android smartphones use Qualcomm’s stand-alone as well as baseband-integrated chipsets. Android and iOS account for a combined 85% of the market, but the near-duopoly could break in the coming years, with Microsoft (NASDAQ:MSFT) making a reinvigorated assault on the mobile space with its Windows Phone 8 OS. But with Microsoft going with Qualcomm as the sole supplier of chipsets for WP8 handsets, Qualcomm has that base covered as well.
Also, with most of the high-end flagship smartphones supporting LTE, Qualcomm remains the LTE leader by quite a margin. Not only are its LTE baseband chipsets mature – being three generations old already, with a new 28nm technique that conserves space and power – they also come integrated with its dual-core Snapdragon app processors. This LTE leadership has served Qualcomm well, and has thus far kept competitors from stealing market share. For example, Samsung’s Galaxy S III and HTC’s One X series had to be launched in the U.S. with a Snapdragon core, since rival chipsets did not play well with Qualcomm’s LTE basebands.
However, competition is slowly catching up, with Nvidia (NASDAQ:NVDA) recently announcing a LTE chipset that it plans to integrate into Tegra in 2013 and Samsung making its Exynos chipsets LTE-compatible as well. Helping Sharp remain in business will therefore help Qualcomm mitigate the impact of direct competitors such as Samsung growing in prowess in the device market. Since Samsung manufactures chipsets such as the Exynos line that it is increasingly looking to incorporate in its own smartphones, its growing market share in the mobile market has a direct impact on Qualcomm.
Qualcomm has so far managed to avert that threat with its technological supremacy in the baseband market, but going forward, it needs partners in other mobile-related domains such as displays. If the Sharp’s IGZO technology catches on, Qualcomm will be able to increase adoption of its Snapdragon processors by closely tying the use of such screens with its chipsets and keep competition at bay.
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