Seeking Alpha
Long/short equity, deep value, special situations, growth at reasonable price
Profile| Send Message|
( followers)  

The wild excitement over the Apple (NASDAQ:AAPL) iPhone 5 launch overlooks the inevitable endpoint for smartphones. That the premier smartphone innovator has apparently run out ideas for Gee Whiz functions for new products would indicate that the smartphone has entered the very early stage of "calculator commoditization". Oh sure, there are enhancements but no game-changing, must-have new features.

The feature set for smartphones has started to become universal. When that happens in the world of electronics, the focus turns to cost cutting and, of course, price cutting.

The bill of material cost on the iPhone is around the $200 mark. That number will approach $150 in six months. In two years the cost to build a universal smartphone with the features of the Apple iPhone 5 will be $100.

The price of a full function smartphone is about $600 today, with about 2/3 of that subsidized by the service providers.

In the "calculator phase" the internals of these devices continue to become more and more integrated in the name of saving pennies and the price comes down at a higher rate than the unit volume can increase. The total market, in dollars, begins to shrink while unit volume continues to grow.

The end point of all of this is a full functioned smartphone that costs a total of $200, or less. The service providers can now give the phone away for a two year contract, or the consumer can simply buy the phone and shop for the lowest cost service he can find.

Who loses? Apple will certainly lose the astronomical margins they now have. The suppliers who succumb to the relentless increase in integration include names like Broadcom (NASDAQ:BRCM), Cirrus Logic (NASDAQ:CRUS), Texas Instrument (NASDAQ:TXN), Marvell (NASDAQ:MRVL), and others will lose. Even Qualcomm (NASDAQ:QCOM) will lose the baseband business to digital techniques. Samsung will be in a similar situation, with their vertical structure either helping or hurting them. Most other component suppliers will be squeezed on price to the point of marginal profitability.

Who wins? The consumer wins big time, he will have a much lower cost of service and hardware. He will have more flexibility in choice of service provider. The service providers will win to the extent that they will not have to subsidize the $200 Universal Smartphone. As the main beneficiary of continued silicon integration of the internals of the phone, Intel (NASDAQ:INTC) wins. Intel wins because they will eventually integrate everything except the couple of MEMS (micro electromechanical systems) devices (compass and three axis gyroscope). Intel will eventually displace a great deal of the Qualcomm business through the direct digital radio efforts now going on. Micron (NASDAQ:MU)/Intel, in joint venture, will win through the eventual use of Phase Change Memory ((NYSE:PCM)) to replace all DRAM and FLASH memory.

Of the eventual $100 BOM cost in the "Universal Smartphone," over half will be semiconductor content with 90% of that going to Intel because Intel's manufacturing advantage is four to six years ahead of the next best in class.

The eventual suppliers of these Universal Smartphones could be yet another list of names that not many would recognize today.

Source: Who Loses, Who Wins From The Inevitable Endpoint For Smartphones?