Qualcomm shares dipped earlier this week after Google revealed its upcoming Pixel 6 and Pro smartphones will use its own in-house chip. The question is: Does this represent a negative changing tide for the San Diego chip-maker?
Losing this particular Google Pixel business isn’t a big loss for the company. Indeed, Qualcomm shares weren’t down by much – about 1% – and they were back up by Wednesday. Qualcomm was quick to point out that it will continue to work with Google.
“Qualcomm Technologies and Google have been partners for more than 15 years starting with bringing the first Android devices to market,” Qualcomm said in a statement. “We will continue to work closely with Google on existing and future products based on Snapdragon platforms to deliver the next-generation of user experiences for the 5G era.”
However, losing Apple is another matter, and something investors are very much aware of. Sure, Qualcomm has known of Apple’s desires for a long time now. The two companies fought over IPR for years, ending with Apple striking a multi-year licensing agreement with Qualcomm. In 2019, Apple bought Intel’s 5G smartphone chip business, solidifying the idea that it’s only a matter of time before Apple sheds its reliance on Qualcomm.
Several analysts told Fierce they don’t think Google’s moves are going to spell bad news for Qualcomm – at least, not anytime soon. Apple is a different matter.
Overall, “I don’t think in the short term, it’s going to have a major impact on Qualcomm,” said Chetan Sharma, founder and CEO of Chetan Sharma Consulting. “From time to time, different players have tried to come with a competitive offering or with their own chipset. But I feel that Qualcomm is generally a generation ahead of its competition,” whether that be its own customers or a rival like Intel.
The reason Intel could never catch up with Qualcomm is it was “so far ahead” in the system design of chips, thanks to Qualcomm’s heavy investments in R&D. By the time someone comes along to match them in price and performance, “they’ve already moved on,” Sharma said.
“Obviously, they can do a better job integrating it with Android” at the software level, but from a pure hardware chipset level point of view, “I don’t think Google can match Qualcomm” unless the strategy changes, Sharma said.
Pixel devices tend to sell in relatively low volumes, so it’s not a big loss to Qualcomm the way Apple will be. Apple will definitely move to its own integrated SoCs with its own cellular baseband processors; it’s been looking to do this for many years, and the purchase of Intel’s 5G modem business will make it easier to do this, said Phil Solis, research director at IDC.
Moor Insights & Strategy senior analyst Anshel Sag said Google is moving toward a more systematic approach to building a smartphone that includes more control over the SoC. Google has worked with Qualcomm since the first Android phone from HTC and now Google is changing its priorities. “Google moving away from Qualcomm is far more symbolic than it is business-critical,” he said.
“The reality is that Google wants more control over what its SoC costs and design are and it’s likely that Google wants to get more AI performance out of a less expensive chip,” Sag said, noting that if an OEM wants top-tier artificial intelligence (AI) performance from Qualcomm, it’s going to pay a premium for it.
Most likely, this approach reflects Google's desire to replicate the kind of tight integration that Apple benefits from today. Unlike Apple, such a tight integration between the two hasn't really happened before on Android because Google always offered up the operating system and then worked with chip partners like Huawei, MediaTek, Qualcomm and Samsung to make chips for phones, Sag said.
“I would expect that this will have an immaterial impact on Qualcomm's bottom line, especially since Qualcomm will still be inside of the upcoming Pixel 5a, which is actually the most popular of the Pixel devices as its pricing and features hit a sweet spot with Android aficionados,” Sag said.
Preparing for the inevitable?
Sag and other analysts echo the idea that Qualcomm has been diversifying for years and is allowing different business units to grow independent of the smartphone market. “I believe that these are a hedge against losing Apple's business more than Google’s but also an acknowledgement that the smartphone industry has mostly leveled off in terms of growth and that it will mostly be share taking every year rather than significant industry growth,” Sag said.
While it isn't a sure thing that Apple will have a modem ready by 2023, most people expect that to be the reasonable timeline, according to Sag.
However, he said that based on the number of job openings and positions he’s seeing for Apple in San Diego, “I'm not sure they have enough staff on hand at this moment to make that happen. I expect we may see a delay of a year or two, which I honestly expected might be the case because 4 years was the best-case scenario” from when Apple acquired Intel's modem assets for $1 billion.
For now, the biggest competitive threat to Qualcomm seems to be MediaTek, which is “nowhere near Qualcomm” in terms of revenue share, said IDC’s Solis. However, MediaTek has designs to move more upstream to higher-end phones while taking advantage of 5G, he said, while noting that Qualcomm still remains stronger where the average selling prices (ASPs) are higher.
While MediaTek is one to watch, it’s also worth noting that Apple turned to Qualcomm last year when it wanted millimeter wave (mmWave) in its latest line-up of devices, according to Solis. Of course, there are 5G phones that don’t support mmWave 5G, but while low-band spectrum provides 5G coverage and mid-band spectrum is the sweet spot for coverage and capacity, nothing beats mmWave in terms of delivering the kinds of blazing-fast speeds that set 5G apart.
Handset makers could skip mmWave, but as shown last fall, “Apple never wanted to do that,” Solis said. “They wanted to put millimeter wave 5G in all their U.S. phones last year, and the phones coming out in the fall are supposed to support mmWave for many other countries,” even though some of those countries are barely starting to roll out mmWave. Qualcomm has been a big proponent of mmWave, an area where its rivals have yet to catch up, according to Solis.
As for Qualcomm’s aims to diversify beyond the traditional handset arena, Solis agreed that it has made significant inroads in areas like automotive, networks and IoT. In fact, he said, Qualcomm is ”probably going to gain so much more in revenue in these areas where they have an increased focus on … than they’ll lose with Apple.”