Thursday, August 21, 2008

3G iPhone: Implications for the wireless ecosystem.

It's been a while since I posted anything tech related. The new 3G iPhone has been the rage since it's release a month back. Semiconductor Insights, TechOnline, Portelligent, and several others have done a great tear down analysis of the device. (You can catch the TechOnline breakdown here)

Apart from the evolution to 3G and the GPS, the hardware innovation is essentially incremental in nature. I thought it would be interesting to talk about the implications for the handset vendors and the chipset manufacturers. My personal opinion is that the iPhone is a good thing for the chip makers but probably a slight negative for the handset manufacturers.

With 19 chips inside, the iPhone will drive higher margin chips and accelerate Smartphone adoption. Check this link for a detailed picture. While there were no major surprises in terms of design wins, I did expect some of the discrete chips to be replaced by a single one.

Chips: Before the iPhone, the chip makers were in a race to the bottom. Cranking out lower cost chip solutions at the lowest possible price point seemed like a solid differentiating strategy (for the ultra-low-cost market). The smartphone uptick is good because it implies a rush for higher content, higher priced chips.

What do I mean? Most chip providers are essentially in a race against commoditization. With prices for chips and handsets eroding every year, they rely on newer features to maintain their margins. With the upsurge in demand for high-end features like GPS, the chip set vendors should be able to sell higher average selling price (ASPs) chips with fatter gross margins. They can further differentiate themselves on the basis of features like multi-mode solutions, power consumption, multimedia, mobile TV, HD video, GPS/bluetooth integration, etc.

Many carriers are now heavily subsidizing smartphones, which is spurring a strong demand for these devices. This should fuel high-volume shipments in these high end chips. Smart phone IC commoditization is at least a few years away for wireless chip makers. In the near future, expect to see additional features like HD video, mobile TV, and of course the natural evolution to a 4G air interface (LTE/Wimax).

Handsets: The first thing I realized when I heard that the iPhone would sell for $200 in the US was that the handset margins were headed down. The $199 price tag points towards handset price erosion for manufacturers like Nokia and Samsung. While carrier subsidies should offset some of the price declines, I remain skeptical about the bargaining power non-Apple vendors might have. The subsidies could also be quid pro quo in nature, like the Apple deal showed (Apple discontinued the unique revenue sharing model it had with AT&T in lieu of the price subsidy). Feature rich 3G phones have historically sold for high prices, and this would be difficult going forward.

Some of the components like memory are probably a couple of quarters away from their cyclical bottom, and it’s unlikely the semiconductor component pricing would decline like it has in the past. A higher silicon content with healthy component pricing points to a higher bill of materials, squeezing those handset margins. Note that some of these negatives are offset by higher volumes (regular demand elasticity).

In conclusion, I view the iPhone as a strong positive for the chip makers but probably a slight negative for the handset vendors.