As the mobile-handset market goes, so goes the mobile-handset semiconductor market-and right now both areas are going through a period of consolidation that may lead to a significant winnowing of baseband chip suppliers, according to iSuppli Corp. In wireless handsets, numerous smaller players headquartered in China have exited the business during the past few years.

This, coupled with the bankruptcy of BenQ-Siemens, has led to an increasing concentration of market share among the Top-5 mobile-handset OEMs. In 2006, the Top-5 OEMs accounted for 83 percent of global mobile-handset unit shipments, up from 75.6 percent in 2005.

This has led to declining opportunities for mobile-handset baseband semiconductor suppliers.

“Quite a few baseband semiconductor suppliers are now battling for sockets at a dwindling number of handset OEMs,” said Derek Lidow, president and chief executive officer of iSuppli. “With a smaller number of handset OEMs accounting for an overwhelming portion of sales, opportunities for baseband IC suppliers are getting more difficult to come by.”

Meanwhile, the overall mobile-handset market is experiencing decelerating growth. After rising by 20.1 percent in 2006, growth in worldwide mobile-handset unit shipments is expected to slow to 13.1 percent in 2007 and then to 11.6 percent in 2008, according to iSuppli. The annual growth rate will continue to decelerate during the following years as the mobile-handset market becomes more mature due to high penetration rates in the world’s developed regions.

This, combined with a slowdown in handset shipment growth, has led to a deceleration in the growth of the mobile-handset baseband IC market. After rising by 14.1 percent in 2006, global revenue growth will slow to low single-digit percentages in 2007.

Consolidation strikes

Signs of the stresses being exerted on the baseband semiconductor suppliers are appearing as growth opportunities become harder to find. Consequently, staying competitive in the race to supply the five leading OEMs requires increased levels of capital, capability and innovation.

In August, the ranks of baseband suppliers was reduced by one as LSI Logic Corp. announced it would sell off its mobility products business unit to Infineon Technologies AG.

And in September the number of baseband suppliers was further reduced when MediaTek Inc. purchased Analog Devices Inc.’s baseband chip product line.

Another example is STMicroelectronics, the leading supplier of analog handset baseband semiconductors, which has struggled in recent quarters as its revenue growth has stalled. The company achieved revenue of $197 million in the second quarter of 2007, down 10.5 percent from $220 million in the second quarter of 2006.

STMicroelectronics recently was the recipient of a “gift” of 200 engineers from customer Nokia, a gift intended to maintain STMicroelectronics as a viable baseband supplier. This has left the baseband IC business with a handful of players with annual revenues of or on pace to be in the $1 billion range: Qualcomm, Texas Instruments, MediaTek and Freescale Semiconductor.

These players dominate the baseband semiconductor supplier landscape.

This shows that as the mobile handset market is consolidating into a small number of large players, so too is the mobile handset semiconductor space.

Cost pressures

Beyond customer consolidation, baseband chip suppliers face another challenge: rising costs.

With mobile handsets continuing to add features, baseband IC chips are becoming more expensive to develop.

Only a few companies have the margins to maintain development costs in this area. “If a company is doing $1 billion in annual revenue and only making a 25 percent gross margin, it doesn’t have enough money for an enormous R&D team,” Lidow said. “We can see in the financial results of some of the smaller suppliers among the top-tier players that they are getting squeezed by these costs.”

This dynamic is likely to further consolidate market share, resulting in a small number of large-sized baseband suppliers.

Tough choices

It’s clear that the baseband market cannot support all the current players. However, how many players will be left when the current phase of consolidation is over is unclear.

Unless one of the top-tier players buys another supplier of equal size, there’s no one else left to buy. This may set the stage for internecine war among the existing players, leading to market consolidation.

“There’s a clash of titans looming,” Lidow warned.

IP owners becoming attractive

Another area where there may be increased acquisition activity is among the Intellectual Property (IP)-rich start-up community consisting of third-tier 4G (i.e. WiMAX) suppliers as well as some of the leading-edge Radio Frequency (RF) semiconductor suppliers.

“WiMAX chipset supplier Beceem Communications Inc. and RF chip firm Sequoia Communications, which has a compelling 3G architecture, could deliver some added value to a tier-1 OEM that needs help creating some differentiation in its RF section,” said Francis Sideco, senior wireless analyst at iSuppli. “Potential acquirers would be leading second-tier baseband suppliers like Broadcom, Spreadtrum, Marvell and NXP. Making the acquisition now will help position these suppliers for the next wave of market growth in 2010 to 2015, driven by the rise of 4G.”

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