Sunday, November 14, 2010

Qualcomm's next monopoly

Qualcomm was among the first Fortune-500 backers of the Android alliance when it was announced by Google three years ago this month. Qualcomm won a design win for the first Android phone, and has aggressively invested to leverage its local ecosystem to develop and port technologies to Android.

Paul Jacobs seems to understand embedded software more than most cellphone CEOs — which is why his former COO rationalized Motorola’s platform strategy and seems to be turning the once-great US maker.

Qualcomm’s early efforts seem to be paying great dividends. A report by PRTM in Forbes found that of 57 Android-based handsets they studied, 77% used Qualcomm chipsets.

The PRTM analysts provided specific evidence of the long-predicted commoditization of handset makers by the Google OS. There are lots of handsets running the same software, making it nearly impossible for any handset maker to use software to achieve differentiation (as Apple has).

However, they go further in predicting Qualcomm-Google monopoly rents:
[M]ost of the handsets–77% of the sample–are based on Qualcomm chip sets. Seasoned observers may find this ominous. Over the years, Microsoft and Intel have captured far more value than the makers of the PCs. Will “Quadroid” become the new Wintel?
This is not just Android: Qualcomm has enjoyed increasing market share in smartphones.This part of a broader shift of revenues and profits from patent licensing to an increasing dependence on chip sales.

However, unlike Microsoft or Intel, Qualcomm has always faced competition in its chip business (if not patent licensing). If Apple can get into the smartphone/tablet CPU business, then Qualcomm will have other firms offering ARM cores — not to mention yet another effort by its arch-rival Intel to enter the mobile business.

So the recent trend is positive for Qualcomm’s chip business — and even if it loses some share points, revenues will grow along with Android’s explosive unit share growth. At the same time, its enviable margins will invite further entry, whether by chip makers or handset makers.

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