Qualcomm and NXP look to challenge Broadcom in networking
In a previous article regarding Broadcom’s $100+ billion hostile takeover offer for Qualcomm, I argued that Qualcomm should expand more aggressively if it hopes to rebuff the attack. Now it appears that Qualcomm is looking to not only be more aggressive but also to challenge Broadcom head-on.
At its CES 2018 press conference, Qualcomm discussed a strategy that expands its Serviceable Addressable Market (SAM) from $32 billion in mobile to over $150 billion in several key growth markets, including RF ($20B), automotive ($16B), IoT and security ($43B), data center ($19B), mobile computer ($7B), and networking ($11B). Qualcomm is already a leader in mobile and looks well positioned for 5G with an expansion of its smartphone footprint into RF. With the addition of NXP, Qualcomm will have a strong position in automotive, IoT and security. Qualcomm is still a new entrant into the server and PC segments with Arm-compatible platforms but has received a high level of support from Microsoft and hardware OEMs. The most interesting area for Qualcomm, however, is networking because Broadcom is a leader in networking chipsets.
Qualcomm's strategy for revenue and SAM growth
The reason why networking is so important to these major semiconductor companies is that it represents one of the highest potential growth rates and profit margins in the electronics industry. The combination of new networking technologies, especially those in 5G, and the expansion of connected and intelligent solutions commonly referred to as IoT requires a high investment in new networks that will be denser and more complex. Qualcomm estimated its SAM of the networking market at $11 billion by 2020, but TAM figures are much higher and are likely to grow at double-digit growth rates. For semiconductor vendors, some of the highest growth rates are for devices at the edge of the network, where profit margins are lower, but some of the industry’s highest profit margins in the core of the network, because of the specialized nature of the chips required. The potential in the core network was one of the reasons for Avago’s acquisitions of Broadcom (now referred to as Broadcom) and Intel’s acquisition of Altera.
Qualcomm and NXP are not new to networking. Qualcomm is a leader at the edge of the network, including solutions for cellular base stations on on-premise solutions, such as small cells and WiFi routers. Qualcomm has invested in networking in recent years through acquisitions, such as the acquisition of WiFi chipset provider Atheros. As a result, Qualcomm has a leadership position in enterprise access points (APs), home retail, carrier solutions and WiFi mesh. NXP inherited the Digital Networking Group focused on communications and data center networking through its acquisition of Freescale. It was widely thought that NXP would divest this group because of a lack of synergy with NXP’s traditional markets and applications, but it has not. However, NXP and Freescale have not invested in networking to the same level of its competitors. Despite this lack of investment, the Digital Networking Group is still well positioned to succeed, especially when combined with Qualcomm’s networking and server groups. In addition, while Qualcomm did not indicate any acquisition in networking, the company’s emphasis on this segment suggests that it may be likely. There are other companies that could enhance Qualcomm’s networking position, but I would rather not feed the rumor mill just yet.
Qualcomm and Broadcom have two drastically different investment strategies. Both companies invest through acquisition, but Broadcom invests only enough in R&D to maintain its market position while Qualcomm invests in R&D at one of the industry’s highest rates to aggressively stay ahead of its competitors and to enter new markets. While R&D investments can often take five to ten years to provide a return, this higher R&D investment could give Qualcomm and edge over Broadcom in new networking areas, such as mesh networks and 5G.
Qualcomm could offer to sell these networking assets to Broadcom in exchange for dropping the acquisition, but that appears unlikely given that Qualcomm’s greatest value is in the company’s wireless IP portfolio (the Qualcomm technology licensing division). As a result, it appears that Qualcomm is looking to directly challenge Broadcom in the networking chip market, setting up an additional battle between the two companies. As Qualcomm management looks for new defensive strategies against Broadcom’s hostile takeover and developing growth strategies for the future, networking should be a key segment. However, two events are critical to Qualcomm’s future – closing the NXP acquisition and the annual stockholder’s meeting on March 6, where Broadcom hopes to replace some of the board members. The sooner the NXP deal closes, the better positioned Qualcomm will be to execute on its growth strategy.