Crowded mobile chip market likely to shrink further

Nokia said recently it would buy phone chips from STMicroelectronics, Broadcom Corp. and Infineon, potentially decreasing the clout of market leaders Qualcomm Inc. and Texas Instruments Inc., Nokia's long-time supplier.

Investors saw the deals as key wins for Broadcom and STMicro as business from the leading mobile phone maker could promise a big enough hike in sales volume to help them shoulder the cost of competing in the cash-intensive chip industry.

Underscoring the need for market scale, LSI Corp said on Monday it would pull out of wireless chips, citing a need for another big handset client besides its main customer, Samsung Electronics Co., and sell that unit to Infineon. There are about 20 makers of baseband chips, the main chip in cell phones.

Some analysts see the openness of cell phone makers to new suppliers as a boon for more small players, with Marvell Technology, MediaTek In2454.TW> and Spreadtrum Communications Inc. potentially standing to win new contracts in future.

But that may mean even bigger hurdles for weaker suppliers. The new deals mean that handset makers will push harder for lower prices and Qualcomm Inc. and TI will have an even bigger incentive to boast about their technology advantages.

"More and more of this baseband market is becoming a high-stakes game, with a high ante to even sit at the table," said iSuppli analyst Francis Sideco. "If (Broadcom and STMicro) start getting a lot of ammunition, it makes it even more challenging for the other guys."

David Wu of Global Crown Capital estimated that a 10 to 15 percent share of the market would be necessary for survival in the mobile phone chip market.

"This business of selling to the cell phone companies is getting very expensive, and fewer companies can economically justify the investment," said Wu.

Last year TI and Qualcomm each had about 20 percent of the mobile phone chip market, according to iSuppli. With roughly 9 percent share, Freescale Semiconductor was next, but it is expected to lose market share as its main client, Motorola Inc., has also added TI and Qualcomm as suppliers.