One of the biggest winners of the mobile revolution has been Qualcomm (NASDAQ: QCOM). The company vaulted past its semiconductor-producing competitors to grab the inside lane providing chips for mobile devices and never looked back. Recently, however, it has started to see some signs that its dominance in the mobile market could be waning.
In particular, the latest new products from Samsung (NASDAQOTH: SSNLF) might well come without any components from Qualcomm, signaling a competitive shift in the industry. This could have big implications for the San Diego-based chipmaker, just as investors are facing the possibility of a year of falling earnings in fiscal 2015 for the first time since 2009. Let's take a closer look at what Qualcomm is dealing with, and what it can do to fight back against Samsung and other rivals in the mobile-chip market.
How Qualcomm built up a mobile empire
For years, Qualcomm has worked hard to solidify its leadership position in the mobile-chip market. By building up a vast storehouse of intellectual property related to 3G and 4G wireless network technology, Qualcomm put itself in a position to profit from both the production of its own chips or licensing out of its technology to third-party chipmakers. Even though the U.S. and other advanced markets have started to evolve beyond existing wireless technology, Qualcomm can still count on selling its chips and technology in many areas of the world that are still catching up to the cutting edge of wireless network capability.
Most of Qualcomm's dominance has come from its strategic decision to look beyond proprietary mobile platforms. By serving several different major producers of mobile devices, Qualcomm can profit from changing trends without running the risk of backing the wrong device maker. As long as mobile customers keep wanting the latest technology in their devices, Qualcomm can rest assured that it will get its share of the profit pie one way or the other.
The Samsung threat
Yet not all device makers have been content to allow Qualcomm to take its cut. In particular, Samsung appears not to have used the Qualcomm' Snapdragon 810 chip in its upcoming Galaxy S6 handset, choosing instead to build out its own proprietary system-on-a-chip processor. Samsung also appears to have built its own modem, RF transceiver, and envelope-tracking chips in the Galaxy S6, locking Qualcomm entirely out of the device.
The news that Samsung is trying to wean itself away from Qualcomm is not entirely new, as at least some of the Galaxy S5 handsets did not include Snapdragon chips from Qualcomm. But the latest news suggests that Samsung has been able to squeeze some additional performance from its 14-nanometer production technology, which has reportedly resulted in a 30% reduction in the size of the Galaxy S6 chip compared to the 20-nanometer counterpart found in the Galaxy Note 4.
Even with the size reduction, early reports suggest that the embedded graphics processor is more powerful than its predecessor. That could give Samsung a huge competitive advantage until Qualcomm can follow suit with improved production technology of its own.
Can Qualcomm fight back?
Fortunately, Qualcomm has some extra ammunition in its arsenal. The company plans to ship its latest Snapdragon 820 chip for mobile devices later in 2015. Some even believe that Qualcomm could earn a spot in the Samsung Galaxy Note 5, which would obviously quash the idea that Samsung is committed to its vertical integration efforts.
Moreover, it is important to realize that Samsung is far from the only player in the mobile-device market. As up-and-coming players rise to challenge Samsung, Qualcomm's neutral position allows it to benefit from their competitive efforts. At the same time, the company can focus its efforts on building next-generation technology to handle future network upgrades, continuing to build on its past success.
Investors in Qualcomm are clearly nervous about short-term headwinds, with the potential loss of business from Samsung making headlines and drawing a lot of negative sentiment for the stock. Still, with its long-term strategy intact, Qualcomm is far from losing its dominance in the mobile industry.
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Dan Caplinger has no position in any stocks mentioned.