Will sell Alpine processors, from its Annapurna acquisition, under its own brand for WiFi routers and other equipment
Ever since it broke out of its retail model to make its own mobile devices, there has been speculation that Amazon would go a step further and create its own chips, achieving Apple-style control over its designs and costs. However, the failure of the Fire Phone seemed to put paid to such plans – until now, with the news that Amazon will indeed sell its own processors, but to third parties rather than its inhouse gadgets.
The company will go up against Broadcom and others with chips for WiFi routers, as well as media streaming devices, low power servers and other portable or home electronics equipment. Its products are the result of the acquisition, a year ago, of Israeli fabless chip provider Annapurna Labs, for a reported $350m. That firm already has some commercial products, with customers including Asustek and consumer WiFi vendor Netgear.
Annapurna’s Alpine chips are ARM-based and fall neatly within Amazon’s philosophy of packing performance into a low cost package in order to drive market share, even at low margins. The chips integrate up to four processor cores and multiple networking options – though not currently cellular. They also come with hardware development kits so that customers can modify them for specific products.
Becoming a merchant chip provider is an unusual step for Amazon, which more commonly buys hardware firms in order to use their inventions inhouse, as it did when it bought warehouse robotics specialist Kiva Systems. The purchase of Annapurna was widely assumed to be connected to Amazon’s own cloud data centers, and a move to improve its performance and economics by controlling its own processor architecture – an approach also taken by Google and other web giants.
Of course, that may still be part of the plan for the acquisition, and the current plan may be a tactical move to generate revenues from the investment in order to sweeten the pill for investors, some of which have been critical of the way that Amazon’s huge technology developments hit its profits.
Annapurna Labs was founded in 2011 by Avigdor Willenz, previously founder of chip design company Galileo Technologies, which was acquired in 2000 by Marvell for $2.7bn.
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With Qualcomm conducting a strategic review, under pressure from activist investor Jana Partners to break itself in two, there is plenty of speculation about the likely outcomes.
Some believe that, if the company does split its licensing and chip technology businesses (see Wireless Watch August 23 2015), the latter would become prey for an acquirer, probably Intel, and so continue the ongoing wave of M&A among semiconductor firms.
Reuters calculates that the Qualcomm chip business would be valued between $30bn and $40bn and could attract Intel as a way, finally, to achieve a strong position in the wireless market. Other analysts speculate that the division could be a target for Samsung, or for a Chinese group (despite the likely US government blocks).
But it remains true that, without the licensing arm, the chip unit is far less valuable than it currently is. It would be deprived of the profits from the patents royalties, which help to fund Qualcomm's massive investment in R&D, which in turn helps the chips to remain at the cutting edge.
Qualcomm itself is thinking in terms of being the acquirer, not the prey. CEO Steve Mollenkopf told Bloomberg: "Qualcomm is very likely to be some form of actor in the consolidation of the semiconductor industry … The timing of which is always the debate." The company will look at acquisition opportunities as part of its strategic review process, he said.
While not identifying possible targets, he said Qualcomm wants to expand outside its traditional handset sector into growth markets like connected cars and healthcare. It has already made substantial developments in these areas but could accelerate the ROI with an acquisition.
He also noted that the firm is better placed to make a major purchase now it has settled its antitrust lawsuits in China, bringing greater predictability to its revenues there. "It's an interesting time to be a scale player in the semiconductor industry, particularly from a position of strength," Mollenkopf said. "We've had strategic flexibility, but it's important that you have your home business well structured for the future first."
Among recent chip acquisitions are Intel's of Altera, NXP's of Freescale, and Avago's of Broadcom, leaving limited options in the top tier for Qualcomm. Nvidia, or even the combined NXP/Freescale, might be targets, speculate Wall Street analysts.
BY CAROLINE GABRIEL
Despite exit from cellular basebands, high end smartphones are still its biggest growth driver, thanks to WiFi
Broadcom may have failed in the smartphone modem market, but the growth in high end handsets is still driving its growth, along with its traditional broadband access offerings. However, while the smartphone segment is proving more resilient than many analysts predicted last year - also boosting ARM in the last quarter - it is increasingly hard to squeeze more profits out of it as the sales pattern shifts to emerging markets and featurephone upgraders.
Broadcom delivered solid results for its first quarter, and predicted a return to more significant growth in the current Q2. Its Q115 revenue was $2.06bn, up 3.7% year-on-year, though down 4% on the last quarter of 2014. Connectivity and other chips for high end smartphones were the most significant contributor, said the company, along with broadband access products. Those two categories together delivered a 13% year-on-year increase in revenue.
Net income was $209m, which was sharply down on $390m in Q414 but up on the year-ago figure of $165m.
In a preliminary statement on its second quarter, Broadcom said it expected to return to sustained growth and to report $2.1bn in Q2, just about meeting Wall Street predictions. The exit from the lossmaking modem business is helping to improve profits and reduce expenses.
"Our connectivity business continues to strengthen with two sequential quarters of year-over-year revenue growth [driven by] the ramp of new highly integrated products such as a location hub…and significant customer interest in 5G WiFi chips," Broadcom CEO Scott McGregor said.
He also singled out small cells as a source of future growth - the firm acquired one of the pioneers of small cell SoCs, Percello, back in 2010. This could be taken as a sign of long-sightedness, though much of Broadcom's success has been based on its excellent sense of timing, entering markets just as they are about to explode (as it did, spectacularly, in 802.11g WiFi), so it may be more likely that the firm expected small cells to gain volume more quickly than they did. Now, however, the market really is seeing mass deployment, especially in homes, and Broadcom should be able to profit from that.
Its modem acquisitions have, of course, proved to be complete miscalculations, rare at Broadcom. Initially it bought former WiMAX baseband specialist Beceem, then added Renesas Mobile (itself based around its parent's acquisition of Nokia's inhouse modem business). Only months after the second deal, however, Broadcom gave up hope of stealing significant share in Qualcomm's heartland and in July 2014 said it had decided to exit, laying off about 2,500 people and taking on restructuring charges of $230m spread over the ensuing 12 months.
At the time, McGregor sought to cheer up investors by showing them how Broadcom
would look "when the baseband exit is in the rearview mirror", promising growth (above the sector's overall rate) in every other major area of activity, and "a market lead in chips for DSL, cable, satellite and fiber".
Three quarters later, shareholders can see some signs of that upbeat outlook coming true. Much of the $100m attached to the baseband business actually stayed within the company, said Broadcom, as baseband partners chose to continue working with the firm on the communications side (WiFi, Bluetooth, GPS and so on). "The theoretical worse case did not materialize, and we've grown since then," McGregor said.
Despite relinquishing the modem slot, smartphones remain important to growth, with key drivers including the uptake of 802.11ac and 2x2 MIMO WiFi in high end phones, with the adoption curve particularly sharp among Chinese OEMs.
"You used to think of phones in China in the low and mid-range, but now Xiaomi, Huawei, and Lenovo are focusing more on the high end market. There is an increased opportunity in those customers. They really want the better specs they get from our products," McGregor told the Q1 analyst call.
Broadband revenue was primarily driven by pay-TV, upgrades to video cells, set-top boxes and the spread of GPON networks in China, said the firm.
"If you want to design wins today you have to have leading products with HEVC and 4K….and Broadcom was first there with that technology," McGregor said.
This reflects some of the shifts of emphasis which Broadcom announced in the wake of its cellular modem decision. It said at the time that it was leading the world in HEVC Ultra-HD set-top box chips, with McGregor claiming that MSOs and their set-top providers were all heading down that route in time for 2015.
Another important move is from 10 Gigabit to 25 Gigabit Ethernet for the enterprise and with 50 Gigabit on its drawing board (it is applying pressure for the world to standardize on its approach).
The network infrastructure business is also in a buoyant phase, with revenue up 6% year-on-year to $631m, largely driven by data center switch-chips.
BY CAROLINE GABRIEL
Around the turn of the year, Samsung was forced to make some bold statements of direction as the harbingers of doom leapt on the declining growth and market share in its most important business, smartphones. It indicated that it would put more funds and focus on other revenue streams, particularly chips and displays, and the former strategy already looks to be having some effect.
The mainstay of Samsung's chip operations is memory, but it also aims to grow its mobile processor and modem activities, and its foundry business. Reports that it will use its own Exynos SoC in more Galaxy S6 models than previously expected (at the expense of Qualcomm) shows the company becoming more self-sufficient, though it also needs to sell the product to more third parties to challenge the leaders, especially if its own smartphone demands fall.
Other reports said that Apple, hard as it has tried to cut its ties to its biggest smartphone rival, is swinging back towards Samsung as the primary manufacturer of its mobile processors. Sources say the latest model, the A9, will mainly be made by Samsung in Korea, and also by its partner GlobalFoundries, a blow to TSMC, which was the main foundry for the A8.
Improving sales of chips and displays are already affecting quarterly figures. According to Samsung's preliminary statement of its first quarter results, those two businesses saw growth, even while the mobile unit continued to contract, leading to an anticipated 30% year-on-year drop in Q1 profits - the sixth quarter of profits reduction in a row (though it was better than analyst estimates). Operating profit for the quarter will be around KRW5.9 trillion ($5.4bn), said Samsung, while revenue should fall by 12% to KRW47 trillion. Full results will be reported at the end of April.
Beneath the depressing headlines, the semiconductor unit will post a profit this year, analysts expect, and in Q1, it is predicted to make sales of 11.1 trillion with operating earnings of KRW2.7 trillion. The display division is expected to report operating profit of KRW450bn, boosted by rising demand for ultra-thin displays for affordable smartphones. The higher end OLED screens are mainly used in Samsung's own high end models.
Operating profit at the consumer electronics division, which includes TVs and appliances, is expected to fall, as are earnings at the mobile unit - likely to post operating income of KRW2.3 trillion on sales of KRW27.1 trillion, according to an analyst poll by Bloomberg. Daewoo Securities said Samsung shipped 81m smartphones in the quarter, up 7% from Q414, and its current quarter should be boosted by the shipment of the Galaxy S6 and S6 Edge from April 10.