The chipmaker is snaring Qualcomm customers before the patent infringement ruling is final, as wireless players scramble amid supply worries
Broadcom (BRCM) has long provided a range of chips for cell phones, such as those that ensure handsets are compatible with wireless Bluetooth headsets. But for years Broadcom has had only a tiny fraction of a more desirable corner of the handset market: so-called baseband chips, the de facto brain of the mobile phone—an area dominated by bigger rivals Texas Instruments (TXN) and Qualcomm (QCOM). That may be set to change, thanks in part to a rancorous legal dispute with Qualcomm that may be luring customers to Broadcom even before the matter is settled in courts.
A recent sign of Broadcom's newfound footing in basebands came May 31, when Broadcom said it and Microsoft (MSFT), the world's largest software company, had jointly created a design center in Taiwan where the companies will develop basebands that run Microsoft's Windows Mobile software. "Several [manufacturers] have been pushing Broadcom and Microsoft to build this development center," says John Starkweather, general manager of mobile communications at Microsoft. He adds that, later this year, a major manufacturer will release a Windows Mobile device based on a Broadcom baseband chip. Neither company would identify the handset maker or say how much it's spending on the design center.
Nokia (NOK), the world's largest cell-phone maker, in August said it will place some baseband chip orders with Broadcom. Samsung (SSGFY), Palm (PALM), and Panasonic (MC) already use Broadcom's baseband chips, and analysts believe Samsung may soon increase its orders. The seemingly sudden interest in basebands from Broadcom may go a long way toward helping Broadcom reach a goal of commanding 10% to 15% of the baseband market by the end of 2009. "We are still very much on target," says Yossi Cohen, senior vice-president and general manager of Broadcom's mobile platform group.
What makes Broadcom, with its puny 1% share, so sure? For starters, Broadcom has used acquisitions to expand in baseband chips, often the highest-priced component in a phone. Currently, more than 1,000 engineers representing at least 23% of its engineering staff are working specifically on baseband research and development. That's a sizable commitment from a company that makes less than 10% of sales from cell-phone chips, with a small fraction of that coming from basebands.
The efforts are starting to pay off. One new Broadcom baseband, based on the so-called EDGE technology used in AT&T's (T) network and others, was demonstrated earlier this year. It's the smallest single-chip product with all major features integrated on the market, says Cohen. Another new chip, running on a different kind of network known as HSPA, or high-speed packet access, integrates many features and can help cell-phone makers shave costs by as much as $15 per handset, Cohen says.
Legal Leg Up
Another big contributor to Broadcom's traction is the company's legal successes against Qualcomm. Over the years, several companies, including Nokia and Texas Instruments, have alleged in court that Qualcomm overcharges on patent royalties, but Broadcom in recent months has gained the most ground. On June 7, the International Trade Commission ruled that Qualcomm is infringing on a Broadcom patent and banned importation in the U.S. of offending Qualcomm chips and phones containing them (see BusinessWeek.com, 6/8/07, "Banned: New Phones with Qualcomm Chips"). That sent carriers and handset makers scrambling, worried about the impact of the decision on their U.S. sales. Qualcomm is appealing the verdict.
There have been other victories as well. On Aug. 13, a U.S. District Court judge in Santa Ana, Calif., ordered Qualcomm to pay double damages of $39.3 million for past infringement of three Broadcom patents. In mid-September, the judge will decide whether to also impose an injunction on production and testing of offending chips and derivative products. And on Aug. 29, a U.S. District Court judge in San Diego will announce sanctions in a different case where Qualcomm was found to have engaged in "aggravated litigation misconduct" and "intentional abuse of industry-standards bodies." Broadcom also has filed claims and complaints against Qualcomm in Europe and South Korea.
Handset makers are looking for second and third sources of baseband chips amid concern their ability to supply handsets to the U.S. and other nations could be impaired because of the ITC decision. Meantime, carriers are fretting over the possible disruption of handset supply. So Verizon Wireless (a joint venture of Verizon Communications (VZ) and Vodafone (VOD)) has struck an unprecedented, multiyear licensing deal directly with Broadcom to circumvent the ITC ban. And analysts believe that, as other carriers follow suit, they will encourage their handset suppliers to use Broadcom's chips.
Seal of Approval
To be sure, Qualcomm and TI aren't betraying worry. "We've had eight consecutive quarters of record shipments, so if our customers are shying away from us, they can't be shying away from us that much," says Terry Yen, vice-president of marketing for Qualcomm CDMA technologies.
Still, Broadcom is gaining a loyal base of customers of its own. On Aug. 8, Nokia named Broadcom as a supplier for its EDGE baseband chips, the largest Nokia business by volume. Orders could be expanded to include other baseband chip technologies. "This has been an extensive technical evaluation done by our teams on relative performance, size, availability, commercial terms," Niklas Savander, Nokia's executive vice-president for technology platforms, said during a call discussing the arrangement. "In that process that we have been running for quite some time, Broadcom came out as the best supplier."
The Nokia seal of approval could help Broadcom win business elsewhere. "All of a sudden, they've got a credible customer, the top wireless handset company," says Will Strauss, founder of Forward Concepts, an electronics market researcher. "That customer said that [Broadcom's chips] were the best. This is going to give them tremendous credibility."