Ericsson AB (ERICB) is betting third time’s the charm for its mobile-phone comeback.
The Swedish wireless pioneer has come up with a strategy to share in the success of Apple Inc. (AAPL) and Samsung Electronics Co. (005930), with a new $17 stamp-sized chip for transferring data to phones it expects to start generating revenue soon. By making the components rather than its own handsets, Ericsson avoids competing against the giants that dominate smartphone sales.
Still, that will require taking on an even more dominant, if less visible, player in the mobile-phone business: Qualcomm Inc. (QCOM) The San Diego-based company last year had 92 percent of the $4.1 billion market for chips like the one Ericsson has developed, called LTE thin modems, which go into devices to let them connect to speedier fourth-generation networks, according to research firm Strategy Analytics.
“It’s a big market with well over a billion smartphones a year so there’s room for several players,” said Bjoern Ekelund, head of strategy and ecosystem at Ericsson’s modem facility in the southern Swedish town of Lund. “The mobile ecosystem needs multiple players in every part of the food chain.”
While Ericsson helped to define the mobile-phone market with its handsets in the 1980s and 1990s, rising competition in the early 2000s led to it focusing on networks instead. Since then, two efforts designed to keep the company involved in mobile phones -- a handset venture with Sony Corp. and a phone-chip business with STMicroelectronics NV -- both failed.
Today, the modem division Ekelund helps run is still unprofitable, with Stockholm-based Ericsson spending 2.6 billion kronor ($390 million) this year alone to improve designs to appeal to phonemakers. Ericsson is forecasting the endeavor to start bringing in revenue in the second half.
The challenge is to convince makers of high-end smartphones to award some of the business now claimed by Qualcomm to Ericsson instead. Qualcomm is benefiting from early investments to broaden its modem portfolio, said Sravan Kundojjala, an analyst at Strategy Analytics in Milton Keynes, England.
Other attempts to shake Qualcomm’s dominance have proved fruitless. This week, chipmaker Broadcom Corp. said it’s giving up its modem efforts and will either sell or close the unit. In April, Intel Corp. (INTC) reported losses that exceeded revenue in its mobile-chip business.
“It’s going to take a lot to dislodge Qualcomm from Apple,” Kundojjala said in an interview.
Emily Kilpatrick, a spokeswoman for Qualcomm, declined to comment on competition from Ericsson.
Shares of Ericsson declined 0.2 percent to 82.20 kronor at 9:23 a.m. in Stockholm. They have gained 4.7 percent this year.
The bursting of the technology bubble in 2000 led to an overhaul of Ericsson’s structure. First, it merged its phone unit with Sony to create Sony Ericsson Mobile Communications Ltd., and eventually sold its stake in the venture to Sony in 2012 after its devices failed to win over users.
In 2009, Ericsson combined phone-platform assets with STMicro, Europe’s largest semiconductor maker, to create ST-Ericsson. The venture struggled to integrate different modem technologies and customers, such as phonemakers Nokia Oyj (NOK1V) and Sony Ericsson, lost traction with consumers.
The partnership accumulated $2.7 billion in net losses before the companies scrapped it. ST-Ericsson was shut down last year and Ericsson took back 1,800 workers to continue its work and transform the assets into its own modem unit. Last month, Ericsson appointed Robert Puskaric, an 18-year company veteran, to head the division.
Much of the unit’s future now depends on the success of its first product under sole owner Ericsson, the M7450.
“It’s a big challenge, of course, but we’ve been doing modems for a lot of years,” said Flemming Knudsen, a department manager in charge of making sure Ericsson’s modems meet standardization and customer requirements, from his Lund office, where computers hum in several radio-static isolation rooms for testing software for future products.
China Mobile Ltd., the world’s largest phone company by users, certified the M7450 last month, a signal to device makers the modem will work on its network. Other major carriers around the world are also testing the technology, Ericsson says.
Even if orders start to flow in, Ericsson has its work cut out to earn a return for its spending. Kundojjala said that at an average selling price of about $17, Ericsson would need to sell almost 45 million chips to just break even this year, a level he says is “totally out of the question.”
If Ericsson scored a deal to be included in a high-end smartphone from Samsung, the world’s largest handset maker, and some additional contracts, the company is likely to sell a maximum of 35 million modems next year, Kundojjala estimates.
Ericsson’s volumes will also be limited because it is focusing on the higher-margin market of top-end smartphones. Makers of mid-priced and cheaper smartphones tend to buy modems combined with another component, the application processor, to reduce costs, said Roger Sheng, an analyst at Gartner Inc. in Shanghai. That’s something Ericsson decided not to offer.
“It’ll be very difficult for them to gain market share in the mainstream market,” Sheng said.
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