- MediaTek isn't in a position to compete with Qualcomm in terms of modem or application processor performance.
- However, Qualcomm's push into downmarket chips could create serious financial problems for its smaller rival.
- Qualcomm investors need not worry, MediaTek isn't really a threat to Qualcomm.
Qualcomm (NSDQ:QCOM) has been the leader in the smartphone application processors and baseband segments internationally for several years now. But time and again we see discussions about how a stalwart in the same segment, MediaTek, could challenge Qualcomm’s hegemony and disrupt its business going forward. The general premise of such debates is that MediaTek would eventually move up from low and mid-end offerings to gradually enter into Qualcomm’s territory of high-end chips and modems. But is this threat real?
The application processor segment
I’d like to start by saying that Qualcomm absolutely dominates the application processor market right now. Its market share aggregates to around 45%, whilst MediaTek has grown to command a 19% share of the segment over the past few years. But generally speaking, the former has been successful in the mid and high range chip segments and the latter caters to the lower end of the market. This is not indicative of how their market shares would evolve over the next few years, but the information provides us with a background of the type of clientele both companies have grown to serve. You can’t expect large companies such as these to change their clients and start catering to an entirely different category overnight. So, I’m of the opinion that MediaTek would struggle a lot in order to dislodge Qualcomm in the mid and high-end chip segments.
However, it would be relatively easier for Qualcomm to impinge on MediaTek’s turf. The chart attached below illustrates that Qualcomm's CDMA Technology division operates with a lower operating margin compared to MediaTek. But the fact of the matter is that the former can lower its prices further and compete with even lower margins, as it has a highly profitable Qualcomm Technology Licensing (QTL) division to compensate for the shrink in profits. After all, the QTL division generated about 74% of the company’s overall operating profit last year, even though its revenue contribution stood at just 31%. So, theoretically speaking, Qualcomm’s decision to go down-market may shrink its overall margins, but it won’t present the risk of creating a cash-crunch situation. However, such a move would most certainly pose serious financial challenges for MediaTek.
Also, Qualcomm has been upping the ante in the down-market segment with its Snapdragon 400 and 600 series SoCs and this is somewhat reflected in MediaTek’s revenue growth last year. I attached a chart below to put things in perspective; MediaTek’s revenue grew at a blistering pace over the past few years but it came to an absolute halt during FY15. This might suggest that the down-market chipmaker could be reaching a saturation point, beyond which, it would have to rethink its product strategy in order to keep on growing.
Lastly, MediaTek has been trying to crack the high-performance SoC market for quite some time now, but to no avail. After the heating fiasco of Qualcomm's Snapdragon 810, and the eventual reluctance by Original Equipment Manufacturers (OEMs) to use Qualcomm’s SoCs (System on Chip), the chipmaker appears to have returned to its former glory, with its chips being housed in several flagship devices this year. But MediaTek still isn’t found in any of the flagship devices by any major OEMs. This would suggest that MediaTek is still not finding favor when it comes to performance devices. So, any threat to Qualcomm from MediaTek’s entry into the mid and high-range segments would largely be an overstatement.
The baseband segment also offers key roadblocks for MediaTek. For starters, MediaTek’s baseband technology is believed to be a year behind Qualcomm's. Analysts from Nomura recently noted that the chipmaker has failed to produce modems as small as Qualcomm’s, which has given the latter a production cost advantage. Also, any OEM looking to manufacture thin devices, wouldn’t be able to use MediaTek due to the SoCs design constrains, at least not for the time being. This pretty much limits the potential of any incursion by MediaTek into Qualcomm’s territory of high-end chips.
Also, Qualcomm mentions in its annual report that it reserves the right to charge MediaTek’s clients a royalty fee for letting them use its wireless technology. This royalty fee varies from anywhere between 2.5% - 4% depending upon the wireless technologies used. But the crux of it all is that MediaTek SoCs have to always be priced at least 3% to 5% lower than Qualcomm Snapdragons for them to be a financially viable option for any OEM. Otherwise, these handset makers would simply pick Snapdragons due to the cost advantage. This would have a particularly significant impact on MediaTek if at all Qualcomm decides to go all-in on the low-end segment. Quoting from Qualcomm's FY 2015 Annual Report:
"Separate and apart from licensing manufacturers of wireless devices and network equipment, we have entered into certain arrangements with competitors of our QCT segment, such as Broadcom and MediaTek. A principal purpose of these arrangements is to provide our QCT segment and the counterparties certain freedom of operation with respect to each party’s integrated circuits business. In every case, these agreements expressly reserve the right for QTL to seek royalties from the customers of such integrated circuit suppliers with respect to such suppliers’ customers’ sales of CDMA-, WCDMA- and OFDMA-based wireless devices into which such suppliers’ integrated circuits are incorporated."
And lastly, the 5G standard is expected to come up in the next 4-5 years. If Qualcomm wins the race and develops enough patented IP to standardize its wireless standards, it could gain a massive edge over MediaTek in terms of modem technologies. MediaTek would be left playing catch-up all over again.
Putting it all together
MediaTek may have grown at a rapid rate over the past few years, but I’m of the opinion that it has reached a saturation point, where it would have to rethink its product strategy in order to keep on growing. Until then, I don’t think MediaTek is any threat to Qualcomm in both the baseband and application processor segments.
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