Texas Instruments (TXN), once the leading supplier of baseband chips, has now been relegated to a distant second position. The company’s problems started two years ago when both Nokia (NOK) and Ericsson (ERIC) decided to multi-source their handset chip requirements. TI lost the exclusive agreements it previously enjoyed at Nokia, and management stated that revenue from Ericsson would also decline from $400 million in 2008 to nil by the end of 2009. Another force in play was Qualcomm (QCOM), which has continued to make steady progress.

Baseband is a generic term used to describe the central application processor that controls and handles most of the digital functions within a handset. Baseband manufacturers face the dual issues of a commoditized market and rapidly increasing development costs. This is because, as features are added to phones, the complexity and cost of manufacturing DSPs are further increased.
 
Previously, in the 3G manufacturing process, custom-made baseband chips provided cell phone makers a competitive advantage. But as the 3G production cycle matured, this competitive edge was lost and the demand for standard chips such as those made by Qualcomm became more popular.

Currently, it makes much more sense for a handset manufacturer to go for standardized chips to drive volumes, rather than custom made chips for a more differentiated product. Infineon, Broadcom (BRCM) and Mediatek (the fourth largest player) were the other direct beneficiaries of the change. STMicroelectronics (STM), the third largest player, shifted focus from custom-made to standardized baseband chips and therefore did not lose much on account of the change.
 
TI was the worst affected, both because of the increasing cost and the loss of customers to their second sourcing strategy. Consequently, management announced its decision to sell off the merchant baseband business last year. However, buyers are hard to come by and management finally decided not to sell the business outright, but continue serving existing customers. The business would instead be phased out by 2012.

For TI, the sale makes sense, since it would save $200 million a year. Management is also optimistic about growth in the increasingly crowded analog market. Its OMAP processors are expected to be a great success and one wonders whether they will be integrated into a baseband chip in days to come.

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Read the full analyst report on “ERIC”
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Read the full analyst report on “BRCM”
Read the full analyst report on “STM”
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