Smartphones (Not PCs) Provide Growth Opportunities for Semiconductor Vendors

Linley Gwennap, Principal Analyst, The Linley Group

Even though the overall cell phone market is expected to drop 10 percent this year, smartphone shipments should rise, bucking the recessionary trend. This growth is driven by the popularity of the Apple iPhone and similar products such as the BlackBerry Storm, LG Dare, Nokia 5800, Palm Pre and Samsung Instinct.

Smartphones have quickly become an important platform for accessing the Web. As Figure 1 shows, smartphone shipments are projected to reach 364 million units by 2013, about the same as the number of PCs shipped, representing a compound annual growth rate (CAGR) of 20 percent from 2008 levels. This growth has attracted not only leading handset vendors, but also PC vendors to the smartphone market. Acer, Asustek, Dell and other PC makers are now offering or developing cell phones. In addition, PC chip suppliers Intel and NVIDIA are now targeting smartphones. These vendors hope that their experience with low-cost manufacturing, software ecosystems and Web support will give them an advantage.

Figure 1. Smartphone Forecast

Source: The Linley Group

For the market to achieve these growth projections, the cost of smartphones must continue to fall. Although the iPhone is typically sold for $199, this price is heavily subsidized by monthly data fees; the actual price without subsidies is $599. The solution to the cost problem lies in new semiconductor products that greatly reduce the number of components required to build a competitive smartphone.

The Disappearing Application Processor

Smartphones have created a new category of semiconductor product called the application processor (AP), which runs the operating system and application software. The AP also integrates multimedia hardware, allowing it to decode audio and video streams in real time and to perform image processing for the phone's camera. Products of this type include the Open Multimedia Application Platform (OMAP) family from Texas Instruments (TI) and Marvell's PXA family. 2008 AP revenue totaled $1.2 billion, according to The Linley Group.

The iPhone and most other smartphones include both an AP and a baseband (BB) processor, which handles the cellular protocols. A standard cell phone does not require an AP, as most BB processors include a small central processing unit (CPU) capable of running a simple user interface. The requirement for this extra chip increases the cost and size of smartphones.

To address this problem, several vendors are integrating complete APs into their BB chips. These AP+BB devices perform all the main processing functions of a smartphone, combining cellular, operating system and multimedia support into one chip. Examples of these products include Qualcomm's MSM7000 family, the SH-Mobile G series from Renesas, Broadcom's BCM21551, Marvell's Tavor and ST-Ericsson's forthcoming U8500.

Smartphone makers are quickly adopting these new AP+BB processors. HTC uses MSM7000 chips in all its new smartphones. RIM uses an MSM7000 chip in the BlackBerry Storm and Tavor in the BlackBerry Bold. The SH-Mobile G series appears in many Japanese smartphones. And Nokia, the number-one smartphone maker, has announced that its future devices will use either the U8500, BCM21551 or MSM7000 processors.

A few chip vendors are bucking this trend. TI, which recently sold its cellular BB business, will continue to offer standalone APs. TI is the leading AP supplier today due to its relationship with Nokia, but as that customer switches to AP+BB products, TI's position will diminish. Among the major BB makers, only Infineon has no plans to produce integrated AP+BB products.

Apple, which currently uses a custom Samsung AP and Infineon BB processor, is developing its own AP using the former PA Semi processor design team. Once this design is complete, Apple is unlikely to purchase third-party APs.

As the leading smartphone makers convert to AP+BB processors, the recent rapid growth in AP shipments will stagnate and could even reverse. AP vendors, particularly those that lack AP+BB products, are seeking new markets for their products. Due to their low cost and high integration, APs are also used in personal navigation devices (PNDs), personal media players (PMPs), mobile Internet devices (MIDs) and other mobile devices as well as some stationary devices, including digital photo frames and Internet protocol (IP) cameras.

The Connectivity Combo

In addition to cellular, smartphones provide connectivity features such as Bluetooth (for headsets), Wi-Fi (for alternative Internet access) and Global Positioning System (GPS). FM radio is also popular, both for listening to broadcasts and for transmitting stored music to a nearby stereo system.

Figure 2. Simplified Diagram of Current Smartphone

Products such as the iPhone 3G require a large number of chips, raising the system cost.

As Figure 2 shows, most smartphones today use a separate chip (or chipset) for each of these connectivity functions, requiring four or more chips to implement them all. In another integration play, however, semiconductor vendors, such as Broadcom, CSR and TI, are combining two or even three of these functions into a single device known as a combo chip. The most popular combinations are Bluetooth+FM and Bluetooth+FM+GPS. Future products are likely to add Wi-Fi to the mix.

Figure 3. Simplified Diagram of Next-Generation Smartphone

Future systems will use highly integrated processors and connectivity products to reduce chip count.

As Figure 3 shows, an AP+BB chip and a combo connectivity chip can greatly reduce the chip count in next-generation smartphones. The good news for consumers is that the growing availability of these chips will reduce the cost of building smartphones, allowing carriers to reduce both the upfront and monthly fees for these devices. These new chips can also reduce design cycles (due to the pre-integrated solution) and extend battery life. Phones that use these integrated chips will be smaller and thinner than current devices. These improvements will further boost the popularity of smartphones.

Smartphones Are the New PCs

As Apple has clearly demonstrated with its iPhone and App Store, the smartphone has become a computing platform that can perform a wide variety of tasks, constrained only by the imagination of software developers. In this way, a smartphone is no different from a PC. The smartphone is, of course, limited by its screen size and CPU performance, but it is also empowered by its portability and unique interfaces, including a touch screen and motion sensors. For example, a PC can provide directions to a destination, but a smartphone can use GPS to tell whether its user is on course to that destination.

Because of their different strengths and limitations, PCs and smartphones are complementary; that is, phones will not replace PCs. From a vendor's perspective, however, PCs are a mature technology offering little growth or differentiation. Smartphones, however, are evolving rapidly, and shipments are soaring. These changes create opportunities for new vendors of both smartphones and the chips that go into them. Seeing these opportunities, many new vendors are targeting the smartphone market.

PC vendors, however, must change their stripes to succeed in smartphones. The PC platform changes slowly, and only when Intel wants it to. Smartphones are all about innovation at both the chip and system level; to be successful, phone makers must not only deliver the newest technology, but must also follow the latest fashion trends. PC makers with me-too phones will struggle to gain business from carriers and consumers.

Smartphones are still phones; they must be validated to work with carrier networks and certified to meet government standards. New vendors that lack experience in the phone market may struggle with these tasks, even if they work with an established BB chip vendor.

Smartphones also have an extensive software component. Whereas PC makers simply license Microsoft Windows, a smartphone might use one of several operating systems, including Windows Mobile, Symbian or a Linux variant such as Android. The two most popular smartphones in North America, the iPhone and the BlackBerry, both use proprietary operating systems to gain an advantage in the market. Smartphones also ship with a set of basic applications (e.g., calendar, camera, media player) and an application programming interface (API) to support third-party software. Processor vendors must validate their products with multiple operating systems and often supply some basic software.

For these reasons, growth in the smartphone market will likely be driven by today's leading vendors, with an increasing role played by established phone makers such as Samsung, LG and Sony-Ericsson. PC makers and other new entrants will be hard-pressed to master the complexities of the smartphone market.

Chips for PCs Are Different

Seeking growth, PC chipmakers are also trying to enter the smartphone market. Intel, for example, is promoting its new Atom processor for MIDs, which are a kind of overgrown smartphone, and for true smartphones in the future. NVIDIA has developed low-power versions of its 3D graphics chips that are used in phones, and it also offers a complete AP called Tegra.

The advantage of using PC components in smartphones is that they make it easier to port software from the PC. As smartphones are more frequently used to access the Web, they need to run a wide variety of Internet plug-ins. Because all APs today use the ARM instruction set, they cannot run some plug-ins and therefore can't display some Web pages. In theory, an Atom-based smartphone could provide the same browsing experience as a PC.

However, the plug-in gap is narrowing. As smartphones become more prevalent, software vendors, such as Adobe, are porting Flash and other popular plug-ins to the leading ARM-based platforms. Although some gaps are likely to persist, ARM-based vendors expect their solutions will be good enough for most users.

PC chipmakers must adapt to the different needs of the smartphone market. Chips for these devices must be much lower in cost and in power consumption than chips for PCs. With the exception of Apple, companies that buy smartphone chips are largely different from those that buy PC components, so breaking into these new accounts will be difficult and time-consuming.

Mastering the Market

The fast-growing smartphone market is an attractive target for semiconductor vendors. To succeed in this market, however, a vendor must have a broad technology portfolio so they can deliver highly integrated chips for next-generation smartphones. These vendors must also provide basic software and validate their processors with leading third-party operating systems and applications. Finally, they must rapidly improve their products' CPU performance, multimedia capability, connectivity features, power, size and cost. Vendors that master this complex set of trade-offs will be rewarded with high-volume design wins.

About the Author

Linley Gwennap is the founder and principal analyst of The Linley Group, and coauthor of "A Guide to Wireless Handset Processors" and other reports. He is a former editorial director of Microprocessor Report and spent eight years at Hewlett-Packard designing and marketing reduced instruction set chip (RISC) CPUs. He earned a B.S.E.E. degree from Yale University. You can reach Linley Gwennap at linleyg@linleygroup.com.

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