1 Reason Apple Inc.s Low Smartphone Market Share Benefits Chip Suppliers

By Markets Fool.com

Apple just posted a record quarter in terms of iPhone unit sales, revenue, and profit. Apple's focus on the high-end of the smartphone market with its iPhone lineup allows it to rake in significant revenue and, more importantly, profit share in the smartphone market. This is great for Apple stockholders, and I don't see Apple's grip on the high-end loosening anytime soon.

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It has also been widely noted that Apple has, relatively speaking, just a small portion of the overall smartphone market in terms of units. Research firm IDC claims that iOS devices made up just 11.7% of smartphone sales in the third quarter of 2014, while Android devices in aggregate made up 84.4% of the market.

Let's explore why this dynamic is good for smartphone chip suppliers, particularly in the applications processor and baseband chip markets.

The benefit for Qualcomm, MediaTek, and Intel
If Apple dominatedunit share in the world of smartphones, chip companies like Qualcomm , MediaTek, and Intel would struggle. Apple designs its own applications processors, which means that the served addressable market for these chipmakers' processors is reduced by Apple's unit share.

Qualcomm enjoys the stand-alone baseband and RF transceiver spots in the iPhone, but the company pointed out on its most recent earnings call that stand-alone modems (known as "thin modems") tend to carry lower average selling prices than full Snapdragon system-on-chip platform solutions. Even though Qualcomm is an Apple supplier, I'm sure it would like to see some of its other, non-Apple customers grow and gain share, as those customers often buy full Snapdragon platforms.

Qualcomm's competitors, such as MediaTek and Intel, also benefit from a market where Apple has relatively low unit share and the market is fragmented into many smaller, less powerful and profitable players. They still have to compete with Qualcomm for designs, but at least that market is open to them, unlike the Apple iPhone applications processor spot.

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How much of the market is truly open to merchant chip vendors?
Let's look at this from another angle by asking an interesting question from the perspective of chips: How much of the smartphone market is actually open to merchant applications processor vendors? According to IDC, in the third quarter of 2014, worldwide smartphone market share breaks down as follows:

Vendor

Market share

Samsung

23.7%

Apple

11.7%

Xiaomi

5.2%

Lenovo

5.1%

LG

5%

Others

49.3%

Source: IDC.

Samsung has been known to use external chip vendors in addition to its in-house chip solutions; but recent reports suggest that Samsung wants to move more of its phones to in-house Samsung-designed solutions.For the sake of extreme conservatism, let's assume that Samsung and Apple are basically unavailable long term to merchant chip vendors.

LG has its own in-house chip solutions, too, but they don't appear to be particularly competitive; so let's assume that most, if not all, of LG's phones continue to use merchant solutions. Finally, most of the players in "other" (except Huawei) likely don't have their own in-house chip solutions.

Under these conditions, I would estimate that well more than 50% of the smartphone market -- perhaps even more than 60% -- will likely use merchant chip solutions. I also expect that, as the low-end and mid-range of the market (where most of these "other" players compete) grows faster than the market for high-end smartphones, the percentage will only grow. In a total addressable market that ships well more than a billion units, a served addressable market of 50%-plus of the total addressable market is alotof units.

In other words, I would say that, as far as applications processor and modem vendors go, the real volume will be had in supplying the many low-profit margin, low-cost smartphone vendors worldwide. While Apple is certainly in a better position to profit from the smartphone boom than those low-cost smartphone vendors due to better margins and higher selling prices, the chip vendors are likely to find these low-cost and/or low-margin phone vendors far more relevant in terms of chip-related revenue and profit in the long run.

The article 1 Reason Apple Inc.s Low Smartphone Market Share Benefits Chip Suppliers originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.