Is Samsung Gearing Up to Challenge Qualcomm Inc. and MediaTek?

By Fool.com

It is well-known that Samsung designs and manufactures mobile applications processor solutions. These solutions are branded Exynos and are generally found inside of select models of Samsung's own smartphones. Interestingly enough, while Samsung has sold applications processors to other handset makers such as Lenovo , the company is not generally regarded as a large player in the merchant mobile silicon market; Qualcomm and MediaTek are the big dogs here.

Is this about to change?On Samsung's most recent earnings call, Sundeep Bajikar, an analyst with Jefferies, asked the following question:

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Interestingly enough, a Samsung representativereplied with the following:

This actually has some pretty serious long-term implications for both Qualcomm, MediaTek, and any other companies that supply applications processors to smartphone vendors.

Why Samsung is so dangerousWhile many focus on Samsung's struggles in the mobile business, the company's semiconductor business has been a significant bright spot for the company. Currently, memory products such as DRAM and NAND flash make up the bulk of the company's semiconductor revenue and profits, but Samsung has been very aggressively trying to expand its logic semiconductor business.

Samsung is already reported to have won a significant portion of Apple's next generation applications processor manufacturing business. Additionally, Qualcomm is on record claiming that it likely won't be in the design cycle for a high-profile flagship mobile device launch. This is widely viewed as Samsung kicking Qualcomm out of the Galaxy S6 in favor of its own in-house applications processors.

Samsung is quite dangerous to companies like MediaTek and Qualcomm for a number of reasons. Firstly, Samsung has relatively large "captive" demand for its chips, blocking out a significant portion of the total market available to merchant chip vendors. According to IDC, Samsung had 23.7% market share of the smartphone market in the third quarter of 2014.

So, with Apple foundry business and a large captive demand base, Samsung has the potential to lock up about a third or so of the entire smartphone applications processor market via either foundry or internally developed chips. This leaves about two thirds of the market -- and much of it midrange or low end -- to the merchant players.

However, if Samsung gets serious about providing merchant solutions, then -- thanks to the scale afforded to it by the large amount of "easy" business it has, coupled with in-house manufacturing, packaging, and test -- it could easily have one of the best cost structures on the market. This would make it very tough for fabless companies like Qualcomm and MediaTek to compete in price-sensitive segments when they need to hand over manufacturing, packaging, and test overhead that Samsung doesn't need to.

The article Is Samsung Gearing Up to Challenge Qualcomm Inc. and MediaTek? originally appeared on Fool.com.

Ashraf Eassa owns shares of Qualcomm. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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.

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