The Samsung Galaxy S6 Is Bad News for Qualcomm, Inc.

Samsung's Galaxy S6 seems to be Qualcomm -free, according to a teardown performed by Chipworks (via Reuters). The S6 uses a Samsung-designed system-on-chip, Samsung modem, RF transceiver, and envelope tracking chip.

There had been some expectation that, at least for some regions, Qualcomm would be able to sell a modem alongside a Samsung-designed applications processor. According to Reuters, though, Samsung is even using its own cellular modem in the S6 model sold on AT&T's network in the United States.

This is bad news for Qualcomm's positioning at Samsung. Further, given that the S6 seems to be the best reviewed of this round of Android flagship devices, Qualcomm's high-end chip business looks like it's facing some pretty stiff competition.

Samsung's chip efforts are looking betterQualcomm has traditionally offered highly integrated, best-in-class solutions for high-end smartphones. Its applications processors are known to offer very good performance and integration, and its modems are generally regarded as the "gold standard."

However, it seems that in the Galaxy S6, Samsung has delivered a very competitive applications processor. Samsung's solution was no double helped by being built on more advanced 14-nanometer manufacturing technology compared to the 20-nanometer technology that Qualcomm's latest Snapdragon 810 is built on.

Samsung also appears to be delivering good LTE modems, potentially dulling what is arguably Qualcomm's chief competitive advantage. The category 6 LTE modem inside of the S6 seems behind the latest category 9 modem inside of the Snapdragon 810, but none of the reviews of the Galaxy S6 that I read seemed to even care about this.

What does this mean for Qualcomm?Qualcomm executives, on the company's most recent call, said that its relationship with Samsung was "good." Supporting that has been the significant chatter in the tech press suggesting that Qualcomm's next generation Snapdragon 820 will be manufactured primarily on Samsung's 14-nanometer technology.

If that proves to be the case, then this might, as some have suggested, make Samsung more open to dual sourcing applications processors and modems from both its internal chip teams as well as from Qualcomm.

In the near-term though, the positive reviews of the Galaxy S6 probably aren't good for Qualcomm. If Qualcomm customers such as LG and HTC lose share to high-end Samsung phones, then Qualcomm stands to lose chip shipments.

Samsung's vertical integration could prove quite a challengeSamsung is a particularly interesting competitor in the premium smartphone market because of its very tight vertical integration. In the S6, most of the critical components, from the display to the flash memory, are designed and built by Samsung.

This should theoretically give Samsung a cost structure advantage relative to its peers in the smartphone business, as it doesn't have to pay the margins of as many suppliers.

Vertical integration should allow Samsung to either be very aggressive on price while maintaining similar margins to higher-priced competition or it could allow for Samsung to capture more profit dollars per unit than its competitors can at a given price point.

Qualcomm needs to win this on technological meritIt seems clear to me that Samsung felt that its Exynos 7420 + Samsung-designed modem was a better solution for the S6 than the Snapdragon 810. Given the performance numbers that the S6 has been able to put out in reviews (it seems quite a bit faster than some of the Snapdragon 810-based phones that have been tested), it's not hard to see why.

To stand a chance to regain share at Samsung, Qualcomm needs to make sure that it delivers chips that are better than what Samsung's internal teams can do. And, given how good Samsung seems to be getting at delivering high-end chips for its flagship phones, it may have raised the bar significantly for what Qualcomm needs to deliver going forward.

The article The Samsung Galaxy S6 Is Bad News for Qualcomm, Inc. originally appeared on Fool.com.

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