The Truth Behind Qualcomm Inc. and the Samsung Galaxy S6 Seemingly Comes Out

By Ashraf

There has been a lot of talk about Samsung potentially dropping Qualcomm in its next-generation Galaxy S6 smartphone. Now, generally speaking, Samsung will launch multiple variants of its flagship Galaxy phones. Some variants will pack Qualcomm chips, but others will feature Samsung-designed silicon.

In recent years, Qualcomm chips have powered an increasingly large portion of Samsung's Galaxy phones, leaving many -- including yours truly -- wondering why Samsung even bothers with its internal chip division. However, it seems Samsung might be getting serious about moving more of its devices to in-house silicon.

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An analyst report that finally makes senseQuite a few reports have suggested Samsung is passing on the Qualcomm Snapdragon 810 due to "heat issues." In other words, they claim the chip runs too hot at full speed, meaning performance takes a hit in devices. Interestingly enough, LG -- which is using the Snapdragon 810 in its upcoming LG G Flex 2 -- recently publicly defended the chip, claiming the "performance is quite satisfactory."

Indeed, according to a report from Susquehanna's Chris Caso (via Barron's), Samsung isn't deploying the Snapdragon 810 processor as widely as it has prior-generation Snapdragon chips due to "competitive reasons." Thanks to a more advanced 14-nanometer manufacturing process, the Exynos processor Samsung is reportedly deploying in the Galaxy S6 is expected to offer better power and performance than the Snapdragon 810.

Caso also noted that progress in internally developed cellular baseband technology -- in particular, "increased carrier acceptance" of Samsung's home-grown LTE solutions -- should lead to a "cost-effective" solution when paired alongside the Exynos processor.

This is a speed bump for Qualcomm's higher-end solutionsQualcomm invests significantly in the development of high-end applications processors and cellular solutions. The problem, though, is that at the high end of the smartphone market, two players reign supreme: Apple and Samsung. Apple designs its own processors, and while Samsung has, too, Qualcomm has seemingly been able to win business from the South Korean conglomerateon technological superiority.

However, with Samsung -- at least according to all these reports -- improving its cellular modems, improving its Exynos applications processor designs, and having its own leading-edge factories to build these chips, the situation gets much tougher for Qualcomm's business.

What's the impact?According to Credit Suisse's Kulbinder Garcha, Samsung switching away "will cause a revenue headwind of some $1.3 [billion]" for Qualcomm. That's not a fatal blow for Qualcomm's entire chip business, which generated $18.67 billion in revenue last year, but it certainly stings. Think of this -- if true -- as the equivalent to Intel losing the Mac chip slots at Apple.

Let's see how this all plays out over timeI'm not ready to claim "doom and gloom" for Qualcomm's chip business just because Samsung might want to shift more of its high-end phones to internally designed chips. In fact, while the high-end Snapdragon chips are very profitable -- as Caso noted in his report -- much of the demand growth in smartphones is in the low end and midrange. If Qualcomm can design competitive chips at competitive cost structures for these phones, then I suspect the company's smartphone chip business should be fine.

At any rate, I'm going to keep a close eye on the situation and, as always, will keep readers up-to-date on developments in this space, both positive and negative.

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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.

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