Why MediaTek Is Smart to Get Out of Qualcomm, Inc.'s Way

Per a pre-publication note in DigiTimes (subscription required), mobile-chip maker MediaTek, largely seen as the No. 2 merchant mobile chip vendor next to market leader Qualcomm (NASDAQ: QCOM), "is unlikely to roll out mobile chips built using more advanced 10nm and 7nm process technologies in 2018."

This, DigiTimes says, is due to MediaTek's apparently shifting its resources away from the premium portion of the smartphone market to instead redouble its efforts in the mid-range portion of the smartphone market.

This is, in my view, absolutely the right move for MediaTek. Allow me to explain why and to go over what implications this could have, if any, on Qualcomm.

The right move for MediaTek

MediaTek has been, for quite some time, investing in trying to build applications processors to go after the premium portion of the smartphone market. The premium segment is dominated by two sets of players. Several premium smartphone manufacturers, such as Apple, Huawei, and Samsung, build their own custom applications processors for their flagship mobile devices. Virtually all other premium smartphone vendors -- companies without the financial and/or technical wherewithal to build competitive high-end applications processors -- generally use chips designed, manufactured, and sold by Qualcomm.

These high-end applications processors tend to be packed with a lot of features such as higher-end CPUs, graphics processors, image processors, media engines, and cellular connectivity.

Qualcomm's strength has traditionally been that it has leadership technologies across all these relevant technology vectors, something that competitors such as MediaTek simply have a hard time trying to match. The problem for companies like MediaTek that can't quite match Qualcomm's technical prowess is that the high-end smartphone market is a crowded one, and there's little room for phones that can't quite make the cut in terms of performance or features. So to stay competitive, those smartphone vendors simply must adopt Qualcomm's high-end chips, lest they appear uncompetitive in the marketplace.

Viewed from this lens, it's totally clear why MediaTek's last attempt at an ultra-high-end mobile chip -- the Helio X30 -- just didn't gain traction in the market.

The situation isn't quite the same in the low-end and mid-range portions of the market, where some consumers are fine trading off features and capabilities to get slightly cheaper devices.

Qualcomm plays in those segments, too -- and, to be clear, it plays aggressively here and commands substantial market share there, to boot -- but unlike in the premium part of the market, MediaTek can stand a fighting chance here, particularly as it can try to deliver "good enough" solutions at lower prices, at the expense of selling prices and margins.

This is hardly a path to glamorous headlines in the tech press or riches -- even Qualcomm's chip business, which practically owns the premium portion of the merchant mobile chip market and still doesn't generate particularly impressive profits -- but MediaTek can certainly cut its operating expenses and boost its overall operating margin by ending high-end chip and platform development projects that have very little chance of delivering a positive future return on investment.

10 stocks we like better than QualcommWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Qualcomm wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of September 5, 2017

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.