Nokia Reveals Chipset ShakeoutNokia Reveals Chipset Shakeout

Nokia Corp. (NYSE: NOK) shook up the chipset scene today with a new strategy that involves dual suppliers across all of its technology protocols, licensing its modem technology, and outsourcing some of its integrated circuit (IC) operations. (See Nokia Revamps Chip Strategy.)

The move will have ripple effects throughout the chipset sector, according to analysts, including: lower margins at Nokia's long-time supplier Texas Instruments Inc. (NYSE: TXN), as well as at Qualcomm Inc. (Nasdaq: QCOM); more competition for WCDMA/HSPA chipsets; and, last but not least, a more efficient R&D business at Nokia.

"This is a significant change in our chipset strategy," said Niklas Savander, Nokia's executive vice president of technology platforms, during a press conference. "What we're announcing today will have an impact on the [chipset] industry structure."

Nokia now has four chipset suppliers, giving the handset giant two competing vendors in each protocol area -- GSM, EDGE, and WCDMA/HSPA.

Texas Instruments remains a supplier across all protocols. In addition, Broadcom Corp. (Nasdaq: BRCM) will supply EDGE chipsets, STMicroelectronics NV (NYSE: STM) will supply 3G high-speed packet access (HSPA) chipsets, and Infineon Technologies AG (NYSE/Frankfurt: IFX) will supply GSM chipsets. Infineon's relationship with Nokia was announced earlier this year.

"This is really about Nokia... getting the best return on our R&D investment and lower costs by fostering innovation in the chipset industry," said Savander.

In addition to the new dual-source strategy, Nokia announced it will license its WCDMA/GSM modem technology -- including HSPA and long-term evolution (LTE) technology -- to chipset firms. Those silicon vendors will then be able to provide the chipsets based on Nokia technology to other handset makers, as well as Nokia.

STMicroelectrics is the first licensee. Nokia says it is in discussions with multiple vendors about such licensing agreements. (See Nokia, STMicro Team.)

"Nokia holds a strong IPR [intellectual property rights] position in modem technology and it is a key part of our current and future competitive advantage," said Savander.

And if that's not radical enough, Nokia also announced it will outsource some of its integrated circuit operations to STMicroelectronics. About 200 Nokia ASIC designers in the U.K. and Finland will transfer to the chip vendor. The deal is expected to close in the fourth quarter this year, but Nokia has not disclosed the financial value.

Nokia's long-time partner, Texas Instruments, is likely to be the most injured by today's announcement. According to Nomura Securities analyst Richard Windsor, the new strategy will "damage TI's very healthy gross margins as it now faces competition in all technologies that it supplies to Nokia in contrast to just GSM."

TI's share price fell by $0.44, about 1.3 percent, to $33.57 in early trading today.

But Nokia's decision to license its WCDMA modem technology will "meaningfully increase competition" for WCDMA/HSPA chipsets, reckons Windsor. And that, he believes, means Qualcomm's "excellent margins" in WCDMA chipsets will be at risk in the longer run as competition and price pressures increase.

According to the analyst team at Dresdner Kleinwort , Nokia's announcement is a "bid to speed time-to-market, lower operational costs, and lessen its dependence on long-standing partner Texas Instruments."

Handsets with chipsets from Nokia's new suppliers Infineon and Broadcom are expected in the first and second half, respectively, of 2008. Nokia has not yet communicated a timeframe for handsets with STMicroelectronic chipsets, but indicated that it would be a multi-year process because the technology is new.

— Michelle Donegan, European Editor, Unstrung