November 27, 2000 12:40 PM PST

Intel targets Texas Instruments in cell phone chips

Texas Instruments has soared in the past few years by establishing itself as one of the leading providers of chips for cell phones, but Intel and Analog Devices will take steps next week to deflate that lead.

On Dec. 5, Intel and Analog will show off a jointly developed architecture for a digital signal processor (DSP), the chips that help refine cellular signals and perform speech compression tasks in cell phones.

DSPs have been at the heart of TI's resurgence. Beginning in 1996, the company started to shed a number of business units, including divisions focused on notebooks, software and military contracting, to concentrate on its growing DSP unit. The company's stock has more than quintupled since late 1997, as TI's chips have become more firmly established as the industry's de facto standard.

According to Hans Mosesmann, an analyst with Prudential Securities, "70 to 80 percent of the engineers doing designs in the industry today are familiar with the DSP software for the TI architecture. The die has been cast. TI is No. 1. The question is who is going to be No. 2."

Although Intel's initial foray into the market won't immediately threaten TI's nearly 50 percent market share, the Santa Clara, Calif.-based chipmaker's entry into DSPs will begin to change the dynamics of competition in the market.

Unlike TI's other competitors, Intel already has a substantial market share in two other crucial components of cell phones--flash memory and microprocessors. Intel's plan, according to analysts and company executives, is to integrate all of these chips into one or two parts to reduce costs.

"If Intel has a way to put lots of cheap flash on a die, it will give them quite a cost advantage," said Will Strauss, an analyst with Forward Concepts. "TI has a version of the DSP with flash, but it is expensive for them to make."

Cheaper integrated chips from Intel will likely first appear in phones from second- or third-tier manufacturers, said Strauss. Major manufacturers such as Nokia and Ericsson, which are both TI customers, are resistant to switching processors. Ironically, both Scandinavian manufacturers buy flash memory from Intel, he added.

Sheer volume
Along with integration, Intel will likely benefit from the sheer volume of the market. A total of 400 million cell phones are expected to be sold this year, while 1 billion are expected to be sold in 2003. Even if TI expands capacity, Intel will be able to leverage its manufacturing base to grab a portion of the market.

If anything, Intel's entry into the market could spell problems for Lucent Technologies, Motorola and even Analog, which all follow TI in market share, he added.

"There are only about five companies that can satisfy that requirement, and Intel wants to be one of them," Strauss said.

Getting beyond the fringes, however, could prove difficult for Intel, at least initially, said Mosesmann. DSP development is extremely difficult and market acceptance of a new architecture takes years. Analog has been making DSPs for years, a factor that could well shorten the adoption cycle. Still, the software base for TI's chips is far larger, giving TI an inherent advantage that won't change quickly.

"It is unlikely Intel will go after the mass market," he said. "There are so many legacy issues."

Although the Intel-Analog DSP announcement is a milestone in the competition between TI and Intel, the two companies have already been heating up the waters. In September, Intel unveiled an architecture for wireless devices called the Personal Internet Client Architecture. By adopting the architecture, device makers would essentially receive a free blueprint for wireless handhelds. The blueprints, of course, depend on Intel chips.

TI, naturally, replied by pointing out the company had already released a similar architecture, called the Open Multimedia Application Platform (OMAP) that Nokia, Ericsson and Sony, among others, had already agreed to adopt.

A week later, TI announced it had formed an alliance with Handspring to develop a common architecture for add-ons to the Visor handheld based on OMAP.

Over the past two years, Intel has purchased more than 20 companies for over $7 billion. Most of these acquisitions have been in the communications market.

 

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