Publish date:

Nokia Lets More Chipmakers Join In

A move to diversify supply underscores a huge opportunity.

SAN FRANCISCO -- The booming market for cell phones just became more attractive -- and more cutthroat -- for chipmakers.

Nokia's

(NOK) - Get Nokia Oyj Sponsored ADR Report

decision to shake up its chip operations, giving

STMicroelectronics

(STM) - Get STMicroelectronics NV ADR RegS Report

and

Broadcom

undefined

VIP status within its club of component suppliers, underscores the ample opportunities suddenly within grasp of many chip firms.

That may not be welcome news to

Texas Instruments

(TXN) - Get Texas Instruments Incorporated Report

and

Qualcomm

(QCOM) - Get QUALCOMM Incorporated Report

, whose long-standing dominance of the handset market is more vulnerable than ever.

But it's a sea change for the multitude of other chipmakers scrapping to increase their share in the billion-unit cell phone market.

Shares of STMicro were up 6.5%, or $1.10, at $18.06 in recent trading Wednesday, while Broadcom's stock surged 10%, or $3.33, to $36.09.

"Historically, handset OEMs

original equipment manufacturers have selected one, maybe two suppliers as their main source for baseband chips and RF chips," says Francis Sideco, a wireless communications chip analyst with research firm isuppli.

"In the last year or so, the main handset makers have been diversifying their supplier base," he says, in order to lower their costs and lessen the risk of a component shortage in the event of a sudden surge in sales.

TheStreet Recommends

Wednesday's announcement by Nokia, the world's No. 1 handset maker, represents a major milestone in that trend.

Nokia has taken small steps to diversify its chip suppliers in the past, such as a previous deal enlisting STMicro to provide it with application processors for certain phones, says Sideco. But Wednesday's decision is particularly significant because it involves baseband chips, which unlike application processors, are present in every single phone.

According to Nokia, the company will cease development of parts of its own chipsets and increase its use of commercially available chips (although Nokia noted that it will continue to develop and license the modem technology used in cell phones).

Meanwhile, Nokia is tapping various chipmakers to supply the silicon at the heart of its various phones. ST Micro will provide a complete chipset for one of Nokia's most advanced handsets, based on the 3G standard. Broadcom will provide chips for midrange phones based on the Edge standard. And chips for some of Nokia's low-end GSM phones will come from

Infineon Technologies

(IFX)

.

Texas Instruments, Nokia's traditional baseband chip vendor, will continue to be a "broad scope supplier across all protocols," although TI doesn't appear to own a particular category all to itself.

TI's stock was off 20 cents, or 0.6%, at $33.81 in recent trading Wednesday.

"This is a pragmatic move in the face of an increasingly complex technology environment," Niklas Savander, executive vice president of Nokia technology platforms said in a statement.

"Companies in this industry need to focus on areas where they can add value and partner with others where it makes sense," he said.

Nokia's move couldn't have come as a total surprise to TI, which has acknowledged that the market is changing.

"We anticipate the wireless market will undoubtedly remain noisy in months ahead as OEMs continue to diversify their chip suppliers," TI Investment Relations Manager Ron Slaymaker told analysts in a quarterly earnings conference call last month.

TI claims it, too, is benefiting from the trend, pointing to its recent deal to develop 3G chips with handset maker

Sony Ericsson

.

Some analysts see another motive in the cell-phone makers' rush to diversify their chip suppliers.

With the wireless market awash in myriad transmission and technology standards, cell-phone makers are sometimes limited to offering products based on the technology offered by their chip suppliers, says Mory Marshall, of consulting and market research firm Semiconductor Partners.

Signing on more chip suppliers can change that equation.

The deal with STMicro "indicates a desire on Nokia's part to have a greater control over their future technology," says Marshall.

And by playing the chipmakers off of each other, the phone makers will clearly be looking for better component prices -- something that won't help profit margins at chipmakers.

Of course, declining prices are already a fact of life in the chip world.

Now the door to greater overall sales is open.