For years, mobile connectivity specialist Broadcom Corporation (NASDAQ:BRCM) has enjoyed a cushy spot in Apple Inc. (NASDAQ:AAPL)‘s iPhones, proving the Wi-Fi and Bluetooth combo chip that serves up short-range communications signals. Broadcom Corporation (NASDAQ:BRCM) investors are getting rattled today, with shares dropping as much as 7%, on the possibility that the company may get shut out of future iPhone design wins. This all comes as Broadcom Corporation (NASDAQ:BRCM) prepares to report earnings after the bell today.
The culprit was an interesting disclosure from Texas Instruments Incorporated (NASDAQ:TXN) last night, which publicly exited the mobile and wireless sector last year.
TI no longer sells its OMAP processors for mobile design wins, and got out of basebands years before that. Instead, TI is focused on embedded markets. The wireless segment continues to decline, on track with the company’s planned exit.
To that end, Texas Instruments Incorporated (NASDAQ:TXN) has been getting rid of various parts of its wireless business. That included laying off 1,700 employees worldwide in November. Apple Inc. (NASDAQ:AAPL) had been reportedly snapping up these wireless engineers at the time, hiring dozens of chip engineers — many of whom worked on Wi-Fi and Bluetooth radio chips. TI was winding down its presence in Israel just as Apple Inc. (NASDAQ:AAPL) was growing its own research center in the region.
Last night, TI said its results included a $315 million gain related to “a transfer of wireless connectivity technology to a customer.” That transfer helped bolster TI’s operating profit, which totaled $906 million. The underlying fear is that Apple is the customer in question, and that the Mac maker is preparing to bring connectivity chip development internal. That’s a big risk to Broadcom Corporation (NASDAQ:BRCM)’s enviable spot as the exclusive supplier of Wi-Fi combo chips.
It may not happen immediately, but Apple has begun to internalize key parts of component design, starting with the A-chip processors. That’s why it’s quite feasible that the Mac maker is exploring ways to bring other chip designs in-house. This also presents a risk to other Apple suppliers, including QUALCOMM, Inc. (NASDAQ:QCOM) in an extreme case further down the road.
At a time when smartphone OEMs are transitioning toward integrated baseband solutions en masse, Apple remains the biggest buyer in the discrete baseband market. QUALCOMM, Inc. (NASDAQ:QCOM) enjoys an exclusive lock on Apple’s baseband business, but it seems inevitable that Apple will want to integrate cellular connectivity eventually. That’s much more challenging than short-range connectivity, so the risk facing QUALCOMM, Inc. (NASDAQ:QCOM) may be farther off.
The risks that Broadcom Corporation (NASDAQ:BRCM) faces are on the horizon.
The article Is Broadcom Getting Shut Out of Future iPhones? originally appeared on Fool.com and is written by Evan Niu, CFA.
Fool contributor Evan Niu, CFA, owns shares of Apple and Qualcomm. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm.
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