WLAN IC Market Starts To Sour

While wireless appears to be the only bright spot for the tech sector, the outlook for wireless integrated circuits (IC) is really souring, according to analysts.

The debate intensified Wednesday when chipmaker Intersil said it was cashing out of the wireless LAN market and selling its Wireless Networking Product Group to fabless IC maker GlobespanVirata in a multi-million dollar cash/stock deal.

The arrangement sent shockwaves through the wireless IC sector, but did not surprise many analysts who say Intersil was bound bend to investor pressure and return to its cash cow of high performance analog chips — a favorite segment among the Wall Street crowd.

“My sense is that Intersil either had to put money into R&D or compete on price and volume to keep a good market share. It obviously decided that it had done very well from WLANs and that its early entry strategy had paid off — but it was time to move on. Makes sense — perhaps WLAN chips are part of a large new category called broadband chips.” Communications Industry Researchers (CIR) analyst Lawrence Gasman told internetnews.com

Toss into the mix recent predictions that ultrawideband (UWB) will eventually beat out both the current Wi-Fi wireless networking standard and Bluetooth and analysts say you have the perfect storm for WLAN ICs.

“[This is] indicative of where Wi-Fi is headed… [it will be] just another technology integrated into larger devices, like Ethernet is today,” Bob Wheeler, senior analyst at The Linley Group, a research firm that follows the wireless chipset market said. “Massive competition is coming into the [WLAN chip] market. Intersil was making good money, but could see that this year would be tough.”

Such competition had already been felt from companies like Broadcom , which had major success with 802.11g chips before Intersil’s own PRISM GT (802.11g) or PRISM Duette (dual-band 802.11a/g) made it to market.

“Broadcom is a big reason for Intersil’s exit from the market,” according to Wheeler.

In addition to Broadcom, Intersil was certainly feeling increased pressure from Intel , which has wrapped up the mobile PC WLAN market already with its Centrino chipset and is making inroads into embedded WLAN chips.

Furthermore, Network Interface Cards (NIC) and access points have become commodity businesses, increasingly dominated by Asian equipment manufacturers and chipset suppliers, which are selling products at rock-bottom prices.

What’s worse say analysts is, now that crossover wireless standard 802.11g is fully rolled out, the IEEE’s 802.11 working group has very few major developments coming down the pike. That doesn’t help IC fabs and fabless chipmakers at all with diversification and product positioning because everyone’s products will start to appear the same.

“With the competition, it is tough to be a pure play Wi-Fi chipset provider,” said iSuppli senior analyst Scott Smyser. A chipset supplier has to bring more to the table. Intel brings its mobile processor technology, which is an obvious integration partner for Wi-Fi. Companies such as Texas Instruments and Broadcom bring strong networking solutions from cable and DSL, to other wireless such as cellular and Bluetooth.

With its focus on a slow-growth area, the combined entity of Globespan and Intersil has niched itself out of the WLAN market, iSuppli believes. Intersil already was slowly losing market share and fading out of the WLAN business. Now that GlobespanVirata owns Intersil’s WLAN product line, the analyst firm says this trend will accelerate.

Demand Great for WLAN

While the WLAN suppliers themselves may change, the demand has not. In fact, it’s getting hotter. A new report from Strategy Analytics suggests 90 percent of notebook PCs sold worldwide will contain embedded WLAN in 2008, up from 24 per cent in 2003, to reach an installed base of 141 million WLAN-connected laptop computers.

A separate report issued last week by Charlottesville, Virgina-based CIR claims that the market for WLAN chipsets will expand from $938 million in 2003 all the way to $1.7 billion in 2007. Key drivers for this growth will be the ability of WLANs to let business users and consumers avoid the high costs of cabling and of moving PCs attached to conventional LANs. WLANs in the form or public or private hotspots are also popular because they give business travelers broadband access on the fly.

The survey reveals that OEMs/ODMs place a high value on WLAN chipsets that offer enhanced transmission range and receiver sensitivity.

“That could be an important source of competitive advantage for smaller chipset manufacturers trying to compete with the likes of Agere, Atheros, Broadcom, Intel, Intersil and Texas Instruments,” CIR said in its report.

Analysts with CIR also said they expect a significant demand from consumers for WLAN-capable flat-screen displays that connect to DVD players or HDTV feeds via a wireless connection. By 2007 CIR expects the market for video-enabled WLAN chipsets to be about $350 million. Enhanced security and switching needs of the business WLAN market will also be hot in the next four years.

“Chipsets for WLAN switching hubs alone will be worth almost $160 million by 2007,” the analyst group said.

That kind of severe pricing and competitive pressure in the WLAN market proves that the sector is not for the faint of heart, according to Deutsche Bank Securities analyst Ross Seymore.

“While Intersil’s WLAN unit has demonstrated tremendous growth and market leading sustainability over the last several years, it has also been an anchor for the company, both in terms of investor perception and profitability. Following its divestiture, we are increasingly positive on Intersil’s ability to further penetrate high-growth analog markets and compete effectively with its closest peers.”

However, on an absolute basis, Deutsche Bank said tenuous near term industry fundamentals show that the analog group as a whole is expensive — Intersil included.

Editor’s note: 802.11 Planet editor Eric Griffith contributed to this report.

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