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Chipmakers struggle to play Apple's iPod game

Posted: 07 Jun 2006 ?? ?Print Version ?Bookmark and Share

Keywords:design win? iPod? MP3 player? Apple? SigmaTel?

Following design wins in the Apple iPod has become as difficult as tracking the queen of spades in a game of three-card monte. PortalPlayer is out, Samsung is in. Samsung is out, SigmaTel is inmaybe.

No one except master dealer Steve Jobs knows for sure who will win or lose the prized sockets. But even as speculation mounts, the dynamics behind the MP3 game may be subtly shifting away from Cupertino, California.

SigmaTel Inc., as it tries to drive flash-based players into the emerging market for portable video, is about to take legal action against at least one of the dozens of MP3 makers cropping up in China. Others foresee wireless as the next big push for a standalone product that ultimately may be subsumed by cellphones.

The latest chapter in the digital-music drama came from a Wall Street analyst's report issued last week. Apple Computer Inc. will "punish" Samsung Electronics Co. Ltd by taking away a design win in the flash-based iPod Shuffle because an executive for the South Korean conglomerate prematurely disclosed it had won Apple's business, wrote Craig Berger, an analyst with Wedbush Morgan Securities Inc.

As a result, Berger wrote, SigmaTel will retain its existing design win in the entry-level Shuffle. But Samsung will still grab a design slot in the midrange, flash-based iPod Nano away from longtime Apple supplier PortalPlayer Inc.

No one confirmed, and several sources expressed doubts about the report, which Berger claims to have assembled based on input from multiple sources. "It is not surprising that Apple would 'punish' Samsung for commenting publicly about its position within the iPod, and we believe that SigmaTel is likely to be the resulting beneficiary of the Samsung executive's gaffe," Berger wrote.

A source close to the situation who asked not to be identified said Apple had never informed SigmaTel that it had lost the Shuffle business. Separately, a senior engineer at one Apple supplier said it would not have made sense for Apple to redesign the electronics of the Shufflewhich observers say Apple could drop from its product line by year's end-to accommodate a chip vendor switch.

In any case, the ongoing business is a boon to struggling SigmaTel, since Apple is projected to ship some 7.4 million Shuffles this year. "We already include 7.4 million Shuffle chips in our SigmaTel forecast for 2006, though there could potentially be some upside to these units if Apple continues to lower its Shuffle price as NAND flash costs decline," Berger said.

SigmaTel desperately needs the business. The company saw revenue slump 67 percent, to $33 million, in the first quarter from the same period in 2005. With losses currently at $27 million and expected to continue into the next quarter, Berger sees the company headed for a cash crunch.

"The first quarter was pretty soft for our Asian customers," acknowledged Ron Edgerton, chief executive officer of SigmaTel. "We may get a line of credit in case there is any perturbation in the market, but based on our current projections we won't need to draw on it."

SigmaTel is "banking on the MP3 market coming back," said Berger.

Samsung's slip
If Apple's alleged castigation of Samsung is true, analysts said, it may not be the first time the company has pulled the rug out from under a supplier it considered out of line. Unconfirmed reports suggest similar punishments have been meted out to suppliers of disk drives for the iPod and graphics chips for the Macintosh.

"They will definitely punish you" for disclosing information, said the Apple supplier senior engineer. "Apple, like Sony, is nuts about control. They don't want anyone saying a damn thing about their business."

In a sign of its passion for secrecy, Apple recently went so far as to sue a blogger who broke news of an upcoming Apple product. The company lost the suit in a recent court decision.

"Apple has so much market share [in MP3 players] they can do what they want," said Stephanie Ethier, an analyst for In-Stat who tracks the MP3 market. The iPod commands as much as 70 percent of the U.S. market for MP3 players, she said.

Hammering China
Much of the rest of the international market for MP3 players is dominated by Chinese system makers that sell simplified systems for as little as $25 based on chips from companies such as Actions Semiconductor Co. Ltd. Berger said Actions' costs are so low that it can sell MP3 processors for as little as $2.50 and still make a profit.

SigmaTel is sharpening its intellectual-property position to compete. In the fall of 2005, the company acquired D&M Holdings, which owned a South Korean patent said to be fundamental to MP3 players. SigmaTel plans to assert the patent against one MP3 maker in China in a case it will file in mid-June. It has already sent warning letters out to as many as 70 companies in China claiming they infringe the patent.

"We have one of the best law firms in China, and when the MP3 makers face the reality of going to court they will consider [settling]," said Edgerton. "It is possible to be successful in that [IP] market now," he added, noting Philips has had success asserting its DVD patents on the mainland.

SigmaTel is pursuing both system and chip companies in China. It has already won a decision against Actions at the International Trade Commission. SigmaTel claims to have filed 322 patents as of yearend 2005.

"You will see a broader IP strategy from us over the next few months," Edgerton said.

But Berger was skeptical. "SigmaTel has a patent [the one acquired from D&M] that no one has been able to garner any royalties on yet," he said, and "getting Chinese companies to pay royalties for systems they sell for as little as $20 a unit will be a challenge."

Wireless or video?
Wireless, not China, is next real frontier for MP3, said the senior engineer at the Apple supplier. "That's where it will all go," he said, and "at the end of the day, it all goes to cellphones. If you want to be in the MP3 business and don't understand cellphones, woe betide you."

As more cellphones follow Motorola's Rokr by integrating MP3 capabilities, Apple and Jobs will lose control of the market, the senior engineer said. "Apple wants to control the end-to-end experience," he said, "but in the U.S. you have to have a partnership with a carrier to sell cellphones, and that means giving up some control."

It's possible that Apple would become a mobile virtual network operator (MVNO), with its iTunes riding on top of a carrier network, the source added. Disney, where Jobs is now a newly-installed executive, already pursues that emerging business model, operating an MVNO under its ESPN brand.

MP3 makers face some challenges building in Bluetooth and Wi-Fi as part of the wireless evolution. But it could be even tougher for cellphone companies to offer quality audio with the low power and high ease of use that is the iPod's stock in trade. Some iPods consume as little as 50 milliwatts, while the Moto Rokr is said to draw as much as 300mW for its MP3 functions.

Preparing for the shift, PortalPlayer has already set up a cellphone group. SigmaTel, for its part, has partnered with Infineon to deliver a Bluetooth chip for MP3 players by early 2007, and it expects to have 802.11b/g capabilities before the end of this year.

Edgerton of SigmaTel said that he sees a near-term opportunity to bring video to flash-based MP3 players as displays shift from black-and-white to color. The company's new 3600-class chip supports 176 x 220-resolution video at 30fps and could power 2Gbyte systems.

That's still a far cry from the 240 x 320 resolution of the video iPod, but it could be adequate for a flash player, said David Carey, president of teardown specialist Portelligent.

Others note that there is a gulf between today's video iPods, with 30Gbyte hard disks, and 2-Gbyte flash players.

"After one guy adds video, everyone will do it, but that doesn't make it a major part of the use case," said the Apple supplier.

- Mark LaPedus and Rick Merritt
EE Times

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