MediaTek sales collapse, loses market share in China to Qualcomm

Mediatek has reported revenues for the month of February 2015 that show a steep decline, both sequentially and year-over-year.  Revenues came in at only NT$9.671 billion, a decline of 45% from January 2015 and a year-over-year decline of 39%. Since the merger with MStar became effective in February 2014, the year-over-year decline is factual and reflects a steep actual decline in the sales level of the combined businesses.

Although MediaTek has attributed the sales decline to a transition to new products in the smartphone segment, seasonal factors and fewer working days due to Chinese New Year, the main reason is likely to be a dramatic loss of market share in the entry-level segment of the Chinese smartphone market due to changes in the competitive landscape and a lack of a low-cost 4G solutions in MediaTek's product line.

Qualcomm's agreement with regulatory authorities in China has hurt MediaTek

On February 9, Qualcomm announced the resolution of the investigation by Chinese regulatory authorities into alleged monopolistic practices by Qualcomm because of the high royalty rates it imposes on all 3G and 4G-connected devices and its ability to combine royalty agreements with chip sales, effectively shutting out competitors. As part of the resolution, Qualcomm agreed to pay almost US$1 billion and agreed to a lower royalty rate of 65% in China.

However, the agreement may have increased Qualcomm's ability to enforce patent royalties and enhanced its bargaining position with Chinese smartphone manufacturers, leading to a larger proportion of Qualcomm chips being used, mainly at the expense of MediaTek's solutions. Previously, a large number of smartphones, most with MediaTek chips, were produced and sold in a grey market that avoided payment of royalties to Qualcomm. This grey market may quickly have become much smaller, contributing to the decline in MediaTek's shipments.

Additionally,  being a Taiwanese company, MediaTek is a foreign company within China, while policies in China tend to favour Chinese companies. As such, the agreement with Qualcomm and related policies may have been designed to favour upcoming Chinese chip designers such as Huawei's HiSilicon technology and the smartphone manufacturers themselves, rather than supporting MediaTek, which is not fully in the Chinese government's interest.

Lack of entry-level 4G SoC has left gap in MediaTek's product line

Because the MT6732, which is the lowest cost 4G solution that MediaTek currently has in the market, is too costly for the entry-level 4G smartphone segment, MediaTek currently has no cost-effective product offering for this segment. As entry-level smartphones transition to 4G, Qualcomm is taking market share with with its 4G-enabled Snapdragon 400, 410 and 210 SoCs, which are already in production targeting the entry-level market. This comes mainly at the expense of MediaTek's existing 3G solution shipments which previously occupied entry-level models in the product lines of most Chinese manufacturers.

Even for existing 3G models, MediaTek may be seeing market share loss as Qualcomm's cost-reduced 3G SoCs may be favoured by certain manufacturers given the changed environment regarding patent royalties.

MediaTek's loss of market share is evident among the current and new product line ups of smartphone manufacturers that previously used a lot of MediaTek solutions, such as TCL (including the Alcatel brand), ZTE, and Xiaomi, as well as other manufacturers.

However, MediaTek is close to bringing the MT6735 to market, which is a lower-cost 4G solution with a WorldMode modem with which it intends to target the entry-level 4G segment. A cost-reduced octa-core smartphone SoC, the MT6753, has also been introduced. It remains to be seen to what extent and when MediaTek will be able to recover market share in the entry level segment. Although its smartphone product line will soon be in good order and complete, it may be affected by factors beyond its control.

Many companies shipping Snapdragon 615 despite technological superiority of MT6752

Adoption of Qualcomm's mid-range Snapdragon 615 SoC by Chinese manufacturers has been strong, even as MediaTek's MT6752 SoC has ramped into production. According to most reports, the MT6752 SoC has a superior cost structure as well as delivering higher performance when compared to Qualcomm's solution, which also dominates new mid-range models from brand-name smartphone manufacturer outside of China. For the reasons explained in the previous section, Chinese smartphone manufacturers may have a strong impetus to ship models with a Qualcomm SoC in order to better deal with patent royalties, despite the technological superiority of MediaTek's chip.

Previous delay of MediaTek's MT6795/Helios X10

MediaTek's main product for the performance segment of the smartphone market, MT6795 (rebranded to Helios X10 last week at MWC), was originally announced in July 2014 with availablity to end users expected before the end of 2014. However, the chip was delayed and it is likely to come to market in the near future, several months after the planned introduction. This has also hurt MediaTek, although given the patent royalty environment it remains to be seen to what extent MediaTek will be able to gain traction with a high-end product, since patent royalties claimed by Qualcomm are significant for high-end devices with a high selling price.

Update (11 March 2015)

On 10 March, DigTimes reported that industry sources expect MediaTek's sales to rebound significantly in March to a revenue level of about NT$20 billion due a pick-up in demand from Chinese manufacturers. The sources attributed the previous decline in MediaTek's smartphone chip shipments to an inventory correction among Chinese manufacturers. According to the sources, there are signs of a pick-up in demand as vendors gear up for the launch of 4G devices in Q2 2015.

However, it is likely some orders from February 2015 where shifted into March. For the months of February and March combined, MediaTek is still likely to be seeing a disappointing year-over-year decline in revenues. Because of the competitive pressures mentioned above, it remains to be seen at what level MediaTek will be able to maintain revenues in the second quarter of 2015.

MediaTek's 4G smartphone chip product line is becoming more complete as the low-end MT6735 (especially) and MT6753 and the high-end MT6795 reach the market. Additionally, some details have surfaced about the new entry-level MT6570 and MT6580 SoCs, which appears to be developments of the popular MT6572 (dual-core Cortex-A7) and MT6582 (quad-core Cortex-A7) platforms with added support for 4G, comparable to Qualcomm's Snapdragon 210 platform, targeting the entry-level 4G segment. Given these new chips, MediaTek's smartphone performance has potential to improve.

Sources: DigiTimes (MediaTek February 2015 sales)

Updated 23 March 2015 (Mention MT6570 and MT6580).