Few companies can shake off quite as easily the big wallop Texas Instruments Inc. (NYSE: TXN) is receiving from Nokia Corp. (NYSE: NOK) following the decision to phase out Symbian, its smartphone operating system, replacing this with the Windows OS from Microsoft Corp. (Nasdaq: MSFT).
That decision will cost TI, the sole supplier of chips for Symbian-based product, a chunk of its baseband IC revenue, but the digital signal processor and analog semiconductor company is already moving beyond that and does not see a lasting impression on annual revenue from the development.
"I would describe [the Nokia announcement] as somewhat neutral to TI," says Ron Slaymaker, vice president of investor relations at the semiconductor maker. "We've intended and planned for some time for that business to go away."
With $14 billion in annual sales -- 2010 figures -- TI can casually shake off blows that would cripple a much smaller company. Baseband IC sales of $435 million accounted for 12 percent of the company's total fourth-quarter revenue of $3.5 billion. Although total 2010 baseband revenue was flat at about $1.71 billion, compared with $1.73 billion in the preceding year, TI had actually shifted its focus from that segment. Its total revenue grew in 2010 to $14 billion from $10.4 billion in 2009, and the share contributed by baseband fell as a percentage of sales during the same period to 12.3 percent versus 16.5 percent. TI, clearly, was moving away from that market.
However, Nokia's adoption of Windows OS still dealt a major blow to TI considering the investment that must have gone into supporting that business. Furthermore, had Nokia been more successful with Symbian and stayed in that market, TI would have benefited greatly from that relationship. But it's clear that a single-source relationship, such as the one TI had with Nokia for Symbian, is fraught with dangers for both the supplier and the OEM customer.
OEMs are known to be wary of contracting with a single supplier for any components, for good reasons. Any failures at the supplier to maintain a steady stream of parts could wreak havoc on the OEM supply chain. There are other potential problems. A single-source supplier relationship for components could hold back innovation and hinder pricing reduction efforts. An OEM that is heavily dependent upon a single company for a critical component may find itself held hostage in negotiations and face months, if not years, of transitioning to a new supplier should it decide to terminate the agreement.
But the supplier is equally in jeopardy if anything goes wrong in its relationship with the OEM, as exemplified by TI's experience. OEMs are not obliged to consider the impacts on a supplier when considering strategic business initiatives. Obviously, sustaining a reliable, long-term relationship would be one key criterion during enterprise reorganization, but eventually the OEM's decision would be based on what is best for the company and its shareholders. If that action involves the abrupt termination of a single-source agreement, the supplier could find itself facing unanticipated losses.
Luckily for TI, growth was accelerating elsewhere. The company was pointing its heaviest guns on the analog semiconductor market and boosted investments in the area. This helped lift analog IC sales to $1.5 billion in the 2010 fourth quarter from $1.3 billion in the comparable 2009 period. That trend will continue even as the reverse occurs in the baseband IC market.
TI's Slaymaker expects continued reduction in the company's baseband IC revenue over the next two years. "Our expectation is that by the time we get into 2013 that revenue will essentially be gone," he says. TI had planned this well ahead of the Nokia deal with Microsoft that sounded the death knell for Symbian. (See: Nok-Win a No-Win Combination.)
I wonder what Nokia would have done if it had stuck with Symbian and TI had been the one to end the single-source supplier relationship. TI had given Nokia notice already when it signaled it would be refocusing on its analog business. How much notice did it in turn get from Nokia?