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Friday, June 02, 2006

Finally, consolidation in handset software.....

Yesterday Motorola acquired handset software & silicon IP vendor TTPCom for £103m, through a specifically set-up subsidiary. TTPCom is a company I know very well, having first met them shortly after their IPO, more than 5 years ago (I was previously an equity analyst for an investment bank, covering small technology firms). The announcement came on the same day that TTPCom announced its results for its 05/06 financial year, which had been pretty poor, despite the growth in volume of the handset industry.

This is quite telling. There are dozens of specialist software companies (as well as semiconductor & silicon IPR firms) servicing the mobile phone industry. The fact that one of the largest independent suppliers to the sector has suffered from such problems, in a banner year for the industry, is a bit of a sobering thought for the hordes (shoals?) of minnows that still flock to it. I've long thought that the market for handset software - especially application "suites" - has been overcrowded, especially given in-house development by a handful of leading handset manufacturers. But it seemed as though every time one disappeared (eg IXI Mobile) another two would pop up in its place.

Generally, handset software firms fall into two categories - those with "point products" like video players, predictive text functions or individual "clients" like push-to-talk - or those with platforms or "integrated suites". Clearly, there's a huge attraction in becoming a "platform player", but the problem has always been that the larger vendors like Nokia are quite happy with their in-house software, so outsiders have always been chasing the Tier 2's and 3's. And there's not a huge amount of kudos (or value) in being "leading software platform supplier to all the vendors who don't have enough scale to do their own". Not only that, but end customers don't really value software that much (they prefer pinkness & thin-ness), and very few other people in the industry seem to recognise just how tricky it is to get right. (Hence my prediction that "IMS phones" will be incredibly late-to-market, as everyone has understimated the complexity involved. See the new Disruptive Analysis SIP and IMS Phones Report for more details)

Motorola, however, appears to "get it". Long castigated for its phones' user interface limitations, and slow in rolling out its various Linux and Windows Mobile products, I think it's fair to say that handset software has never been Moto's core strength. Lower down the stack, it has also been fairly closely tied to its spun-off Freescale chips. TTPCom fills in a few separate pieces of the puzzle - firstly, its protocol stacks work across multiple vendors' chips, and secondly its Ajar platform can potentially fit nicely "below" the higher-end Java-Linux inhouse platform (or, possibly, be integrated with it). The TTPCom solution should also mean it's easier for Moto to manage its various outsourcing/ODM partners, by providing them with a more standardised software platform.

The acquisition premium was pretty staggering, at 246% of the previous closing price, indicating how vicious and short-term sentiment had been around the company's share price - and how difficult it is for outsiders to get their heads around the mobile phone software business. That said, $200m for 600 high-end mobile engineers is not unreasonable at all.

The other interesting side to this acquisition is TTPCom's stake in ip.access , probably the best-established player in the suddenly smoking-hot cellular picocell infrastructure business. TTPCom recently got a round of external funding for this arm of the company, but retains a large stake. Interestingly, there's a very good fit indeed here - ip.access has been relatively slow with creating 3G "home cellular access point" versions of its products (also called femtocells). Meanwhile, Motorola's AXPT rival lacks 2G capabilities - fine for providing indoor high-speed data connection, but missing out on the more basic need for low-cost homezone voice options.

Potentially, this acquisition throws a few spanners into the works for various of TTPCom's other customers. TTPCom has a broad range of other handset clients (although it has probably focused more on semiconductor firms as routes-to-market of late), while ip.access has an OEM deal with Siemens for picocells. Whether Moto can assuage these companies' fears by setting up a separate subsidiary remains to be seen.

This is also not the only transaction involving handset software recently. Swedish rival Teleca (which owns the Obigo software division, a rival to Ajar) has bought a Russian consulting firm, Telma, which also had Motorola as a client. It will be interesting to see if some of the other big players in the space (eg OpenWave's mobile software unit) also have a role to play in consolidation.

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