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Qualcomm's Latest Chip Illustrates a Price-Boosting Strategy of Its Own

Ashraf Eassa, The Motley Fool

One increasingly common trend in the smartphone market is for smartphone makers to focus on building more feature-rich and higher-priced products in a bid to boost average selling prices in the face of falling industrywide unit shipments. (Analysts with IDC claim that smartphone unit shipments are set to fall for the third year in a row this year.)

That strategy has helped device makers boost their own revenues, but such a strategy can be a boon for component makers, too. After all, more feature-rich devices demand more advanced features and capabilities, potentially meaning more revenue for those component makers.

A Qualcomm Snapdragon chip next to a flower.

Image source: Qualcomm.

Smartphone giant Qualcomm (NASDAQ: QCOM) recently released a new chip called the Snapdragon 712. According to AnandTech, the chip is little more than a variant of the older Snapdragon 710 that runs at slightly higher speeds.

While this might not seem particularly noteworthy, investors should care. Here's why.

A better chip for a bigger price tag

When chips are produced, some chips inevitably come out more capable than others -- that's just the nature of chip manufacturing. In the smartphone world, chip companies haven't historically sold multiple variants of the same chip but segmented based on their quality (which could ultimately translate into higher speeds). Instead, what these companies often do is set the bar low enough so that the bulk of the chips produced can meet those required specifications.

In recent years, though, Qualcomm seems to be breaking the mold in attempting to offer variants of a base chip design that run at slightly higher speeds. The Snapdragon 712 is the latest example of such a practice, but Qualcomm has done it before with products like the midrange Snapdragon 616, which AnandTech described as leaving "the [Snapdragon] 615 mostly unchanged, with the top [clock speed] of the little cluster jumping from 1 GHz to 1.2 GHz." (When all else is equal, higher clock speed means better performance.)

Now, faster chips are certainly interesting to technology geeks, but as far as investors go, what matters is that higher-performing products can generally command higher prices than lower-performing parts. 

Qualcomm doesn't disclose the pricing of its Snapdragon parts to major smartphone makers, but I'd be willing to bet that if a smartphone maker went to Qualcomm today and wanted to place orders for either the Snapdragon 712 or the Snapdragon 710, the Snapdragon 712 chips would be pricier. To the extent that Qualcomm's customers shift their demand to the higher-performing products, Qualcomm's chip business should benefit. 

Why might customers be willing to pay more?

To be clear, it doesn't look like the performance difference between the Snapdragon 712 and the Snapdragon 710 is all that huge. AnandTech says that the Kryo 360 CPU cores (the high-performance cores on the chip) in the Snapdragon 712 run at 2.3 GHz, just 100 MHz (or 4.5%) greater than the ones in the Snapdragon 710. The graphics processing unit (GPU), too, is only 10% faster, per the publication.

So, why would potential smartphone customers want to potentially pay more for the Snapdragon 712 instead of the Snapdragon 710? The best reason I can think of is as follows: If a smartphone maker wants to introduce a higher-end version of a smartphone that comes packed with a Snapdragon 710 and charge a premium for it, equipping such a device with a Snapdragon 712 (and possibly some other slight enhancements) could make such a product viable in the marketplace. And, as long as the premium that the smartphone maker can charge for the new device significantly outpaces the premium that the smartphone maker has to pay Qualcomm for the better chip, then this is a win-win situation. 

Since the smartphone market is fiercely competitive, a situation that could arise is smartphone vendors all rushing to introduce Snapdragon 712-based devices in a bid to capture that premium, but since the smartphone market is hugely competitive, it would translate into Snapdragon 712-based products replacing the Snapdragon 710-based devices at roughly similar price points with the latter being discounted further.

In any case, customers may either want to go with the Snapdragon 712 for certain models to boost their profitability or to simply keep up in what seems to be a never-ending tech spec arms race in the smartphone market. Both of those situations are ultimately positive for Qualcomm.

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Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.