As the wireless handset market surpasses one billion units shipped per year, application processors are an increasingly important enabler of multimedia capabilities in high-end smartphones and feature phones. However, according to a recent study from ABI Research, this growing market will face several key challenges over the next several years.

“Over the course of our forecast period, from 2007 to 2012, strong unit growth is expected to be offset by dropping unit prices,” says ABI Research senior analyst Doug McEuen. “After significant increases during the next two years, the decline in unit prices will compress the application processor revenue to a flat growth rate.”

In later stages of market development, application processor unit shipment growth is expected to decrease due to two key factors: integration and the rise of the ULCH (Ultra Low-Cost Handset) market. Integration impacts the market negatively, as multimedia functions are combined into the baseband processors, fabricated using 65 nm or 45 nm process technology. Low-cost handsets, which will not require an additional application processor given their limited multimedia functionality, likely will increase market share within the overall wireless device market, further contributing to the decrease in application processor unit growth.

In 2012, application processor revenue is expected to reach nearly $2.8 B, with unit shipments of 553 million, at a cost of $5.04 per unit.

ABI Research notes that over the next several years, the smartphone segment will be the largest market for application processor unit shipments. Although smartphone revenue will decrease from $3.3 B in 2007 to $2.1 B in 2012, it will continue to dominate the market. “One device with the strongest growth over the same forecast period is the high-end feature phone, or enhanced phone, as unit shipments are expected to increase by 42%,” concludes McEuen, “while revenue will rise by almost 21%.”