Solarflare Communications, a chip startup in Irvine, Calif., has raised $26 million in a third round of funding. That brings the total the company’s raised to $126 million, which is a lot of money for a chip startup, even when you consider that the amount includes money raised by Level 5 Networks, which Solarflare acquired in April 2006. But the startup is hoping to use that money to attack a big problem in the data center at prices lower than the current technology offers. And if it succeeds, it’ll make computing faster and data center operations more flexible.

Like many other communications chip companies, Solarflare is working on a way to deliver 10 Gigabit Ethernet over copper, which is cheaper than delivering it via fiber. That enables the high-speed transport technology to move outside of the telecommunications networks, where companies such as Infinera are already pursuing 100 Gigabit Ethernet over fiber, and into mass adoption in the data center. Getting the technology into servers at a reasonable cost would create a market 10 times bigger than that of networking switches.

Others chasing mass adoption of 10 GigE on the server side are Intel and Broadcom, which like Solarflare, have controller chips. Broadcom and Solarflare also have PHY chips sampling with customers. Solarflare CEO Russell Stern plans to integrate the PHY with the controller chip in 2009, beating Broadcom to the market. He will use some of the funding for that purpose.

It’s likely Broadcom will end up attempting an integrated 10 GigE over copper chip as well. Broadcom doesn’t talk about its chips until they’re sampling, but the company did make a mint by cornering the market for integrated 1 Gigabit Ethernet chips for servers. However, success for Solarflare or Broadcom is probably three years out and depends on creating an energy-efficient chip at the 32 nanometer process node, according to Bob Wheeler, an analyst at The Linley Group.

Power consumption is a big challenge for these chips because unless it’s managed properly, they run too hot for servers and switches. And because technology doesn’t stand still in the data center, where virtualization and ever-increasing amounts of data are screaming for fatter pipes, hybrid forms of networking technologies that mix fiber or Fibre Channel with Ethernet are emerging to bridge the Gigabit gap between servers and networking equipment. Broadcom has several products that take advantage of such a hybrid networking environment. Startups such as Arastra and Woven Systems are also in that sector, and may see gains at the expense of a unified 10GigE world, which means Solarflare’s market opportunity could fragment if cheap, integrated 10 GigE takes too long.

If this story interests you then you should definitely check out our upcoming conference, Structure 08.

A lot has been written about the new 3G iPhone, its price and its impact. Now it’s time to shift attention to the most important question about this device: How much money will it make for Apple and its carrier partners?

While I don’t have any concrete financial projections, after reading some of Wall Street’s better analysis and taking clues from my own sources, I can offer some observations, which I’ve packaged in a Q&A format here:

Q: Why did Apple agree to a price subsidy?
A: Mass adoption. AT&T Mobility CEO Ralph de le Vega told the WSJ that it was all about getting the device to the mass market. “I think this is going to reach people that would otherwise never put $199 into a mobile device,” he said.

Q: Is subsidizing the handset going to cost AT&T and other carriers, like UK-based O2 (which is offering a free version with premium packages)?
A: Yes. In the WSJ interview, de la Vega says, “It’s going to impact earnings in 2008 and 2009 in a negative way, but will turn very profitable in the long term.”

Q: How much of a hit will the subsidy be to AT&T’s revenues/earnings?
A: The company says between 10 and 12 cents per share. According to Stifel Nicholas analyst Christopher King, this assumes that AT&T gets around 5.5 million incremental gross subscriber additions and a $200 subsidy per phone in both 2008 and in 2009.

Q: AT&T says the subsidy agreement with Apple will become accretive starting in 2010. Likely?
A: “For AT&T to meet its 2010 accretion goal, we believe the company will have to significantly accelerate its market share over the course of the next 12-24 months, among the most lucrative, post-pay subscriber base,” Stifel’s King writes in a notes to clients. “With the current levels of wireless penetration, we believe this implies AT&T must take subscribers from other carriers.”

I don’t see it happening either, especially since other handset makers will undoubtedly have some tricks up their sleeves with which to respond to the iPhone. The window of opportunity to sell a lot of phones for Apple is not unlimited.

Q: How many 3G iPhones does Apple hope to sell?
A: UBS Research estimates that the company is looking to push out between 10 million and 15 million 3G iPhones, based on their checks with vendors and parts suppliers. But even despite the subsidies, UBS analysts expect the final number could be closer to the lower end of that range. By way of comparison, Motorola sold about 11.3 million Razrs the first year — with subsidies, global distribution and multiple carriers in the very same regions. And that was one of the best-selling phones ever.

Q: How much money can Apple make selling 15 million units?
A: Assuming Apple gets $399 per device from the carriers (using Stifel’s math of a $200 subsidy) and most of the devices sold are the low-end model, Apple could make $5.98 billion. Of course, the numbers could be much higher if the high-end model becomes popular. So a reasonable guess would be between $6 billion and $7 billion. This will be a profitable enterprise for Apple, according to analysis of the iPhones parts by research firm Portelligent. The materials currently costs about $170, but that will soon go down to $100 as volumes scale.

Q: Will it impact Nokia and RIM?
A: I wouldn’t bet on it, despite the fact that in Nokia’s home market of Western Europe, Apple has not only addressed the lack of 3G connectivity but signed some huge distribution deals. At 15 million units, the iPhone will be marginal compared to Nokia’s offerings. Nor do I think that RIM will keel over, though I do think this puts the kibosh on RIM’s consumer play somewhat.

Q: Who loses?
A: My bet is on Motorola and Palm. Motorola is just a rudderless Titanic right now, and is especially vulnerable because it doesn’t have anything that it can use to compete with the likes of an iPhone. Similarly, Palm just doesn’t enjoy the cachet it used to, and the lower-priced iPhone makes the $99 Centro look a tad dowdy. Given how much AT&T has riding on the 3G iPhone, I am betting they will purposely promote this to the detriment of others.

Q: What about the iPhone ecosystem — who’s making what inside the 3G iPhone?
A: Infineon is making the baseband and RF transceiver, while Samsung is providing the application provider. Forward Concepts analyst Will Strauss says the GPS chip is based on Broadcom’s Global Locate technology (and not a Broadcom chip, as we had initially reported) that has been licensed by Infineon. Time to re-check that information again.

PS: I promise this is the last iPhone post till all the hoopla dies down.

Freescale should get ready for change. I visited the Austin-based chip maker yesterday to talk about wireless and networking chips as well as broad trends in the industry, and walked away realizing that the firm needs to split itself up in order to survive.

The company has some very cool technology — especially around its multicore processors for embedded systems such as printers, storage arrays and routers — and a huge base of users for its Power architecture. But it has too many areas of focus. In the next two years, it’s unlikely that the company will have the same combination of businesses it has today.

Specialization is key in the chip-making industry because it allows a company to allocate its R&D more effectively, optimize manufacturing processes and generally improve profits. Freescale, which makes chips for automobiles, RFID systems, cell phones, base stations, networking equipment and industrial applications, designs both high-volume chips at advanced process nodes and low-volume chips that require a lot of manufacturing tweaks.

It’s likely that Freescale’s private equity owners will divide the company along the lines the firm established late last year: networking and multimedia; microcontrollers; cellular; and RF, sensors and analog. Each of the divisions made more than $1 billion in 2007 and could be combined with similar divisions at other firms such as Infineon, Broadcom, STMicroelectronics or even Intersil. Earlier this year, Freescale got a new CEO (from Intersil) with M&A experience, so change is certainly in the air.