Qualcomm Inc (QCOM)

[khemara_qc]

Nokia falls short of wireless goals
Firm likely to turn to rival Qualcomm for CDMA chips in venture with Sanyo

By Jennifer Davies
UNION-TRIBUNE STAFF WRITER
April 21, 2006

http://www.signonsandiego.com/news/business/20060421-9999-lz1b21nokia.html

Call it Finnish pride or credit Nokia's aggressive, take-no-prisoners business style. Whatever the reason, for years, Nokia, the No. 1 mobile phone company in the world, resisted Qualcomm's wireless technology.

Initially, Nokia was convinced, along with almost everyone else, that Qualcomm's standard, called code division multiple access, or CDMA, would fail. Nokia instead focused on a competing standard that became the dominant wireless technology in the world.

But as San Diego-based Qualcomm made inroads in key markets like the United States and South Korea, Nokia took notice and began targeting the CDMA phone business, opening up a state-of-the-art facility in Poway in 2000. But even as Nokia began to offer CDMA cell phones, the company refused to buy Qualcomm cell-phone chips.

That stance made Nokia a lone wolf in the CDMA wireless world, as every other major mobile phone company used Qualcomm's chips. In 2003, Nokia joined up with Texas Instruments and STMicroelectronics with the aim of providing alternative CDMA chips and finally cracking Qualcomm's near-stranglehold on the CDMA chip market. Analysts estimate that Qualcomm has as much as 90 percent of the market.

But Qualcomm's percentage could soon reach 100 percent as Nokia might finally capitulate and become a Qualcomm customer – sort of.

In February, Nokia announced that it was joining its CDMA operations with Sanyo to establish a separate company that would focus exclusively on CDMA phones. The joint venture deal, which is expected to be finalized in next few months, will have about 3,500 employees worldwide.

Nokia's current Poway facility, which has about 1,100 employees after recently laying off 200 workers, will become the global headquarters for the new company, which has yet to be named.

While no formal announcements about chip suppliers have been made, there are indications that the new entity will indeed be a Qualcomm customer despite Nokia's and Qualcomm's historically frosty relationship.

“Qualcomm is an important partner for Sanyo at the moment,” said Timo Ihamuotila, senior vice president and general manager of Nokia's CDMA mobile phone business. “Qualcomm will certainly be a key partner for the new company as well.”

The joint venture will help both Sanyo and Nokia flesh out their CDMA product portfolio, Ihamuotila said. Whereas Nokia has had much of its success in the cheaper, entry-level phones in such regions as Latin America, Sanyo has done better in the high-end market in countries like Japan.

By combining Nokia's and Sanyo's market shares, the new company would catapult itself into the second-largest CDMA phone maker in the world behind LG Infocomm.

Despite the business strategy behind the joint venture, analysts said the move signaled that Nokia had finally admitted defeat in the CDMA market.

“I do think this is them sort of going uncle,” said Michael King, an analyst with Gartner Group.

While Nokia would hardly characterize its CDMA venture as a failure, the company no doubt has failed to reach the lofty goals it had set. Back in 2003, the company said it wanted to have 25 percent of the CDMA market by 2005.

Currently, Nokia has about half that, with about 12.9 percent of the CDMA phone business, according 2005 numbers from Strategy Analytics, a market research firm.

“Clearly, you can draw the conclusion that it has not been exactly as we had hoped,” Ihamuotila said.

Nokia is used to achieving its goals, having built itself into the No. 1 mobile phone maker by concentrating on the other wireless standard, GSM, short for global system for mobile communication.

Early in Qualcomm's history, most people discounted its technology, saying it is was too complicated and expensive to compete with GSM, which already had a fairly impressive headstart.

While CDMA has made inroads, GSM is still the most prevalent wireless technology in the world. But with high-profile carriers like Verizon and Sprint using Qualcomm's CDMA technology, Nokia and other wireless phone makers have realized they also must make phones using that technology if they are going to improve their sales.

Still, while the Sanyo-Nokia joint venture will focus on CDMA, Nokia will continue to concentrate on GSM and its next-generation technology path.

Nokia's failure to capture more of the CDMA phone business was hardly its fault alone, said Albert Lin, an analyst with American Technology Research.

He said Nokia had expected Texas Instruments to come through with CDMA chips that could match Qualcomm's products. The problem, in part, was that Texas Instruments focused on a different variation of Qualcomm's next-generation technology, called CDMA2000 EV-DV, but wireless companies like Sprint eventually went with the technology Qualcomm was pushing, CDMA2000 EV-DO.

The end result is that Texas Instrument's next-generation CDMA chips had no real market, so Nokia couldn't use them in their phones.

“They just skipped over that technology,” Lin said of the wireless phone companies.

For its part, Texas Instruments said it wasn't the chips it produced but rather the anti-competitive nature of the CDMA market that torpedoed its foray into the the business.

Alain Mutricy, the company's vice president and general manager of cellular systems, complained that Qualcomm has made it impossible for other companies to compete.

“CDMA is not a fair, open, competitive market,” he said.

Because of that, Mutricy said Texas Instruments decided to get out of the CDMA chip business and focus on other wireless technologies it deemed to have better growth opportunities.

Texas Instruments and Nokia are not the first the companies to try to enter the CDMA chip market only to give up.

Motorola, the No. 2 mobile phone maker, used its own chips but now buys them from Qualcomm. LSI Logic and Intel were interested in entering the CDMA chip business but decided against it. Sanjay Jha, president of Qualcomm's CDMA Technologies Group, said that economies of scale, not anti-competitive practices, explain his company's success.

He said that when a company has only 10 percent of the market, it can only invest in one type of chip. But Qualcomm is always working on new versions of its technologies so it can stay ahead of consumer demand.

Nokia, for instance, is still using CDMA chips that have a harder time providing such next-generation services as video and audio clips than Qualcomm's CDMA2000 EV-DO chips do.

The rise in popularity of those next-generation services and CDMA2000 EV-DO is part of the reason Nokia had to figure a different way to tackle the market, Lin said.

“When you are looking at 15 percent of the market is EV-DO, it's sort of hard to stay No. 1 when you have zero percent of that market,” he said.

But others disagree. Mutricy of Texas Instruments said that the other next-generation technology, W-CDMA, or wideband-CDMA, which uses some of Qualcomm's patents but is considered to be a more open standard than CDMA2000, is growing faster – so that's where companies like Nokia and TI are concentrating their attention.

Ed Schneider, an analyst with Charter Equity Partners, said Nokia's decision to join up with Sanyo for CDMA phones is both a tacit admission of defeat in the CDMA business as well as an acknowledgement that the market has fundamentally changed.

“They are saying that CDMA is not as important as it was three or four years ago,” he said.

But Ihamuotila begged to differ, saying that the technology is an important and growing sector and one that the new joint venture will go after aggressively.

“The CDMA market is growing on pace with the global handset market,” he said. “It is hard not to characterize it as a growth market.”



--------------------------------------------------------------------------------

Jennifer Davies: [phone]; [e-mail]