Qualcomm Inc (QCOM)

[khemara_qc]

Lex live: 3G intellectual property
Thursday May 11, 8:55 am ET
FT.com

http://biz.yahoo.com/ft/060511/fto051120060912547720.html?.v=1

Investors are sceptical about 3G. After years of hype, only a tenth of global mobile subscribers have 3G phones. Still, the spat between Nokia and Qualcomm (NASDAQ:QCOM) over intellectual property (IP) suggests 3G has finally come of age.

Qualcomm pioneered CDMA technology, but missed out on the 2G boom which was largely based on the rival GSM standard. In 3G, however, its position is outstanding, with critical patents owned for both standards (CDMA2000 and WCDMA), which it licenses to handset and component manufacturers. Licence revenues should reach $2.6bn in 2006, of which about half should be from 3G.

Qualcomm's model has attractions. Unlike GSM patent owners, it has no major conflicts of interest with handset makers. For a fee, anyone can get access to the IP it owns or has aggregated. The question is whether that fee, of perhaps 4 per cent of a handset's price, is fair. Qualcomm points out that it has amicable agreements with 130 manufacturers. However, Nokia, Ericsson, NEC and Panasonic all now claim that Qualcomm is overcharging.

They say that Qualcomm's share of WCDMA IP is lower than for CDMA2000, while its royalty rates are the same. Qualcomm disputes this, but offers no alternative analysis. Financial metrics suggest massively excessive returns. Qualcomm's IP division's operating margins are over 90 per cent. It is entitled to an economic return on its high risk investment. However, IP operating profits of about $2.4bn this year compare embarrassingly well to cumulative research and development spend of $4.6bn over the past decade.

Despite the evidence, Qualcomm exhibits the confidence of the ascendant. Rightly so. The absolute impact on end user prices is too small to spark consumer outrage, and regulators could take years to act. By that time even the 3G boom may have come and gone.