Qualcomm Inc (QCOM)

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Nokia and Qualcomm Battle It Out For 3G Dominance (NOK, QCOM)
Posted on Jul 11th with stocks: NOK, QCOM

http://wireless.seekingalpha.com/article/13338

submits: Picture this scenario if you will. Two bitter rivals going “eyeball to eyeball” in a battle of nerves designed to wear the other down; fingers ready on their respective triggers and seemingly oblivious to the mutually assured destruction that would result if they actually acted on their implied threats.

If thoughts of the ongoing nuclear stand-off with Iran or North Korea come to mind, then it proves that you’ve been reading the front pages of late, but you haven’t necessarily been reading the business pages.

The two rivals in this “cold war” standoff are not card carrying members of the “axis-of-evil”, bent on challenging the might of the United States, but two of the biggest players in the global communications industry - Nokia (NOK) and Qualcomm (QCOM).

The paradox in all this is that both parties have been long time partners, critically dependent on each other.

So what then is the basis for the current acrimony?

As the holder of key patent rights to the third generation (3G) cell phone standard, known as CDMA 2000, Qualcomm has reaped the benefit of its near-monopoly position with this technology by raking in the royalty payments from cell-phone handset and chip manufacturers deploying it’s version of 3G. It’s estimated that somewhere between 4-5% of the price of each CDMA enabled handset goes as a royalty payment to Qualcomm.

Licensees of CDMA 2000 technology have long chafed at paying what they regard as excessive royalties to Qualcomm and rival chipset manufacturers have cried foul at perceived anti-competitive practices on the company’s part. All of this has prompted a wave of litigation that patent lawyers only dream of.

Last year, Qualcomm’s longstanding legal skirmishing with Broadcomm began to widen into an industry-wide conflict. In October 2005, six companies — Texas Instruments (TXN), Broadcomm (BRCM), Ericsson (ERICY), Nokia (NOK), Panasonic Mobile Communications and NEC Corp (NIPNY) — filed a complaint with European telecommunication regulators, claiming that Qualcomm’s licensing arrangements were stifling competition.

In May of this year, Qualcomm fired its own shot, by suing Nokia in British courts over alleged patent infringement related to GSM technology.

All this acrimony is happening against a backdrop of growing acceptance of GSM technology and its version of 3G, called WCDMA, from around the globe. From a 55% global market share in 2000, GSM/WCDMA reached 82% in the first quarter of 2006, as penetration has been facilitated by the availability of cheaper GSM handsets - the key to penetrating low-end markets in China and India.

Global market share could swing back towards CDMA 2000 though, as Qualcomm’s System on Chip (SoC) solution for CDMA 2000 is waiting in the wings and offers the prospect of dramatically lowering handset costs for its licensees.

As the world’s leading manufacturer of cell-phone handsets (33% market share), Nokia has a clear stake in the outcome of this battle and isn’t sitting on the sidelines. Nokia’s CDMA 2000 license with Qualcomm covers only a partial set of patents and is due to run out by April 2007. The current license doesn’t cover access to the new SoC technology.

Late last month, Nokia signaled its intention to scale back its commitment to CDMA 2000 when it canned a proposed joint venture with Sanyo to make CDMA 2000 handsets. The move can be seen as a step towards a full disengagement from CDMA 2000 in anticipation of a non-renewal of its license deal with Qualcomm next year.

As an alternative to CDMA 2000, Nokia could push ahead with its adoption of the WCDMA standard. As the next generation version compliant with GSM, adopting WCDMA is a logical move for Nokia, given its existing base of business in the GSM world. However, the move would not be without risks.

Qualcomm has raised the point that elements of the WCDMA standard are covered under certain patents it holds and you can bet that it would be prepared to take the issue to court. The last thing Nokia would want is to be locked into an endless legal wrangle with Qualcomm over WCDMA, while the emerging market opportunities tied to the emergence of this standard get siphoned-off, due to CDMA 2000 with SoC gaining traction.

Already, CDMA has been gaining in China, with volumes up 55% last year, prompted by a 30% decline in handset prices.

Losing its piece of the next generation (3G) market that should naturally flow from its major commitment to the GSM standard would be a disaster for Nokia. For its part, the last thing Qualcomm wants is to see is its steady stream of royalty income from CDMA 2000 undercut by the unchallenged emergence of an alternative standard like WCDMA.

Given what’s at stake for both parties, the build-up to next year’s April’s license deadline is bound to affect the share price of both companies. Despite Qualcomm shares dropping nearly 21% since the beginning of the year (vs a 7% gain for Nokia), my personal preference would be to continue to favor Nokia at this point.

Nokia has managed to hold its own in response to the intense competition that it now faces in the handset market via product innovation and savvy marketing, while Qualcomm’s competitive response has been primarily confined to the courtroom - a strategy that may have fully run its course.

By Eugene Bukoveczky, Contributor -

Eugene Bukoveczky is a freelance writer for Investopedia.com. He holds a Chartered Financial Analyst (CFA) designation and has broad experience in investment research and portfolio management. He has traveled extensively during his career, working in Toronto, New York, London and Dubai. He graduated from York University School of Business with an MBA.

At the time of release Eugene Bukoveczky owned no shares in any of the companies mentioned in this article.