Qualcomm Inc (QCOM)

[khemara_qc]

Nokia and the Standards Battle in China (NOK, CHL, CHU)
Posted on Jul 12th with stocks: CHL, CHU, NOK

http://china.seekingalpha.com/article/13456

David Wolf submits: Nokia has been tossing a press release of sorts around China announcing that they are bringing DVB-H, the mobile television standard most favored by The Boys from Espoo, to China to test. They even have a single model of a phone that can actually use that standard for the eyebrow-raising price of RMB 6,000.

Welcome, DVB-H and Nokia. Glad you could join the party, especially since QUALCOMM has been here testing MediaFlo for at least two years, and the local team has managed to modify their Digital Multimedia Broadcast standard (DMB - I know, not the smartest acronym around, but go figure) to include wireless handheld devices.

If it has taken this long for Nokia to start testing, something is seriously wrong, especially since the word coming from the west end of Chang’an Avenue is that SARFT is about to crown DMB-T/H [grin] as the standard of choice for China. Nokia is basically showing up at the 11th hour.

Frankly, I think something much bigger is going on.

Gunfight at the T.V. Corral

Word around the campfire in Beijing is that China Mobile (CHL) and China Unicom (CHU) have actually been testing all of the standards for some time. What makes this particular standard decision different than, say, the decision on what 3G standard to use or what frequency allocation each standard will get is that this decision will NOT be made by the Ministry of Information Industries, or MII, the regulatory entity that oversees the telecommunications industry.

For complex political reasons I won’t go into here, the decision will be made by the State Administration for Radio, Film, and Television, or SARFT, because mobile television is seen by many senior government officials and Party cadres as a broadcast medium and thus under SARFT’s purview.

Now, I suspect the mobile handset manufacturing industry in China would like to see DVB-H or MediaFlo win, certainly not because of any deep love of either Nokia or QUALCOMM, but because these are international standards and phones made to use these standards are thus sellable overseas. If China can build a healthy market in DVB-H or MediaFlo phones, there are waiting markets overseas and the Chinese manufacturers would have enough economies of scale at home to be competitive abroad. In theory, at any rate. For carriers, the equipment is tested, in commercial use, and reliable, and thus good for business.

SARFT, on the other hand, likely favors the DMB standard because it has been reviewing it for terrestrial television broadcasts for some time, because it is a local standard (thus providing SARFT an opportunity to show its own overseers how it supports local innovation) and, frankly, because deep down inside they know that selecting it will cause a few cases of indigestion over at the MII.

Nokia - and the carriers - all know this. And it doesn’t make any of them very happy.

“Doc, Wyatt and I are Going to Check on the Horses. Wanna Come?”

So here is what I think is happening:

• The testing - from a technical standpoint, is done. That’s not what this is really about.

• Nokia applies for permission from SARFT for a test network, with a view of doing the test with (in all likelihood) China Mobile. SARFT won’t want to do it, but China Mobile will push very hard both at SARFT and the State Council to get Nokia permission, on the grounds that DVB-H deserves more than just a lab test.

• With such a test approved, it gets harder for SARFT to make an immediate decision about a standard. After all, testing is still taking place, right?

• The Test Network will be a “test” in name only. What it probably will be is a full commercial rollout in a limited geographic area. (After all, why announce a retail price for a handset if you’re just “testing” the network?) SARFT can’t cry foul on this because SARFT and entities under it use the “commercial test” method for technologies in television as well.

• Once the Test Network is up and running with customers paying for service, it gives the MII, China Mobile, and Nokia an opportunity to have greater influence in the final decision about a standard, and in the process of appealing SARFT’s selection at higher levels of government, like the NDRC or the State Council.

If this is the case (and mind you, I’m speculating here), Nokia is playing a dangerous game. It is not wise to interpose yourself between giants, and especially between organizations like the MII and SARFT. By fronting for its patrons in China, Nokia may well make itself some powerful entities. In a place where memories are long, the structure of the government is still evolving, and officials bounce around on a regular basis, that’s asking for trouble.

If I’m wrong, if there is nothing more to this than in the current release and Nokia is truly appealing to SARFT on its own behalf, then Nokia is far less China-savvy than even I had thought. Apart from the fact that this request should have been made a long time ago, it should have come from a local company, not a foreign enterprise. That would have made it much harder for SARFT to say no, and it would have put DVB-H on a more balanced footing with DMB.

Nokia’s China people know this. And that’s why this all seems so strange.

The Shots Heard Round The World

While seemingly esoteric, this fight has a profound importance that transcends the realm of the propeller-heads in the mobile phone business.

Sometime over the last year, something quite amazing happened. In the largest television market on the planet, with over 350 million TV households, the number of mobile phone subscribers surpassed the number of homes with televisions. At the same time, quietly, a small cottage industry has been growing around delivering both general and highly targeted marketing to multimedia-enabled mobile devices.

Meanwhile, a growing number of very large advertisers in China - and their agencies - are losing their patience with the rising advertising rates and the falling returns on spot television ads on Chinese television. They’re unhappy with having to fight harder for better air time, with the TV industry’s continued inability to deliver a ratings system anyone could swear by, and with growing evidence that Chinese are spending less time watching broadcast TV and more time on their computers and on the go.

The more visionary of those advertisers and agencies are taking a long, hard look at mobile TV (MoTV), China’s increasingly mobile population, and the ability to get more and more meaningful viewer information and feedback through mobile. This, understandably, worries the folks in the TV business. Even if they wind up supplying the content to mobile TV, they’re going to have to share their ad revenues with the carriers, and they’ll at best be in a weakened position when it comes to setting their rates.

We’re talking about potentially millions and eventually billions of RMB moving out of broadcast TV and into MoTV, more than enough to support the medium and to use China to make a global case for MoTV.

If a decision is made by SARFT - or someone who could override SARFT - to select a standard that is market-ready (like DVB-H or MediaFlo), MoTV could become a reality quite quickly, meaning that the shift of dollars would start taking place comparatively soon. If the decision was made to go with DMB - which still needs development work before it is commercially ready - the market would require many more years before MoTV became more than a blip for advertisers.

What is at stake, then, is the future shape of the Chinese Media Environment, and the flow of millions if not billions of U.S. dollars, completely disregarding any monies to be earned by royalties on technology, which could also run into nine or ten figures.

That’s a high stakes fight. And The Boys From Espoo are now squarely in the middle of it.

Good luck, Nokia. You’ll need it.