Qualcomm Inc (QCOM)

[Eric]

CDMA V. GSM Battlegrounds: India (Spin Begets Spin)

Hi Jim,

<< ... what I find striking in all of this is the fact that the average cost of GSM phones (with inferior technology) is 50% higher than CDMA phones ($113 vs $75, +$38). >>

I seriously doubt that GSM handset sell-in ASP in India is $38 (or $35) more than CDMA handset ASP even though GSM handsets address a much broader range there beyond the entry level models phones that dominate the Indian CDMA lineup or that the ASP of GSM/3GSM handsets sold into India in April was $113 which evidently somebody extrapolatd from something. If it was, Nokia is in for one heck of a good Q2, but I'm not taking that to the bank.

The global ASP of handsets today (all technologies) is ~$135 or slightly lower, and that ASP of course is propped up significantly by UMTS (WCDMA) and CDMA2000 HRPD handsets which are sold primarily into mature markets, so $113 for GSM sell-in ASP to India doesn't really compute on my abacus. While I suppose it is possible, it does not seem probable, even though GSM handset OEMs benefited from strong upgrade cycles in emerging markets last year and that trend is continuing.

There is definitely a considerably broader portfolio of GSM handsets being sold into India than the CDMA2000 range being sold in, including Nokia UMTS (WEDGE) models for the most affluent, and the ASPs are indeed higher and the best seller there is the relatively high margin Nokia 1110 with pre-paid tracker (or the 1600 with the color screen) neither of which is a sub $50 ULCH, or part of the GSMA ULCH contract: its ASP is below $75, but not below $50 ... yet, although the 3 year old Nokia 1100 which is still being sold to compete with the ultra-low cost Moto's being furnished under the GSMA ULCH contract is, and on the CDMA side so is the new Nokia 1255 manufactured by China's TechFaith with a QUALCOMM MSM that competes with the new ultra-low cost LG's. Reliance's lineup here ...

http://www.relianceinfo.com/Infocomm/Rim/rim_handsets.html

Nokia's complete range for India is here at their Indian cybergateway ...

http://www.nokia.co.in/nokia/0,,45242,00.html

Wise to note that well before the Nokia GSM 1110 and 1600 with their SCOT engine started to ramp in volume early this year the wholesale ASP of the older 1100 -- the best selling single model in global cellular history was sub-$50, and may have actually reached sub-$40 while it was being phased out.

Speaking of LG who as late as last summer claimed 60% CDMA market share in India, and whose handset production (unlike Samsung's or Moto's) remains predominately CDMA, Bloomberg recently commented on analyst expectations (and let's hope they are wrong) ...

LG Electronics Inc., Asia's second-biggest mobile-phone maker and No. 4 worldwide, probably had a record loss of 33 billion won from handsets, according to a separate survey by Bloomberg of 12 analysts. The previous record was a 31 billion won loss in the first quarter. The company reports on July 19.

This despite LG's recent success with the GSM/GPRS version of their KG-800 'Chocolate' phone which they introduced to India at an entry price of Rs 16,000.

Reliance just might be concerned that LG will soon give up CDMA handset manufacture for refrigerators, washers, and dryers -- and GSM/3GSM handsets. <ggg>

Recent spin from the Twin Spin Cities of SoCal apparently has some spinning like a top. It's like a fish story. In every retelling the fish gets bigger, and a fresh water pond trout becomes a Chinook.

Does this statement below say that the ASP of a GSM handset being sold into India is $38 (actually $35) more than a CDMA handset?

According to the Yankee Group, when considering the entire portfolio of low and high-end devices that were available in India during April of 2006, the average wholesale price of all CDMA2000 devices was $35 less than GSM.

That is NOT my read and I don't think the marketeer that studied John Jackson's 15 page report and wrote the PR read that in the report. Let's read that statement again for comprehension ...

... when considering the entire portfolio of low and high-end devices that were available in India during April of 2006, the average wholesale price of all CDMA2000 devices was $35 less than GSM.

Is the source credible? San Mateo (just like Dublin) generally chooses its words VERY carefully, selectively, and precisely for its promotional puff releases and I'm guessing they did so in this case. I consider them to be credible, but I parse em carefully -- very carefully.

The report was 1st brought to my attention on this board when khemera_qc posted CDG's PR referencing it on June 26 -- the day it was issued, and before I listened to the June 21 IPR webcast -- and I've reposted it at the end of this post.

I have to wonder if Mike Hartogs, VP Division Counsel for QTL, or Kanwalinder Singh, President of QUALCOMM India, ever actually read the report when they ad-libbed about it on July 21, although Mr. Singh may have, and probably did, which might account for his qualification which imparted a slightly different spin than Hartogs' statement in the last four sentences of the first paragraph below ...

MIKE HARTOGS: Now while admittedly, there is a small price differential for CDMA and GSM handsets, it's on the order of about $4? And notwithstanding that, the sales volume of CDMA handsets under $50 have far exceeded the number of GSM handsets at that level. In fact, nearly two-thirds of all CDMA handsets sold into India today are priced below $50 and over 98% of them are priced below $75. Not shown in this slide is the comparison of the overall average market selling prices for GSM. And CDMA and they're interestingly enough the average selling price for the GSM phone in India far exceeds the average selling price of CDMA phones. It is I think more than a $30 differential. That number I think Yankee has in their report.

KANWALINDER SINGH: Let me also add to that. Let me also give you another statistic that was briefly referenced by Mike before. If you look at the average weighted prices, wholesale prices, of handsets coming into India in totality for all of GSM and all of CDMA, you will find and this is referenced from the Yankee Report that just came out, that average selling prices of GSM handsets in totality in India is about $38 more than the average selling prices of CDMA handsets coming into India. So you can then see how the effect of QUALCOMM reducing, working with this ecosystem to reduce the prices is actually reducing in dollar terms to the operators and consumers the overhead. It's actually in fact GSM vendors who are bringing in handsets in totality, which are much higher priced than CDMA handsets.

http://www.investorshub.com/boards/read_msg.asp?message_id=11987750

I might add that Mr. Singh referred to handsets of GSM vendors being brought into India, not referencing those produced there by the largest GSM vendor in India, who is also number 2 to LG in supplying CDMA handsets in the sub-$75 category that according to the report accounts for 98% of all CDMA handsets being sold (not manufactured) in India, or LG who is already producing GSM handsets in Pune near New Delhi, and currently has 3% of the GSM market and is gunning for 10% by 2007 ...

http://www.newkerala.com/news3.php?action=fullnews&id=21115

... what I find striking in all of this is the fact that the average cost of GSM phones (with inferior technology) is 50% higher than CDMA phones ($113 vs $75, +$38).

At the end of the day it is a carrier that determines which technology is superior or inferior for his particular market, at a particular time, and what the TOC and ROI will be when comparing migration paths for that network and the suitability of the technology as a platform for VASs ... and consumers buy handsets not technology, and they base their decision on a number of factors but those include what they percieve to be the best available handset features and functionionality at a particular price point.

Across a broad portfolio of phones, GSM, GSM/GPRS, GSM/EGPRS phones have a lower wholesale ASP than their 2.5G 1xRTT counterparts, and an EDGE feature phone or smartphone from Nokia or Sammy Sung will perform with or outperform their 1xRTT counterparts at the same unsubsidized price point in many if not most respects that a consumer values -- including, of course, faster downloads, and the capability to pause and resume a data session to make or take a voice call, and if they are class A, and the network supports it, to multitask voice and data.

If 98% of all CDMA phones that were being sold into India in April had a wholesale ASP less than $75 and almost two-thirds less than $50 (which means B&W display, and nothing but basic functionality -- certainly not whar we'd consider to be 3G data functionality, much less any self-respecting Indian -- then it would seem to me that the ASP would most certainly be many dollars less than $75 and 75% or more would be targeted at entry level only not the more experienced user who is in the upgrade cycle that drove GSM handset sales and higher ASP's in the maturing segment of emerging markets last year and which is continuing into this year. If 98% of all phones that were being sold into India in April had a wholesale ASP less than $75 and almost two-thirds less than $50, then they were sold in at an ASP that is fully 50% less than the global ASP of a broad portfolio of CDMA2000 phones whose ASP is ~$145 or just slightly less.

>> CDMA2000 OFFERS The Largest Selection Of Entry-Level Phones In India From 10 Suppliers

CDG Press Release
Costa Mesa, CA
June 26, 2006 —

http://www.cdg.org/news/press/2006/Jun26_06_phones.asp

CDMA2000 and GSM Handsets are Approaching Price Parity in India

The CDMA Development Group (CDG) (www.cdg.org) announced today that there are 21 CDMA2000® phones being offered for less than $50 USD (wholesale) from 10 different suppliers in India. This compares to only 18 GSM handsets being offered for less than $50 from 5 suppliers. The low-cost CDMA2000 handsets provide access to downloadable value-added services, while the GSM low-cost handsets, as 2G devices, do not.

The level of competition to deliver entry-level handsets in India, one of the most competitive markets in world, has increased significantly. A recent Yankee Group report that focused on the monthly ex-factory/landed cost of all handsets legally imported into India has uncovered many important facts related to the price and availability of ultra-low cost devices. The report, entitled “Aiming Low for Great Heights: Ultra-Low Cost Device Competition in India,” supports the claim that CDMA2000 devices outperform GSM devices in this dynamic market.

Since the beginning of 2006, CDMA2000 handsets have accounted for as much as 60 percent of all entry-level (sub-$50) handsets imported into India on a monthly basis. And, for more than six months, the difference in the average wholesale price of CDMA2000 and GSM phones being sold below $50 in India has been $1.00 to $4.00 USD. During the same period of time, less than 5 percent of the handsets purchased in India were supplied by the GSM emerging-market handset initiative. The findings of this market study show that CDMA2000 is leading the way in offering subscribers more value and doing a better job at fulfilling the demand for entry-level handsets to price-sensitive consumers in India.

The response of the Indian market towards the purchase of CDMA2000 handsets has been very positive. Today, about one-third of the more than 100 million wireless subscribers in India use a CDMA2000 handset. In March of 2006, CDMA2000 handset shipments into India surpassed those of GSM for the first time. One reason for this increase in shipment volume is due to the larger selection of affordable devices from more suppliers across the entire CDMA2000 product portfolio, and their ability to meet the diverse needs of most Indian consumers. According to the Yankee Group, when considering the entire portfolio of low and high-end devices that were available in India during April of 2006, the average wholesale price of all CDMA2000 devices was $35 less than GSM.

As a result of this intense competition, the price gap between entry-level CDMA2000 and GSM handsets shipped into India has narrowed significantly. Market data now shows that CDMA2000 and GSM handsets are equally competitive at the low end. “CDMA2000 low-cost handsets have approached price parity with GSM and are more affordable than GSM handsets across the entire product portfolio,” said Perry LaForge, executive director of the CDG. “These competitively priced devices will enable operators to more effectively address the entire market”.

Recent market studies have confirmed that consumers want to do more with their handsets than just make simple voice calls and send short messages. John Jackson, director of wireless/mobile technologies at the Yankee Group, who led the Yankee Group ultra-low cost handset study states, “It is clear that consumers want affordable phones that offer value, not necessarily the cheapest phone. Consumers associate value with brand affinity, quality perceptions, and performance expectations. In this regard, the low end is no different from the high end. Therefore, the lowest priced handsets may actually drive consumers away. In markets such as India where PC penetration is nominal, the data-capable handset will define the Internet experience for a massive numbers of end users.”

“Affordable data access using solutions such as BREW ® are catalyzing value-added service consumption by allowing users to download ringtones, wallpaper, games, news, daily prayers, and eventually Bollywood video clips. In the long term, exposing users to an enriched customer experience and exposure to advanced data services will enable operators to sustain revenue and profit growth,” added Jackson.

CDMA2000 offers a larger selection of fixed and mobile devices to address the diverse needs of individual markets and different market segments than any other advanced wireless technology today. Based on current market data, CDMA2000 is leading the way towards addressing the rural market segment in the most price-competitive mobile communications market in the world – India.

The CDMA industry is working on several initiatives to further reduce the cost and accelerate availability of entry-level devices, as well EV-DO mobile broadband and WorldMode TM global roaming devices. CDMA2000 is becoming the 3G technology of choice for rural markets.

More information on CDMA2000 handsets is available at www.cdg.org. A copy of the Yankee Group report on ultra-low cost devices is available at www.yankee.com. <<

Best,

- Eric -