Qualcomm Inc (QCOM)

[Data_Rox]

And then there were three

The Economist
January 25, 2003
beijing and london


WITH around 200m subscribers, or 20% of the world total, China is the largest market for mobile telephones. So China's choice will have a huge impact on the biggest conundrum currently facing the industry: what will be the main standard used by third-generation (3G) mobile telephones to offer such excitements as internet-browsing and video? When operators bought licences to run 3G networks, paying far too much (over $100 billion) for them, a single global standard still seemed a possibility. No more. Instead, there are two rival technologies: W-CDMA, championed by European firms, which is expected to become the dominant 3G standard, but has been delayed by technical problems; and CDMA2000, championed by Qualcomm, an American firm, whose technology is already used in South Korea, America and Japan.

Now, the big question is: which standard will China choose? Backers of both 3G standards, each with strong political support, have been furiously lobbying the Chinese government (which is expected to issue 3G licences this year) to bless their particular technology. To complicate matters further, however, a third contender has entered the field: China's home-grown 3G standard, called TD-SCDMA. This new standard was derived from an earlier technology developed by Siemens, a German conglomerate. It was a candidate to become Europe's 3G standard, but lost out to W-CDMA. The China Academy of Telecommunications Technology, which has spent five years refining the standard in conjunction with both Siemens and Datang, a state-owned Chinese technology firm, then took it up.

Why might China like its own standard? Adopting TD-SCDMA would reduce its dependence on foreign vendors and technology, and level the playing field for domestic suppliers of network infrastructure and handsets. Choosing W-CDMA would mainly favour European vendors, who are most familiar with that technology, while choosing CDMA2000 would mainly favour American vendors. Choose TD-SCDMA, however, and the foreigners are back to square one, except for Siemens, which is spending euro50m ($54m) a year on the technology in an attempt to steal a march on its rivals. Tellingly, Motorola, an American equipment vendor, has announced that it has begun to develop TD-SCDMA technology too.

Another advantage of TD-SCDMA may be that the other two 3G technologies rely on intellectual property belonging to Qualcomm. Proponents of TD-SCDMA claim that their technology was developed independently. Thus they need not pay licence fees to Qualcomm, making TD-SCDMA equipment cheaper. Qualcomm disagrees. A lawsuit seems inevitable.

Fervent backers of TD-SCDMA believe it will emerge as a mainstream 3G standard in China, and possibly beyond. Klaus Ahlbeck of RTX Telecom, a Danish company that is developing TD-SCDMA technology, says he believes that China will try to push the technology both at home and in neighbouring countries. After all, the government says it wants China to become a net exporter of intellectual property.

However, others argue, as Connie Hsu, an analyst at Pyramid Research in Hong Kong, puts it, that "China would never go it alone--it doesn't like to be different from other leading markets." One option would be for the Chinese government to bless more than one technology: both W-CDMA and TD-SCDMA, perhaps. The problem with this, notes Patrick Horgan, an analyst at APCO China in Beijing, is that China's two mobile operators, China Mobile and China Unicom, are both partially privatised. If either one was forced to adopt TD-SCDMA, an unproven technology, its shares would fall.

Such sceptics believe that the likeliest outcome is that China Mobile will adopt W-CDMA, China Unicom will adopt CDMA2000, and that TD-SCDMA will take off only if the government issues additional licences to let other firms enter the market, one of which then opts to adopt the unproven technology. Gavin Patterson, an analyst at Baskerville, believes it is most likely that TD-SCDMA will be used by China Netcom and China Telecom, two fixed-line firms, to provide "wireless local-loop" access. This works much like domestic cordless telephones, but on a larger scale; it is cheaper than connecting homes with copper wires, but the handsets work only within a limited area.

So far, the Chinese government is prevaricating: when it will issue the 3G licences, whether it will mandate particular technologies and whether TD-SCDMA will be one of them, all remain unclear. Officials are closely monitoring 3G's progress in other countries. Much hinges on how quickly W-CDMA can overcome its teething problems. If the European standard continues to struggle as different vendors battle to get their equipment to work together smoothly, TD-SCDMA could start to seem increasingly attractive, particularly to China Mobile, which is currently leaning towards W-CDMA. Given the government's vagueness and foot-dragging on 3G, says Ms Hsu, there is even the possibility that China might be thinking about skipping 3G altogether and going straight to 4G--whatever that turns out to be.