Qualcomm Inc (QCOM)

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WiMax Keeps Gathering Momentum
The "ultimate complement to Wi-Fi," it's expected to be widely available commercially in 2006, with Intel likely leading the way
By Kenneth M. Leon

http://www.businessweek.com/investor/content/aug2005/pi20050826_9926_pi044.htm

A number of recent developments since my last column (see BW Online, 6/20/05, "Here Comes WiMax World") indicate that all of the pieces are coming together for WiMax service.

We at Standard & Poor's Equity Research feel confident that WiMax service will be commercially available in 2006. Trials by telecommunications carriers around the world are already under way.

TESTING IN SUNNY SPAIN. We believe WiMax is the ultimate complement to Wi-Fi, capable of back-hauling wireless hot spots and wireless LANs (local area networks) to the Internet, providing campus connectivity, and offering a wireless alternative to cable and DSL for last-mile broadband access. It has a service range of up to 50 kilometers and provides data rates of up to 280 megabits per second per base station.

Just as a refresher, WiMax stands for worldwide interoperability for microwave access. It's a wireless technology that has been updated from IEEE 802.16 to the 802.16-2004 specifications for fixed wireless services.

Many vendors are beginning to submit their WiMax base-station and customer-premises equipment for network interoperability testing at Cenecom, the WiMax Forum Certification Laboratory, which opened in early August in Malaga, Spain. This means all WiMax products must comply with 802.16-2004 and be certified by Cenecom in Spain.

CORPORATE DONATIONS. Intel (INTC ; ranked hold; recent price: $26) plans to begin shipping its new WiMax chip, known as Rosedale, to customers in late 2005. It has entered into nonexclusive alliances with Alcatel (ALA ; hold; $12) and Nokia (NOK ; hold; $16) to deliver WiMax equipment in the second half of 2005.

This month, Intel said it's already helping 13 communities in the U.S. and internationally in varied wireless projects like Wi-Fi, and we expect it to expand to broader WiMax networks in the coming months. According to Reuters, Intel expects to work with more than 100 cities around the globe to improve public services via WiMax use.

Many cities are planning Wi-Fi and WiMax networks to bring affordable broadband wireless Internet service to all their residents within a year. Intel has donated capital to projects in several cities, including Philadelphia, Cleveland, Corpus Christi, Tex., and Portland, Ore.

SERVICE-PROVIDER QUESTIONS. Recently, Philadelphia selected EarthLink (ELNK ; hold; $9) and Hewlett-Packard (HPQ ; hold; $27) as finalists in a bidding process for the construction of a citywide wireless broadband network.

While the equipment suppliers and chipmakers see win-win scenarios for deploying WiMax, the picture is far from clear on the service-provider side of the business. Right now, there's no authorized radio frequency spectrum from the Federal Communications Commission for the issuance of WiMax licenses.

Conventional thinking would suggest, in our view, that licenses are needed for startups to get funded from the capital markets in addition to private-equity firms. So for the major wireless carriers, which paid billions of dollars to the FCC for authorized 3G licenses or additional radio frequency spectrum, how can WiMax be a good thing for their broadband wireless business or return on invested capital?

ROOFTOPS KEY. The U.S. has several emerging fixed wireless carriers, including AirBand, Clearwire, and TowerStream. These carriers believe bandwidth is adequate within 50 megahertz to 500 megahertz bands for Wi-Fi and WiMax without seeking radio frequency licenses from the FCC.

TowerStream will be able to provide quick installation times, with 48-hour guarantees for new equipment that will be SIP-enabled, a stantard that allows for Internet voice service. In early August, TowerStream announced an alliance with Vonage Marketing, a subsidiary of Vonage Holdings, so its customers can choose Vonage's small-business Net telephone services with low-rate billing.

The barriers to entry may be weak for WiMax from a license regulatory perspective, but some startups believe the value proposition is tied more to building rooftops.

PRICE DROPPING. If a WiMax provider is able to secure "last interference rights" through long-term lease contracts for the tallest buildings' rooftops, these companies may gain a strong advantage over late entrants or incumbent service providers that lack the optimum line-of-sight to the target customers or office buildings in metropolitan markets.

Some of these companies don't believe you need a uniformed radio frequency in the U.S. market. In our view, vendors can make adjustments in the radio frequency used by the base-station equipment and customer-premises equipment, but the economies of scale that lead to lower WiMax equipment pricing may be problematic.

Nonetheless, TowerStream sees base-station equipment in the $30,000 to $40,000 range in 2006 and self-installed customer gear priced at $400 to $500 per unit initially, then coming down to around $250 in 18 months.

QUALCOMM'S PLAN. OFDMA, which stands for Orthogonal frequency division multiplex access, is the preferred radio air frequency for WiMax. This radio frequency technology has many developers but, in our view, it remains uncertain whether any single one has the OFDMA intellectual-property rights as they relate to WiMax.

Qualcomm (QCOM ; buy; $40), however, a leading developer and innovator of code division multiple access (CDMA) and other advanced wireless technologies, announced in August that it plans to acquire Flarion Technologies, a pioneer and leading developer of OFDMA technology and the inventor of FLASH-OFDM technology for mobile broadband Internet protocol services.

Flarion, with an expansive portfolio of OFDMA intellectual property, has worked closely with several operators worldwide in developing and demonstrating OFDMA technology and products. Qualcomm plans to pay approximately $600 million net of Flarion's projected cash at closing, in Qualcomm stock and cash, including the assumption of options and warrants at fair value.

LAPTOP PLANS. Upon the satisfaction of certain milestones over the next few years, Qualcomm may also pay an additional $205 million in the form of cash and Qualcomm stock. Completion of the acquisition, which is subject to necessary approvals, is expected later this year.

It's worth noting that the first WiMax Forum-certified products are targeted for fixed WiMax services, not mobile. The initial certifications will cover equipment in the 3.5-gigahertz frequency band. The forum will make sure all future enhancements to the baseline profiles will support backward compatibility.

Probably by early 2007, the WiMax Forum plans to certify IEEE 802.16e for mobile wireless access from laptops and handhelds. We believe Dell (DELL ; strong buy; $36) and other major PC makers are already talking with Intel and other chipmakers about their design requirements for WiMax inside a laptop.

Other WiMax vendors are busy. In addition to Intel, Japanese chipmaker Fujitsu announced in early 2005 that it had begun developing a chip similar to Rosedale, which it hoped to launch in 2006. Select members of the WiMax Forum -- including Airspan Networks (AIRN ; buy; $5), Alvarion (ALVR ; buy; $9), Aperto Networks, Ensemble Communications, Navini Networks, Nokia, Proxim, and Wi-LAN -- plan to start shipping products in late 2005 or 2006. We would expect Cisco Systems' (CSCO ; buy; $18) Linksys division, Netgear (NTGR ; strong buy; $22), and others to be very active through consumer-electronics channels with WiMax products.



Required Disclosures
In the U.S.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.

In Europe
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.

In Asia
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.

Globally
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.



5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
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