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TI, Qualcomm spar over 3G phones

09:08 AM CDT on Tuesday, September 6, 2005


Bloomberg News

http://www.dallasnews.com/sharedcontent/dws/bus/stories/090605dnbusti.2ee9edc0.html

Texas Instruments Inc.'s Christophe Jouin won't take his staff for a working lunch to the House of Kabobs or the Tiki Hut Grill or any restaurant in the Sorrento food court a five-minute walk from their suburban San Diego office. His enemies could be sitting at the next table.

Jouin, 39, is the ranking manager at the 200-person West Coast outpost of Dallas-based Texas Instruments, whose semiconductors run more than half of the world's mobile phones. His closest rival, Qualcomm Inc., has headquarters around the corner on Morehouse Drive.

“We have to be careful what we say over lunch,” says Jouin, after dining at Harry's Bar and American Grill, a 10- minute drive from his office and a safer place to discuss the competition.

The battle between the two biggest makers of semiconductors for mobile telephones is intensifying as phone sellers and service providers roll out the next generation of handsets -- and try to persuade consumers to cough up more than $200 for them.

In the works for almost a decade, the so-called 3G phones use double or triple the number of chips found in current models, providing a potential bonanza for semiconductor companies. Getting the phones right -- from the half-inch width to a battery that won't die after 15 minutes -- may translate to a $40 billion market by 2009, Boston-based research firm Yankee Group Research predicts.

Investors' Bets

Investors are betting Texas Instruments can parlay its lead in so-called 2G and 2.5G models to dominate the new market. The company gets more than $1 billion in annual chip sales -- about one-tenth of its revenue -- from Espoo, Finland-based Nokia Oyj, the world's biggest handset maker.

Texas Instruments' shares have surged 32 percent this year to $32.50 on Sept. 2. Qualcomm's stock fell 5.7 percent during the same period after outpacing Texas Instruments in 2004.

Qualcomm twice slashed its forecast this year for worldwide shipments of the main type of 3G phones, which are known as Wideband Code-Division Multiple Access models. Qualcomm Chief Executive Officer Paul Jacobs now predicts manufacturers will ship 45 million WCDMA phones globally this year, down from a January forecast of 55 million.

Jacobs has said he wants to control half of the WCDMA market. Yet he hasn't managed to wrap up deals for 3G chips with either Nokia or Schaumburg, Illinois-based Motorola Inc., the world's No. 2 cell-phone maker, says Cody Acree, a Dallas-based analyst at Legg Mason Wood Walker Inc.

'Hard-Pressed'

“I'm hard-pressed to see how he gets there without getting one of them,” says Acree, who rates Texas Instruments shares “buy” and Qualcomm “hold” and says he owns neither stock.

Both Texas Instruments and Qualcomm may stall as they wait for customers to determine the magic combination of bells and whistles that will entice them to trade up to 3G models.

Earlier this year, Nokia installed a program on some phones to track what customers did with them. The callers used an average of 15 separate applications each week, such as watching videos and working on documents. They downloaded five new programs a month.

Pertti Korhonen, Nokia's chief technology officer, says no one feature emerged as a clear favorite. “There has to be the right device for the preference of the individual,” Korhonen says. “And those preferences are different.”

A killer application -- if it does arise -- may surprise even seasoned observers. Motorola and other handset makers failed to predict the popularity of built-in cameras in 2003. And users unexpectedly embraced ring tones to personalize their phones, downloading $217 million worth last year in the U.S., according to New York-based research firm Jupiter Research.

Bubble Burst

U.S. carriers are wary of rushing headlong into 3G after their European counterparts got burned by paying about $100 billion for fast-data licenses.

Instead of ushering in a new telephone age -- where mobile phone users could watch movies or challenge each other in video games -- the spending by Newbury, England-based Vodafone Group Plc, Bonn-based Deutsche Telekom AG and Milan-based Telecom Italia Mobile SpA peaked as the Internet bubble burst in 2000. Vodafone and others delayed services such as video calls that would have run on the new networks, sending shares plunging.

'Chip on Their Shoulders'

“The service providers still have a chip on their shoulders because they don't think they've been fully compensated for the buildouts they did in the 1990s,” says Daniel Morgan, who helps manage $5.45 billion, including shares of Qualcomm and Nokia, at St. Petersburg, Florida-based Synovus Investment Advisors.

This time around, companies are betting the question is when -- not if -- 3G will take off. Customers have gotten used to camera phones and on-screen games, and doing anything more requires faster speeds.

For carriers, networks updated for 3G have the added advantage of handling 25 percent to 30 percent more voice traffic and reducing dropped calls, says Kris Rinne, chief technology officer of Cingular Wireless LLC, the biggest U.S. mobile-phone carrier.

“By going to 3G, I increase my capacity and I reduce my costs,” Rinne says, noting that users who aren't sold on the gee-whiz aspects of 3G will see an improvement in the quality of a simple phone call.

Intel as Spoiler?

Intel Corp., the world's biggest semiconductor company, may emerge as the spoiler in the 3G chip wars. The Santa Clara, California-based company is jumping into cell phone chips as its main market -- personal computer semiconductors -- slows. Intel's sales growth will fall to 8 percent next year from 15 percent in 2005, according to Thomson Financial.

To counter the drop-off, Intel CEO Paul Otellini, 54, is pushing a new 3G processor called Hermon, which puts the communications capabilities and the software that runs a cell phone's video, sound or games on a single chip.

For Texas Instruments, Qualcomm and the other 3G hopefuls to win in the projected $40 billion new market, they'll have to produce phones that do a lot of cool things, even if no one's quite sure which of those things will lure consumers.

And they'll have to persuade investors, who have been burned before, that this time around 3G is coming -- even though it's not the prevailing standard yet. With hurdles like those to conquer, it's a wonder anybody at Texas Instruments or Qualcomm has time for lunch at all.