Qualcomm Inc (QCOM)

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Intel, Qualcomm Ready To Fight Over Emerging WiMax Standard
BY REINHARDT KRAUSE

INVESTOR'S BUSINESS DAILY

Posted 9/30/2005

http://www.investors.com/editorial/IBDArticles.asp?artsec=16&issue=20050930

A battle is brewing between Intel (INTC) and Qualcomm, (QCOM) and the future of the wireless phone industry could hang in the balance.

The two firms have starkly different visions. Intel, the world's No. 1 chipmaker, looks to build a market for a wireless broadband technology called WiMax — a successor to the popular Wi-Fi standard.

Qualcomm, a pioneer of mobile phone electronics, looks to provide broadband via cell phone networks. And if WiMax spreads, it could supplant the need for Qualcomm's technology.


Qualcomm appears to have the edge, analysts said. But Intel's marketing muscle is hard to match.

"Intel is the godfather of WiMax," said Max Weise, an analyst at the consulting firm Adventis. "It'll be interesting to see how this battle plays out. At the moment, Qualcomm is probably better positioned."

The big question is whether WiMax will catch on with Internet users. The technology has its roots as a big brother to Wi-Fi, a wireless technology that lets laptop computer users connect to the Internet.

Early WiMax systems, like Wi-Fi, provided "fixed-point" access — say, in a hotel lobby or coffee shop — without the ability to roam.

Intel's goal is to turn WiMax into a more mobile technology. New versions of WiMax, in theory, will let users download a movie on a fast-moving train.

If Intel has its way, WiMax networks will start replacing Qualcomm-powered cell phone networks by next decade.

Why is Intel so interested in WiMax? It plans to sell WiMax chips for notebooks and handheld devices, much as does with Wi-Fi chips now, and also to cell phone and smart phone makers.

WiMax should be a big step up from Wi-Fi. WiMax beacons have a longer range and could theoretically offer more bandwidth — as much as 70 megabits per second vs. 54 for today's most popular flavor of Wi-Fi.

But WiMax is a gamble. Analysts expect the fixed-point version of WiMax to catch on, but they aren't sure about the mobile version.

Fixed WiMax gear will likely be used in developing countries or parts of rural America — where homes lack high-speed Internet hookups via cable or phone wiring.

As for mobile WiMax, it will get its first big tests in 2006.

That's when Korea Telecom will launch WiBro, a mobile WiMax-type service, in South Korea.

In the U.S., Sprint Nextel (S) plans to test two types of mobile WiMax gear early next year.

If Sprint decides to build a mobile WiMax network, that will give Intel and other WiMax backers — such as Samsung, Motorola (MOT) and Texas Instruments (TXN) — a big lift.

The best-case scenario for Qualcomm is for WiMax to flop. In the worst case, the mobile flavor of WiMax will prove its mettle and sap the need for cellular networks.

So there's pressure on Qualcomm to prove that its technology — called CDMA, or code division multiple access — can handle superfast Internet connections.

The company said it's ready to do that. "We're well-positioned under any scenarios," said Paul Jacobs, who took over from his father, Irwin, as Qualcomm's chief executive in July. "It'll get fought out in the marketplace. CDMA is in a good position. It has a great road map."

Qualcomm has been active as the WiMax threat grows. In August, the company acquired Flarion, a startup wireless equipment firm.

Buying Flarion gave Qualcomm access to OFDM, or orthogonal frequency division multiplexing. WiMax equipment relies on OFDM.

Qualcomm said it will supply Flarion-type gear to wireless phone companies if they want it. One long-range possibility: hybrid CDMA-OFDM networks.

"Qualcomm is hedging its bets — in case CDMA eventually gets killed off or loses out to OFDM," said John Freeman, an analyst at Precursor Group, a research firm.

Intel is much bigger than Qualcomm, having raked in $34.2 billion in revenue last year. Qualcomm had $4.88 billion in 2004 revenue.

Intel dominates the personal computer industry, along with Microsoft. (MSFT) Now the chipmaker wants to become a force in wireless technology, and it sees WiMax as a way do that.

To push WiMax along, Intel invested in Clearwire. That company has built a fixed WiMax network in about 20 small U.S. markets.

Intel's main thrust has been outside the U.S. It's been seeding WiMax projects in the Asia-Pacific region, including Malaysia, Thailand and the Philippines.

A hurdle WiMax faces worldwide is a scarcity of licensed radio spectrum. Intel has been lobbying governments across the globe to make spectrum available for WiMax.

There's been some speculation that Intel may buy radio spectrum itself. But most observers doubt it would actually do that.

WiMax backers look to tap into a general dislike for Qualcomm and its patent licensing tactics, analysts say.

Telecom gear makers pay Qualcomm royalties on equipment they sell to wireless firms. Many chipmakers have to ante up too, since they design chips that work with CDMA gear.

Royalties and licensing fees for CDMA gear accounted for 27% of Qualcomm's 2004 revenue. Almost one-third of the mobile phones sold worldwide in 2004 used CDMA. It's even more pervasive in the U.S., where CDMA is the dominant wireless standard.

That means a lot of wireless firms are making payments to Qualcomm.

"No one likes sending a check to San Diego (Qualcomm's headquarters)," said Derek Kerton, a principal at the consulting firm Kerton Group.

Sprint Nextel agrees. "Most of the world is unhappy with Qualcomm," said Barry West, Sprint's chief technology officer. "They feel that its licensing model is egregious."

Then again, WiMax could also carry licensing fees. WiMax Forum, a group of companies setting technical standards, has indicated there will be no royalties for WiMax gear. But West doesn't believe it.

"There has to be some sort of royalty structure," he said.

Sprint looms as a major player in the Qualcomm-Intel battle. That's because the company owns a large chunk of 2.5-gigahertz radio spectrum in the U.S. That spectrum could be used by WiMax gear.

But Sprint is a longtime backer of Qualcomm's technology. It was the first U.S. wireless firm to become a CDMA customer in the mid-1990s. And Qualcomm's Jacobs downplays the possibility of Sprint bolting the CDMA camp.

"Sprint often tries many technologies," Jacobs said. "In the end, we tend to see eye to eye about what the technology road map should be."

For now, Sprint is keeping its options open. It plans to test mobile WiMax gear from both Motorola and Samsung. It's also interested in Flarion's gear and yet another wireless broadband technology from startup IP Wireless.

Sprint plans to start building a wireless broadband network by late 2007. The firm could play the role of kingmaker depending on which technology it picks, West said.

"No one else is in our position right now," West said. "We have all the assets. We have a vision of wireless interactive multimedia services."

Wireless phone companies are eager to sell more data services, rather than just voice calls. For now, text messaging accounts for most of their data revenue. But that's changing — especially outside the U.S.

Many wireless customers of Vodafone, (VOD) NTT DoCoMo (DCM) and SK Telekom (SKM) are watching video clips, sending photos and downloading music.

Most of today's wireless networks can't handle data-intensive applications, analysts said. Even emerging third-generation, or 3G, networks often aren't up to the task, they said. That's why there could be a need for OFDM-based technology.

Qualcomm doesn't think such a radical shift is needed. Upcoming versions of CDMA will pump up data speeds, the company said.

If mobile WiMax gains momentum, Qualcomm still has options.

One of Qualcomm's reasons for buying Flarion was getting its hands on key OFDM patents. Since WiMax is partially based on OFDM, Qualcomm could ask makers of WiMax gear to pay royalties. Qualcomm hasn't said whether it plans to do that. "We do believe we have IP (intellectual property) in WiMax," said Jacobs.

One issue is whether Intel and others can create a mobile WiMax technical standard without infringing on Qualcomm's patents.

"For sure, Qualcomm-Flarion has some IP related to WiMax, but there are other people with intellectual property," said Zvi Slonimsky, chief executive of Alvarion, (ALVR) a top maker of fixed WiMax gear.