CDMA Smackdown
Nokia prepares to battle Qualcomm for control of the fastest-growing wireless standard. Again.
By Matthew Maier, May 27, 2003
In its quest to remain the world's biggest manufacturer of mobile phones, Nokia (NOK) has recently stepped up efforts to establish itself as a leader in CDMA (for code division multiple access), the industry's fastest-growing mobile communication protocol. To that end, Nokia announced last week a partnership with Texas Instruments and Switzerland's STMicroelectronics, two of the world's largest semiconductor manufacturers, to develop new CDMA chipsets for use in upcoming Nokia handsets.
Nokia's maneuver comes at a critical juncture for the Finnish phone giant. The global heavyweight in mobile-phone sales, with about 40 percent of the market, Nokia has dominated by focusing on phones that use the GSM (global system for mobile communications) standard. GSM now accounts for some 75 percent of all phones in use. Yet as that market matures, and newer models start incorporating third-generation data services like always-on Internet access and multimedia applications, CDMA-based networks and phones (which can handle more data) are becoming increasingly popular. That's a problem for Nokia. While it has offered CDMA phones since 1997, they haven't sold well. During the first quarter of 2003, Nokia sold just 7.6 percent of all CDMA phones purchased around the world, according to research firm Strategy Analytics. That was a significant drop from the 11.3 percent share that Nokia commanded during the same period last year.
In part, analysts say, Nokia's CDMA problems stem from its inability to develop a reliable CDMA chipset -- the brains of the phone. Unfortunately, early Nokia models, including handsets in the 2100, 5100, and 6100 lines, had chipsets that didn't work well with next-generation networks, which nearly led to massive recalls. Representatives from Verizon Wireless (VZ) and other U.S. operators were on record stating that Nokia's handsets failed to live up to expectations. Nokia executives have always maintained that the company's early hiccups were the result of a halfhearted effort. "Our performance was as good as could have been expected, given the low resource-level commitment in the past," says Adam Gould, vice president for Nokia's CDMA technology strategy.
So, having the philosophy that it didn't need to reinvent the wheel, Nokia decided to close its Seoul-based CDMA research and development facility early this year and partner with some pros instead. Enter Texas Instruments and STMicroelectronics. Experienced semiconductor manufacturers both, those companies will help shoulder some of the R&D and chip development costs, which in turn should bring down the costs of Nokia's CDMA-based phones. (On average, those phones cost roughly $50 more than GSM-based handsets.)
The wrinkle in all this, of course, is Qualcomm (QCOM), the company responsible for developing CDMA in the first place. Qualcomm receives roughly 60 percent of its revenues from sales of its CDMA chipsets and also gets licensing revenues from CDMA chips developed by other manufacturers -- including, ironically enough, Nokia -- since it controls many of the patents. Virtually owning the CDMA market, Qualcomm has enjoyed very little competition in its core businesses, which was one of the main reasons Nokia decided to try to break in. Though Nokia licenses CDMA technology from Qualcomm, it does so grudgingly, and the two companies have been rivals for years.
Who's going to win? Chances are it will be the same victor you see in any situation like this, when two companies make a concerted effort to develop a new technology: the consumer.
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