It’s been a wild roller-coaster ride for Qualcomm Inc.’s stock this year.
The former Wall Street angel is fighting a public-relations battle that says a move to wideband Code Division Multiple Access technology is a move away from Qualcomm.
Such is the story in South Korea, where the political fights between cdma2000 and W-CDMA technology are perhaps most evident. Several Korean operators are said to be leaning toward choosing W-CDMA technology-which is incompatible with the CDMA technology they use today-for new spectrum the Korean government expects to grant later this year for third-generation services. Korean operators, however, plan to evolve their existing CDMA systems into the next generation as well.
Qualcomm’s stock fell by $5.06, about 8 percent, to end July 7 at $56.63 on the news. Investors appear to be harshly punishing Qualcomm’s shares in recent months, many analysts note. The stock has fallen from a $200 high in January and has been under pressure since recently warning of expected lower chipset orders in South Korea and on news that China Unicom likely will not pursue CDMA technology. Many analysts downgraded Qualcomm’s stock, fearing slower growth in Korea, which accounts for about 40 percent of the CDMA market. At RCR press time, the stock was up $1.88 at $63.88.
Investors have been reacting to speculation on which type of 3G technology the world’s markets will choose, and a move to W-CDMA doesn’t bode well in their minds.
“The stock has been penalized on misinformation of Qualcomm’s business model,” said Mark Roberts, infrastructure analyst with First Union Securities. “The longer-term business fundamentals are solid.”
Now that Qualcomm has shed its infrastructure and handset division, its sources of income primarily come from its chipset business and from royalties, which significantly increase every quarter as CDMA technology sales increase around the world.
Investors have bought into this concept. PaineWebber analyst Walter Piecyk initiated coverage of the company in December at a price target of $1,000 a share. He said 85 percent of phones sold by the end of the next decade will use CDMA technology. Qualcomm’s resulting royalty stream could reach $20 billion, he said. Investors loved it. Shares of the San Diego company’s stock surged 30 percent and Qualcomm’s stock split four for one.
With the hype surrounding the prospect of mountains of royalties for Qualcomm, it’s no wonder intellectual property rights are a sensitive issue for investors. Qualcomm has continually defended its position, saying it will receive the same amount of royalty revenues regardless of which CDMA technology operators choose for the third generation.
Many analysts agree the CDMA innovator benefits in terms of royalties regardless of which version of CDMA technology operators choose. The question lingering is: How much?
“Many believe that Qualcomm will ultimately receive a lower royalty payment for W-CDMA phones, and that there will be more competition in the W-CDMA chipset market,” said a report by Merrill Lynch analyst Michael Ching following the news from Korea.
Analysts estimate Qualcomm enjoys a royalty rate of around 5 percent on the wholesale price of Interim Standard-95 products today. Qualcomm won’t give out the figures.
Wit SoundView Corp.’s model calls for a blended royalty rate of about 2.5 percent for Qualcomm (4.5 percent for cdma2000 and 1.5 percent for W-CDMA technology) when 3G technology matures in 2010. More manufacturers will be able to claim intellectual property rights to it, likely diluting Qualcomm’s share. Nearly 30 companies so far have claimed they hold essential patents to W-CDMA technology.
“Qualcomm continues to expand its substantial portfolio of CDMA patents, including many patents essential to the deployment of any commercially viable CDMA mobile system,” Qualcomm Chairman and Chief Executive Officer Dr. Irwin Jacobs said it a press release, once again defending Qualcomm’s position on 3G technology. “Qualcomm has now extended many of its license agreements to cover all 3G modes. Under these agreements, a licensee pays the same royalty rate to Qualcomm for W-CDMA and cdma2000 equipment as for cdmaOne infrastructure, phones, semiconductors and other equipment.”
Qualcomm says it has licensed wideband CDMA technology to L.M. Ericsson, Lucent Technologies Inc. and Nortel Networks. Nokia, Siemens AG and Alcatel are noticeably absent from the list.
First Union’s Roberts believes Qualcomm is somewhat a victim of its own licensing agreements, which are confidential. The Koreans historically have voiced their anger about the royalties they pay for CDMA technology.
“They are tough negotiators and sign very attractive license agreements. But the license agreements are confidential,” said Roberts.
No one knows how the royalty game will play out at this point. The final European UMTS standard still isn’t finished, and most vendors say they are waiting for this to happen before they make significant headway in hammering out the IPR rights to W-CDMA technology with various players. Some vendors, spearheaded by Alcatel, have attempted to create a patent platform in order to pool IPR and agree on a maximum aggregate royalty to keep royalty costs down. But major companies like Motorola Inc., Nokia, Ericsson and Qualcomm haven’t joined.
In Korea, political posturing has taken hold in recent months. The Korea Herald quoted an Ericsson executive as saying his company, along with NTT DoCoMo and Nokia, have agreed to a royalty cap. Qualcomm has travelled to Korea to say that it can charge a royalty rate for cdma2000 lower than what the W-CDMA camp may offer since a number of companies will claim IPR to W-CDMA technology.
Investors also know this: Even though Qualcomm supports all CDMA 3G modes, it’s clear the company favors cdma2000 technology and it fights in places where the technology is in danger. In Japan, it planned on applying for a 3G license if current CDMA operator DDI Corp. switched its technology choice to W-CDMA technology. DDI ultimately chose cdma2000 technology, citing cost factors.
“Although Qualcomm supports all modes of 3G CDMA, the company believes that carriers deploying cdma2000 technology have a major economic and time-to-market advantage over carriers deploying W-CDMA,” Jacobs said last week. “Therefore, we will continue to examine opportunities to invest in carriers where the competition has not elected to use cdma2000.”
Korean operators say they don’t want to become an island with cdma2000 technology, and they are seeing key Asian operators moving in the direction of W-CDMA technology. Multimode networks and handsets Qualcomm says will solve roaming and incompatibility problems don’t seem to be catching the industry’s attention at this point.
“It makes sense if the rest of the world is going W-CDMA,” Jeffrey Schlesinger, technology analyst with UBS Warburg L.L.C., said of Korean operators’ public preference for W-CDMA technology. “It makes them more competitive long term.”
