TALES OF THE TAPE: Good Qualcomm
Patent Isn't Hard To Find
By JOHNATHAN BURNS
NEW YORK -- Wireless technology leader and Wall Street high-flyer
Qualcomm Inc. (QCOM) has been doing a lot of low-level gliding lately,
partially on concerns its patents can be avoided as telecommunications
companies around the globe spend billions building next-generation networks.
But it just isn't so, the San Diego-based company and some Wall Street
analysts say.
"Qualcomm's patents cannot be skirted," said Lou Lupin, senior vice
president, proprietary rights counsel for Qualcomm. "Qualcomm continues to
expand its substantial portfolio of CDMA patents, and currently holds many
patents essential to the deployment of any commercially viable CDMA
mobile system."
That point was underscored Monday when the Japanese Patent Office and
the European Patent Office upheld three of Qualcomm's patents applying to
Code Division Multiple Access, or CDMA, wireless technology. The patents
had been challenged in Japan last year by Nokia Corp. (NOK), L.M.
Ericsson Telephone Co. (ERICY) and Japanese wireless phone company
NTT DoCoMo Inc. (J.NTX). The ruling sent Qualcomm's stock up almost
11% Monday to 69 13/16.
Still, the company's stock is down 65% from its early January high, in part
because investors believe competitors like Nokia and Ericsson can build
CDMA-based networks and handsets without paying Qualcomm the same
level of licensing fees as they did for earlier CDMA-based technology.
"This company has done a terrific job marketing CDMA," said Matt
Hoffman, analyst with Wit SoundView. "And they've fought these battles
before."
The most recent sell-off in Qualcomm began earlier this month after news
services reported that Korea's largest wireless phone operators eschewed
Qualcomm-hatched cdma2000 technology and instead chose a
wideband-CDMA technology supported by Nokia, Ericsson and NTT
DoCoMo.
The fact that both Nokia and Ericsson officials told Dow Jones Newswires
that no decision had been made didn't seem to matter.
What did matter were investor worries that such a choice would cripple
Qualcomm in Korea, one of the company's biggest markets.
"I think a lot of the overhang in the stock is because of market confusion
over Qualcomm's royalty rates in WCDMA," said Mark Roberts, analyst
with First Union Securities. "People believe Qualcomm will get no or less
royalties. I think Monday's ruling makes it pretty apparent that's not true."
To understand the debate, think of CDMA wireless technology as a car.
Qualcomm, Roberts explained, would hold the patent for a crucial piece of
that car - say the internal combustion engine. There may be different ways
to build that engine - with eight cylinders or six - but the basic patent still
applies.
Thus, Nokia and Ericsson can't skirt Qualcomm's intellectual property rights
until the wireless technology they design uses a different standard outside the
purview of Qualcomm's intellectual property rights. They'll need to build a
new engine.
That's unlikely to happen, industry observers say.
"It's almost without dispute among engineers in the industry that you can't do
CDMA without infringing on Qualcomm's patents," Roberts said.
"Qualcomm is really in the driver's seat. They really don't care, from a
licensing perspective, which is chosen (between WCDMA and cdma2000).
They would have more competition in chipsets (with WCDMA), but
regardless if you're using any of Qualcomm's components in your phones,
you're still paying Qualcomm a royalty."
Wideband CDMA is advertised as a next-generation step that will allow
mobile phone users to roam from a CDMA-based network in Korea to a
GSM-based one in Japan.
But WCDMA is a more expensive system and operates better on unused or
"virgin" radio spectrum, Hoffman said.
Qualcomm's cdma2000 is a much cleaner evolution for existing CDMA
networks, he added.
"The question is really how big the cdma2000 footprint is at the end of the
day," Hoffman said.
Operators with existing networks who choose WCDMA will have to bear
the substantial added expense of installing new base stations, analysts agree.
So why is there a technology debate among operators?
"The measure you use to judge the technology is highly subjective," Hoffman
said.
Wideband CDMA would be more expensive to install. But it would also
allow for service providers to enter into agreements with GSM-based
operators in foreign countries which could reduce the expense of customer
roaming. That means more money for the operators.
Conversely, WCDMA requires more radio spectrum than cdma2000. In
spectrum-constrained markets, service providers would likely have to spend
billions acquiring new radio wavelengths.
But choosing wideband CDMA would also mean more suppliers for
components.
Korean service providers, for example, could insure lower prices if they had
more handset manufacturers and - more importantly - several suppliers of
chipsets.
"The telecommunications industry has historically wanted to dual-source
everything," Roberts said. "There is a natural antipathy towards Qualcomm."
Hoffman said it could also mean a lower royalty rates paid to Qualcomm on
chipsets and infrastructure using CDMA technology.
"Their intellectual property rights may be watered down some in wideband
CDMA," he said. "Their IPR is worth more in cdma2000. There will be a lot
of negotiations."
His reasoning, using the car analogy, is this: wideband CDMA would be like
using certain aspects of the internal combustion engine, but not all of it.
Qualcomm, however, said it has already reached licensing agreements with
many equipment makers covering all third-generation CDMA modes,
including WCDMA and cdma2000.
"A licensee pays the same royalty rate to Qualcomm for WCDMA and
cdma2000 equipment as for cdmaOne infrastructure, phones,
semiconductors and other equipment," said Lupin. "Nokia's license covers
cdmaOne and does not yet cover WCDMA."
He added that every major manufacturer has approached the company
regarding licenses for third-generation technology and expects those hoping
to address the market will "extend their licenses with Qualcomm in the next
12 to 24 months."
The Korean operators are expected to make their decisions about which
CDMA-based technology they will use within the next two months.
Meanwhile, Qualcomm said it will began sample shipments of
WCDMA-based chips in time to meet commercial deployment of the
technology. Lupin said the company intends to use its experience in
producing the most advanced CDMA chipsets to capture a large share of
the WCDMA chipset market.
As for the company's stock, both Roberts and Hoffman rate Qualcomm a
buy. Hoffman's rating and 12-month price target of $140 is under review,
while Roberts is sticking with a 12-month price target of $150. Qualcomm
shares recently traded down 3 3/4 at 66 1/16.
-Johnathan Burns: Dow Jones Newswires; 201-938-2020;
johnathan.burns@dowjones.com |
