Nokia Looking for CDMA-Phone Deal With Verizon
By Tally Goldstein
Staff Reporter
10/20/00 5:15 PM ET
Third time's a charm -- or so Nokia (NOK:NYSE ADR
- news) hopes.
The world's largest mobile-phone company is close to
finalizing a large-scale contract to sell mobile phones
to Verizon (VZ:NYSE - news), despite two previous
failed attempts at a deal. The companies are still in
negotiations, according to a person familiar with the
situation, but may announce the deal as soon as next
week.
Watching closely to see if the deal goes through will
be mobile-phone chipset maker Qualcomm
(QCOM:Nasdaq - news). As the leading producer of
chips for mobile phones using CDMA (code division
multiple access) technology, it's going to hope that
Nokia again fails to get a toehold in its primary
market.
So far, Nokia hasn't been able to manufacture a
mobile phone that is compatible with the CDMA
technology, which is used by Verizon, the country's
largest wireless carrier in terms of subscribers. The
bulk of Nokia's phones operate with the GSM (global
system for mobile communications) standard, which is
used by 74% of cellular users. But Nokia CEO Jorma
Ollila said on a conference call earlier this week about
CDMA, "We want to be a dominant and key player in
this space."
Currently, only about 15% of mobile-phone users -- or
67 million worldwide -- rely on CDMA technology. But
it's a growing standard, and Qualcomm is trying to
gain a presence in China, a fast-growing market, for
the technology.
If Nokia can complete the deal with Verizon, it would
give the company a chance to show that it can
produce CDMA gear. And once in that sector, Nokia
would offer Verizon and other CDMA-based operators,
such as Sprint PCS (PCS:NYSE - news), a choice of
manufacturers.
Until perhaps now, Qualcomm has had a corner on the
market in developing the chipsets necessary for
mobile phones operating on CDMA networks. Nokia
has refused to purchase CDMA chipsets from
Qualcomm, preferring instead to develop them
in-house. Thus far, Nokia hasn't been successful in
doing so, which was why its two previous attempts at
deals with Verizon fell through.
If, however, Nokia has finally nailed the technology,
Qualcomm is certain to feel the pressure. "If Nokia
wins in CDMA, Qualcomm loses," says Chase H&Q
analyst Ed Snyder. "It's a teeter-totter."
Qualcomm still will receive royalties on its CDMA
licenses, but the sale of CDMA chipsets is expected
to account for about 45% of the company's total
revenue in 2001. If Nokia, which owns about 30% of
the mobile-phone market, is successful in
manufacturing CDMA technology, it threatens 10% to
20% of Qualcomm's revenue -- totaling hundreds of
millions of dollars, Snyder says. This is because
Nokia will be able to take market share away from
Korean mobile-phone manufacturers, such as
Samsung, which dominate CDMA handset sales and
rely entirely on Qualcomm's chipsets.
It's unlikely that Nokia will sell its chipsets directly to
Samsung and other competitors, but it will be able to
take business away from them and, in doing so, from
Qualcomm. Qualcomm officials didn't return calls for
comment. (Chase rates Nokia and Qualcomm strong
buy and buy, respectively, and hasn't performed
underwriting for either company.)
Ollila called Nokia's CDMA market share "more than
meaningful" but said it hasn't reached its target yet.
"It's a good story [how] operators feel about the
product, as well as how end consumers are receiving
it and demanding it," he added.
It will take some time, and of course a deal in hand, to
see if a Verizon contract would give Nokia a serious
foothold in the CDMA arena, according to Bear
Stearns analyst Wojtek Uzdelewicz. Verizon has
started to sell Nokia's CDMA products, which are
called tri-mode phones because they can be used on
analog, digital and PCS frequencies, even though
details of the contract are still being discussed.
"It's hard to say what people will think or how they'll
sell at this level of reception," he says, noting that the
contract is for about 1 million units. A fuller
assessment of its success will take weeks to
determine. Nokia is selling its phones to Verizon at a
discount of at least 18% to what tri-mode CDMA
handsets usually cost, he says, adding that Nokia
probably isn't making money off the deal. (Bear
Stearns rates Nokia accumulate and hasn't been an
underwriter for the company.)
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