Unicom-Qualcomm Saga Causing Investor Angina
By Steven Schwankert
Managing Editor, asia.internet.com
[February 16] China Unicom this week confirmed that it will build a $1.2 billion, 10 million-user capacity CDMA network later this year. Be still, my foolish heart.
Predictably, Qualcomm shares shot up to greet the news, and for some reason, China Unicom shares slipped. Both buyers and sellers in this case are being grossly short-sighted.
Since China Unicom, China's state-run competitor to China Telecom, began its pre-IPO roadshow in May, 2000, Qualcomm executives and investors have spent a lot of time clutching their hearts. After WTO negotiators exacted promises from China that it would allow the development and deployment of the proprietary Code Division Multiple Access (CDMA) format--developed by San Diego, California-based Qualcomm and used in North America, Japan, and Korea--China Unicom has sent those same executives and investors scrambling for their nitro pills on several occasions. On May 29, 2000, Unicom announced that, oh, by the way, we're not building a 2.5G CDMA network. Qualcomm shares plunged.
Heart rates returned to normal when on June 1, June 5, and June 12, respectively, Unicom made statements saying, oh, well, maybe we'll build one after all, but for 3G, not 2.5G.
That squeezing feeling in the chest returned the following month, when China announced it would develop domestic CDMA technology. When China doesn't want to pay for foreign technology, or it wants to pressure a foreign company into reducing its price for that technology, it announces it's developing its own. Qualcomm--thanks for the memories, China's telecom bureaucrats seemed to say.
At the beginning of this year, China Unicom got from the People's Liberation Army what it had previously wanted from Qualcomm: a nationwide CDMA network. The PLA's network, a.k.a. Great Wall Telecommunications Company, has a user capacity of 750,000 and is regarded as one of, if not the best such net in China. That's not a surprise. Unicom then announced last week that it would spend $1.81 billion to upgrade the network. Upgrade to what, they did not say, but once finished, the refurbished network will be handed over to China Unicom's Hong Kong-listed entity.
Given Unicom's on-again, off-again track record with CDMA, one wonders what this $1.2 billion network will be. Will it just be the upgrade and a little more? Is Unicom really going to spend $1.81 billion to upgrade a network that can serve less than one million users, and then spend $1.2 billion on one that serves 10 million? Would you buy a new engine for your 1992 Toyota Camry when you can buy a new Lexus for one-third less?
That's simply the confusion on the infrastructure side. Neither Qualcomm nor Unicom has begun to fight the battle of getting consumers to actually use CDMA. Trials in Beijing turned off a lot of users because the service areas were so limited, and getting connected outside of Beijing, Shanghai, Guangzhou, and Xi'an just wasn't possible. China already has nearly 70 million GSM (Global System for Mobile Communications) users. They didn't exchange their phones to try WAP; it's unlikely they'll do it for CDMA, either.
CDMA is considered the superior of the two systems in terms of call clarity and reliability. However, it is more expensive to implement, phones tend to be larger and heavier, and is currently limited in terms of countries that use it. GSM is cheap to deploy, and one can use the same phone and same SIM card from Beijing to Hong Kong to Paris to London. Now, with the introduction of GSM 1900 services in the United States, users with tri-band phones (like Nokia's 8890) can use roaming services almost worldwide.
History demonstrates that consumers do not choose the best available system; they choose whatever is the most convenient and widely available, and often, what is least expensive. Apple continues to manufacture products superior to their Microsoft competitors, but ignorant consumers assume they need Windows to get basic word-processing or spreadsheet software, and like sheep they go off to the "illegal operation" slaughter. Betamax is still the standard for television professionals, but in the days before DVD, VHS was victorious.
Some estimates place China's current GSM capacity at 400 million users, approximately 30 percent of the nation's population. By 2005, China could have as many mobile phone users as Japan has citizens. CDMA better have a lot more capacity, and more importantly, a far greater appeal than 10 million to make it viable. That's also assuming wide distribution of CDMA phones, of which there is presently almost none.
Those investors buying Qualcomm shares on the strength of an announcement by Unicom that it will use Qualcomm or CDMA technology, a word of advice: don't. Good reasons to buy Qualcomm include the role that CDMA will play in Japan's roll-out of 3G service in May, and in similar networks in Korea and Singapore, but not for anything that's happening in China.
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