Dr. J. on China impact on Qualcomm revenues
Qualcomm sees net profit on China ops in FY 2003; will continue to invest
AFX News Asia, 1/9/2002 12:55:00 AM
BEIJING, Jan 09, 2002 (AFX-Asia via COMTEX) -- Qualcomm Inc, whose technology is being used by China Unicom in its new CDMA network, expects to start making a profit on its China business in the year to October 2003, chairman and CEO Irwin Jacobs said.
"I think there will be some interesting contributions to our revenue and profitability towards the end of this calendar year," he told reporters at a briefing.
"But... it will be sometime in the next fiscal year that we will see net profitability."
Jacobs said the soft launch of the CDMA network means that the impact on Qualcomm's revenue and earnings will initially be small.
Qualcomm earns royalties on sales of equipment and chipsets using its CDMA patents. But Jacobs said royalties from handset chipsets provide a far more substantial proportion of revenue than income from the infrastructure side of the network. "It's a 90-10 trade-off."
China Unicom yesterday formally launched the first phase of its CDMA mobile phone network at a cost of 2.8 bln usd. The network will run alongside its existing GSM mobile phone service.
Unicom is already in talks with telecoms infrastructure companies including Lucent Technologies and Motorola Inc over contracts for the second phase of the network, which is expected to be rolled out later this year, and for upgrading the system to Qualcomm's third generation CDMA technology, CDMA 1X.
Currently, only China Unicom and China Mobile, which has a GSM mobile phone network, have mobile licences. But Wu Jichuan, minister for Information Industry yesterday announced a further restructuring of the telecoms industry which would see the two companies to be spun out of China Telecom - China Telecom and China Netcom - each receive a mobile phone licence, probably in two years' time.
Jacobs said it is too soon to assess the opportunities this would provide for Qualcomm.
He said the company had had contacts with China Telecom. "There are some contacts, but nothing I would formalise as talks at the moment. It's early.
"As other carriers come in, we will obviously be trying to work with them, support them... We will be pursuing that in the future. But now our focus is on Unicom."
The launch of China Unicom's CDMA network yesterday caps 15 years of effort by Qualcomm to bring its CDMA technology into the Chinese market.
Jacobs said Qualcomm had worked closely with Unicom in the construction of the network, but the focus now would switch to marketing and support to grow subscriber numbers and towards developing new features and capabilities for the handsets to encourage users to switch from the rival GSM system.
"The challenge is to continue to build out the system further and to add lots of subscribers, make sure that the values of CDMA are clear, and that there are applications and make a real business out of it."
Analysts have expressed concern that persuading users to switch to the network initially will be difficult, because the service will focus on voice transmissions rather than data services which can take advantage of the network's faster speed.
Jacobs said a key factor in the network's success will be its ability to offer value added services and applications, such as streaming audio and video.
"We continue to invest (in China), and we are building up our own staffing here," he said.
Qualcomm is not only investing resources in CDMA infrastructure and handsets, but also on data applications using its BREW wireless application platform which will allow China Unicom to provide downloadable applications to the phones.
The group is hoping to hold its first conference for BREW application developers in China in March.
Jacobs said the service may get off to a slow start because of China Unicom's caution in making sure the system is working properly, the availability of handsets, and the amount of marketing and subscriber support needed for the new technology.
"I would guess that they will start a little slowly and then ramp very rapidly.
"As much as you test in advance, you want to make sure there are no great surprises as you add subscribers to the system."
He said Unicom's target of 7-8 mln subscribers in the first year was "ambitious, but a reasonable target. It will be interesting to see whether they go over or under."
Chinese newspapers have reported that so far only four companies have CDMA mobile phones available on the market, and that China Unicom is only making 100,000 telephone numbers available over the next month, with another 400,000 being released by April.
Today's Beijing Youth Daily reported that only three models were available at the China Unicom outlets in Beijing, from Motorola Inc, Qingdao Hai'er and Hisense, priced at between 2,350 and 4,500 yuan.
Chinese manufacturers have been reported to be unwilling to sign licence agreements because they believe the royalty fees demanded by Qualcomm are too high, and are taking a wait-and-see attitude to gauge potential demand.
But Jacobs said Qualcomm has so far signed handset licence agreements with 10 of the 19 manufacturers given permission by the Ministry of Information Industry to manufacture CDMA telephones.
He said there had been some delays in getting government approvals for the licences, but does not see the number of licences as a problem.
"I think some (manufacturers) have started out quite aggressively, others may indeed wait to see how the market develops or until they get phones that they are very comfortable with. I think that's the usual situation with any manufacturing situation."
In terms of persuading people to subscribe to the CDMA service, Jacobs said China Unicom would need to provide significant market support, "and provide all the things that make people want to use your service".
"There are a whole range of start-up issues. Experience in the States shows that it usually takes a few months to train sales people. Some of that has started, but there's probably much more yet to be done.
"Although Unicom has experience with its GSM business, CDMA itself is new, so... it will have to go through the usual start-up situation."
nma/tr
Copyright 2002. AFX News Ltd. All rights reserved.
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