That Qualcomm Mystique, Part 1
By Tero Kuittinen
Special to TheStreet.com
I tried to write this column without referring to nationalism or investor emotions. It can't
be done.
Qualcomm (NasdaqNM:QCOM - news) is a highly emotional topic among tech stocks --
much as Verizon (NYSE:VZ - news) and Sprint (NYSE:FON - news)
are, to a lesser degree. ... ( This article continues for RealCommentary subscribers...)
The reason to buy Qualcomm now is that U.S. investors have finally realized how weak
second-generation CDMA networks are commercially. This is the moment of
disillusionment.
Qualcomm's genuine strengths -- a good chipset unit and a great licensing fee outlook --
are
being ignored.
The company itself created its recent share-price crash. By relentlessly overhyping
CDMA, it
invited a vicious backlash. Overpromising and underdelivering are organic to Qualcomm.
However,
just because Qualcomm is a lot like P.T. Barnum doesn't mean it can't also be a bit like
Thomas Edison. Qualcomm is
simultaneously a tacky carnival barker and an ingenious technology company.
Despite Qualcomm's chipset and licensing advantages, the current CDMA networks never
delivered the superior
performance that was once promised. Verizon, Japan's KDDI Corp. and CDMA operators in
Latin America are falling below
projected growth performance.
Almost no one acknowledges this mixture of good and bad. In the land of Qualcomm,
there are only absolute
worshippers or vicious detractors. Let's break this cycle and examine both sides. I'll start
with the juicy stuff and do
another column Friday about my grudging admiration.
Hometown Hero
The common factor among Qualcomm, Verizon and Sprint is CDMA. In the early '90s, the
rise of global systems for
mobile communications, or GSM, to the global mobile-telephony standard created a
backlash in the U.S. Qualcomm
developed an alternative second-generation standard, CDMA, and became an icon.
Verizon and Sprint championed this
U.S. mobile standard that was destined for greatness.
Right from the start, the story got portrayed as a moral fable: the U.S. can-do attitude
vs. a European standard
developed by a committee and imposed by bureaucrats. (The usual demons were
European governments pressuring
developing countries, Scandinavian vendors bribing Latin American operators, etc.) CDMA
would be superior in every
way -- and its glamorous flagship carriers, Verizon and Sprint, would become global
showcases for the brilliance of
California tech savvy.
Qualcomm has mined this cliched but irresistible narrative quite successfully in recent
years. Rarely has the technology
industry seen such a compelling morality tale. So Qualcomm watchers split cleanly into
two camps: giddy U.S. observers
and icily dismissive European snipers.
Qualcomm cast a spell on certain American IT gurus. Any and every absurd claim it made
was enthusiastically
embraced. One million CDMA satellite phones by the end of 2001? Way cool! CDMA
overlays on TDMA networks and
Nextel. The deals are almost signed! Data-transfer speeds of more than 100 kilobits per
second for 1xRTT (the new
upgrade for CDMA networks) in 2001 for Verizon? It's a done deal!
As these claims unraveled in the past 24 months or so, the reaction has ranged from
denial to panic. The latest blow --
Verizon's dismal subscriber-addition performance -- hurts so much because it undermines
the very foundations of the
CDMA story. Recently, U.S. investors have slowly digested that CDMA operators in
Israel, Mexico, Japan, Hong Kong,
Australia and other markets have started to disappoint. But the fact that U.S.
consumers don't see CDMA phones any
more appealing than Nextel's iDEN models or AT&T's and Cingular's TDMA handsets cuts
to the quick.
Qualcomm stock is so volatile because the bar was raised so high. The claims made by
CDMA fans were so extravagant
that they were bound to fail -- and investors' reactions have often been violent.
Second-generation CDMA won't ever
be much of a player outside the U.S. and Korea. It now has 100 million subs vs. GSM's
600 million. This gap isn't going
to narrow; it will only grow. Second-generation CDMA is a pretty nifty niche standard,
but it will never seriously
challenge GSM.
The 100 million subscriptions that CDMA has achieved in recent years is a remarkable
victory for Qualcomm. But it can't
match the dream of a CDMA Camelot that the hypesters created, so now Wall Street is
mulling that gap between real
achievements and impossible goals.
A year ago, Verizon claimed it would launch 1xRTT models in 2001 at data speeds of
more than 100 kbps. Recently, the
operator admitted that the launch is delayed to 2002 and that top speeds will be 40 to
60 kbps. Remarkably, there's
been almost no media critique of this.
CDMA showed red-hot growth rates two years ago, as various operators jump-started
their programs with lavish
promotional incentives, but then CDMA just couldn't compete with entrenched operators
outside the U.S. and Korea.
The claim that second-generation CDMA was destined for global dominance slowly fell
apart.
The Moment of Truth
The final blow is Verizon's slow fizzle. To put the recent performance in context, Verizon
gained 715,000 new
subscribers during the fourth quarter of 2001. That's 2.5% growth during the hot
Christmas quarter. The U.S. digital
phone market penetration is at about 40% -- right at the sweet spot, the point at which
mobile markets supposedly
display the hottest growth. During a similar spot in the phone market growth in Italy and
Portugal, dominant operators
clocked in 15% to 20% subscriber-addition growth quarterly.
Here's the taboo topic of the moment: Verizon is arguably the weakest major mobile
operator in the industry's history.
No other big operator has failed the growth test this badly in its domestic market. If
Hong Kong or Israel didn't prove
that CDMA isn't what it's claimed to be, Verizon is the nail in the hype coffin.
From 2001 to 2003, GSM will emerge as the fastest-growing digital standard in America.
Any Sprint subscriber in
Chicago or Verizon customer in Los Angeles knows from bitter experience just what that
CDMA edge over rival standards
amounts to in real life.
So let's admit once and for all that CDMA never achieved its goals. Sure, it had features
that were technologically more
advanced than anything GSM possessed. But that was countered by the flaws: lack of
text-messaging support and
international roaming. These shortcomings were never really admitted by CDMA fans;
they were brushed aside as
insignificant. Nevertheless, these factors hamstrung CDMA in Southeast Asia during 2000
and 2001.
What's sordid and sad about Qualcomm are the overblown claims about
second-generation CDMA. But what's interesting
and promising are the new 1xRTT upgrade for current CDMA networks and the upcoming
licensing fees from
third-generation mobile products.
In my follow-up column Friday, I'll take a look at why Qualcomm will rebound once again
-- and why it may be the most
compelling mobile-buying opportunity at the moment.
It isn't because the company is perfect or that current CDMA operators have stellar
growth prospects. I acknowledge
this probably isn't the case. However, Qualcomm's technological strength and bright
licensing prospects will probably
ultimately outweigh the disappointments. |
