Showdown for 3G - Impasse or Surpass for QCOM?
Colleagues: this is offered as my framework to analyze QCOM will benefit substantially or will be dragged sideways by the decisions being taken in Europe to defer, waive or abort 3G developments in wCDMA. I agree with the comments of many of you that it is crunch time in Euroland and we will see more blame and shame being thrown in coming months. Will this be good for QCOM? I think so.
1. Europe in stasis. Govts, vendors and carriers will be paralyzed so that 3G evolution will crawl in Europe. (i) Existing carriers with 2G licenses are restricted to use of GSM; even if they wanted to upgrade to GSM1x -- a complete about-face as the Euro policy has been "the technology doesn't matter so long as we all use the same" -- the govts cannot permit this change of the license. If 3G licensees were permitted to evolve to 3G it would destroy the value of the spectrum licenses sold for 3G, and sold for >$100 B. Not an option. (ii) The 3G licensees are deep in debt and must incur much more to build out 3G infrastructure and subsidize handsets. Even when dual mode handsets are available, and presuming that handoff, power and clunkiness problems can be reduced to just dreadful not deathful constraints, the costs of spectrum licenses, new infrastructure and handset subsidies are going to keep costs of providing wCDMA service very high, much higher than GSM service. If costs are high, data services won't fly; a ring tone download at $5 is not very amusing. 3G carriers are also hugely constrained by competition (which was not in existence when GSM was rolled out). Computations of marginal revenue generation will show that a carrier cannot justify building base stations in farmland and mountains; full national coverage will depend for decades on GSM in dual mode (and roaming charges if the 3G carrier is not also a 2G carrier in that country). wCDMA will, like FOMA in Japan, emerge in big cities. (iii) The Govts are in a box too. They cannot rescind the auctions and start over; political impossibility to refund the huge windfall revenue from spectrum sales. They cannot ameliorate the conditions substantially; the auction losers will litigate that they were illegally prejudiced. Individual countries could not release 3G licensees from the requirement of using wCDMA; Europe not only believes in but really needs a uniform standard. Agreement on a fix to the wCDMA standard is even more difficult; the vendors and carriers cannot agree on Release 99. Europe is locked into a high cost, poor technology decision, This is bad for QCOM because royalties from adoption of wCDMA and purchase of QCOM 6200 and sister chipsets will grow much more slowly than we hoped when we assumed that wCDMA would follow a normal adoption and improvement curve.
In my opinion, the recognition of the terrible mistakes made in Europe will benefit QCOM in all other markets and the benefits will outweigh the loss in Europe.
In Latin America, conversion of TDMA to GSM to be in sync with a world moving from GSM to wCDMA will be seen as an option to insolvency. I don't see how carriers or govts will, as the European dilemma becomes understood, follow down this road; the forklift change to CDMA1x, when these carriers can afford these capital expenditures, will be seen as the only way to go. OK, Latin America is not going to be big money.Mark this as a significant but not large or immediate benefit to QCOM.
In the U.S. the judgment of ATT and Cingular will be questioned as they careen down the road to GSM and as visions of EDGE dancing through their heads are perceived to be hallucinatory. But the game will be determined based on cost of service. With continuing capital costs to install GSM and upgrade to GPRS (and subsidize handsets with yesterday's technology), their costs will go up. And their provision of data services requires allocation of capacity which will be taken away from voice service; they will have to limit this allocation and keep the cost high to protect availability of service to their basic voice customers. CDMA 1x providers with doubled capacity from the 1X upgrade and higher data rates creating greater digital throughput will have lower cost per minute/ per megabit and can afford to use capacity to give greater anytime minute buckets and free trial or other discounts on data throughput (look at the anytime minutes and fairly reasonable megabit rates on some of the PCS Vision plans). The trend will be for the low ARPU and high credit risk customers to migrate to ATT and Cingular and the business and high-ARPU customers to move to VZ and PCS. Survivors among U.S. Cell, Alltel, NXTL and LEAP will evolve along the cdma2000 track. Capacity increases among cdma providers will dilute pressure to free up 2ghz spectrum for 3G service and the option to upgrade to 3G by wCDMA will be postponed for a long time during which time the costs and disadvantage of this upgrade path will make it increasingly unattractive. The issue of how favorable these developments are for QCOM depends on how much market share shifts to the cdma providers from the Cracked Bells (ATT + Cing) which cannot ring true.
In Asia the mess in Europe will work to the substantial advantage of QCOM. Korea will be seen as the paradigm for wireless development. KT and SK will defer wCDMA buildout in accordance with their 3G licenses; the only reason for them to develop wCDMA networks in Korea was to assure that Korea would be seen as the national leader in every flavor of wCDMA and its vendors would showcase their capability in wCDMA infrastructure and handsets which were, at the time of issuance of the licenses, presumed to be the future 80% share of the market. My pure hunch in Japan is that NTT DoCoMo will adopt serial adaptations to its wCDMA standard, without regard to Release 99 (DoCoMo has to protect its main market first and cannot afford to worry about uniform international standards with a group who have been so notoriously self-serving) the net effect of which will be to bring DoCoMo's cdma into convergence with cdma2000. Get synchronized; modify the bands to permit adoption of DO to the DoCoMo 2G service; adopt power control techniques of cdma. The Japanese have never been too proud to imitate and they do it very well. Japan through the success of KDDI with cdma2000 and the adaptation of DoCoMo which J-Phone will have to follow will become a cdma market with two flavors which taste very much alike. Just a guess, an inference from past business experience not a judgment about engineering on which I am a know-nothing.
The big shoku will be in China. In my opinion, China will defer (indefinitely) approving wCDMA as a 3G standard for China's carriers. One could infer this from the direct and indirect support China has given to the Unicom development of its cdma network. One could guess that this was the motive behind China's fuss about radiation standards; you know those big, hot, power-hungry wCDMA handsets; we cannot allow them for health reasons and no one in the ITO can complain about health standards as a reason to exclude imports. And one can be sure that the problems and failures in Euro will buttress a China policy to preclude a standard which (i) requires large and as yet unknown royalties to be paid to foreign parties (ii) disadvantages China's domestic vendors of telecom equipment in increasing their share of China's equipment needs and (iii) commits China to an inferior technology and thereby hinders China in obtaining a leadership position in design and production of telecom equipment for export. If 3G in China develops as cdma2000, I believe that the rest of Asia will sooner or later fall into line with Korea, Japan and China. And Asia is the continent of huge population and low teledensity; China and India (>1B), Indonesia, Pakistan, Bangladesh, Japan and Russia are all in the top ten populations (with U.S. Mexico and Brazil). If wCDMA trails off to oblivion in Asia, it becomes irrelevant. The opportunity for QCOM is to become chipset supplier, taking advantage of its speed to imporove the product and the scale of production efficiency from a huge market share, to the ambitious Asian producers -- not just in Korea and Japan, of course, but to China, India, Russia and others who want in to the clone-phone business when annual sales of a billion handsets are normal.
That's my read on the present situation. An impasse in Europe for a long time, but one which gives QCOM an opportunity to surpass the former leaders of telecom equipment by combining QCOM's extraordinary skill and experience in cdma with its brilliant business strategy to support and empower its customers by IP licensing and chipset supply but not to compete with them in manufacture of equipment.
propitious |
