Meeting notes - Part 2 - Tony Thornley
Tony Thornley – President and COO 50 minute mark
Irwin explained the tremendous capability that we have developed and are developing for wireless devices. We are really just at the beginning. There is so much ahead of us. I hope that you will feel by the end of the presentations that indeed there’s an exciting journey yet to come.
Slide 2 – Qualcomm’s Mission
This slide shows a pyramid with Expand CDMA Market at the base, Drive Replacement Cycles with New Products – Consumer Electronics Model as the next layer, Add Revenue Streams – BREW, QChat, gpsOne – Enterprise Applications as the next layer and New Areas at the top of the pyramid.
As of now, we are at approximately 13% of worldwide wireless subscribers on CDMA. And therein lies the fundamental point about the trip just beginning. Certainly we are on a path to have all of the 1.1 billion wireless subscribers use CDMA. Of course, that number of 1.1 billion will grow.
We’re doing that by expanding the geographic footprint – in fact that’s been one of the major elements of our strategic investments program – to get CDMA going in certain markets where the competition has been particularly fierce and that’s been very successful but we’re moving on from that now to focusing more on delivering applications, content, differentiation in services…
Just expanding the footprint of subscribers is only the beginning; what you want to do then is to sell each of those subscribers a new device very frequently. So you want those devices to continually evolve so that consumers will want to replace the existing device. We talk about phones today but really the devices are becoming much more than phones... One of the things we’re planning to do is to make all of those capabilities cost effective so that it becomes very affordable for all consumers ultimately to get this very broad range of capabilities.
Our chip business, certainly by introducing new capabilities on a regular basis, is really focused on driving that replacement cycle but BREW also is a factor in that because you will want to have more powerful devices as the applications and content becomes richer and the affordability of that content comes down. Indeed, not only are we looking to drive the replacement cycle with those capabilities, but we are also looking to expand our revenue base by achieving revenues from those capabilities – BREW is a very good example where we are sharing in the revenues from development of applications and because we’re enabling the operators – we’re enabling the manufacturers – a whole distribution chain for these applications to get to the consumer. We collect a small share of that developer’s revenue and we believe that revenue can grow substantially because again we are at the very beginning of delivering applications to wireless devices. QChat and gpsOne are other examples of specific capabilities that we are generating revenues from today.
At the top of the triangle, we have New Areas. We are constantly exploring new business opportunities. GSM1x is certainly an element of the new capability. We are looking at a small base station for EV-DO to deliver high data rate capability to enterprises. We’re looking at all areas of wireless indeed for new opportunities that hopefully will turn into large businesses down the road. Here again, we think there’s a huge opportunity ahead of us.
Slide 3 – Large CDMA Market Potential
This slide shows the large markets most of which have not been well penetrated by CDMA:
China 1.3 billion
India 1.1 billion
Latin America 494 million
W. Europe 425 million
No America 237 million
Japan 127 million
So Korea 48 million
South Korea is a very important market for Qualcomm. Japan is very heavily penetrated with wireless – again, just the beginning of CDMA. North America, where we have had considerable success, has a lot more to go. In Europe, with 400 million people, essentially no CDMA but the potential for the 70% or so wireless users there to convert to CDMA. Latin America, India and China are somewhat different markets in that the gross domestic product of those countries and those areas is lower than perhaps the first areas that I mentioned. Therefore, we are also focused on very low cost phones so that we can expand the base of users and then as the gross domestic product of those countries increases, as it inevitably well – particularly facilitated by the expansion of communications itself – we’ll be able to up-sell them with devices that have greater capabilities later.
Slide 4 – 2003 CDMA Handsets mature and Emerging CDMA Markets
This slide shows the percentages in each major market that are expected to be replacement handset sales in 2003 and the percentages (the rest) that are expected for new CDMA subscribers. The mature or maturing markets are mostly replacement markets: South Korea – 90%; Japan – 84%; U.S. and Canada – 73%. There are some markets where handset sales will largely be for new subscribers this year: China – 99%; India – 90%; Latin America – 60%; and Rest of the World – 73%.
China and India are only just beginning in terms of CDMA penetration. South Korea, Japan and the U.S. are very largely replacement markets. … South Korea has well over 60% penetration – all CDMA. Japan – very little CDMA – but we expect in 2003 that KDDI our main customer in Japan will be the main buyer of handsets. DoCoMo and J-Phone will be much more significant to us in 2004 and beyond. Latin America is kind of a balance [between new and replacements] because we have been in Latin America a long time but the growth there, with that large population base, still the expansion of the footprint is going to be bigger than replacement. The Rest of the World, which is a small part of the total, we’ll still be growing the base.
Slide 5 – Regional CDMA Handset Estimate – as of January 22, 2003
TT: This breaks down the handsets we expect to ship by regions. We can see that Asia is not only the largest market for us but also the fastest growing at the moment. This is driven substantially this year by China and India. China and India are very large markets and we expect them to continue to grow rapidly. North America on the other hand is relatively slow growth – this is because penetration is already relatively high. Competition is very strong between the different operators. We expect to see somewhat slower growth. Latin America, while it’s been flat for the last three years – we expect it to be flat this year but we do see some upside here because of some recent events, in Brazil in particular. Then the Rest of the World figure, we have included a very small amount – about 3 million – of WCDMA, which will be spread between Japan and Europe.
Slide 6 – China Unicom Successful Launch of CDMA
Slide indicates that Unicom expects to launch 1x in 30 cities by the end of February 2003. Unicom’s goal is have 20 million subscribers by the end of 2003. It enjoyed huge growth in the third and fourth quarters of 2002. Slide 7 says the Chinese manufacturers have been building handsets based upon the MSM3100 and MSM5105; the MSM5100 with gpsOne will be launching in 2003.
Focusing on China, Unicom is the second operator in China. They have a substantial GSM network; they have over 60 million GSM subscribers; last year they launched a CDMA network. They did a fantastic job; nobody believed – including us – that they would achieve their target of 7 million subscribers. But they did and they actually exceeded that slightly, which given that they started off with nothing at the beginning of 2002 – to get to 7 million subscribers – and we can see here [on chart] the growth by quarter – that it was just a remarkable achievement for them. We were very happy to be partners with them and we are working very closely with them here.
One of the major forces that is driving China is their ambition to be a major player in the worldwide markets for devices and infrastructure. We’ve been enabling the handset manufacturers in China – both the local companies but also joint ventures with existing players from Korea, Japan and the U.S. You can see that there are a large number of suppliers of handsets into China. It’s obviously a very big market and a lot of companies focused on this. There’s a very wide variety of handsets available – 58 as of now – and there’re just beginning to move to third generation as Unicom deployed 1x upgrades to its network and now they’re buying an increasing number of 1x handsets [reference to Yao Ming photo on slide – he’s pitching for Unicom].
Slide 7 – India Launching CDMA
There were 300,000 who signed up with Reliance on the first day and 1 million had signed up as of February 7, 2003. Reliance has a 10 million subscriber initial network capacity and plans to have 673 cities launched by the end of 2003. At the same time, Reliance is launched a wireline backbone.
India is just beginning. It’s behind China but has something of the same potential. We’ve seen several operators deploy CDMA networks in 2002 and launch services later in the year. Reliance, the largest of them, has made a soft launch but it’s planning its major commercial launch at the end of March. [Tata.. BSNL]…
We think Reliance is going to be the strongest of these operators. They have the widest coverage of the independent operators and they are investing large sums, not only in a wireless network but also the wireline backbone, a long distance carrier there, an international carrier. We believe they are going to drive subscriber growth in India very rapidly.
Slide 9 – Color, BREW, gpsOne and EV-DO Handsets Drive Growth in South Korea
Over 4 million 1xEV-DO subscribers are estimated to be added in 2003. The Wireless Data ARPU Percentage [of total subscriber revenue?] grew from 7% in 2001 to >12% in 2002 and is estimated to grow to 15-18% in 2003.
In South Korea, where the market is quite well penetrated and we’ve experienced some difficulties because the Government has banned subsidies which a lot of people thought would impact the sales of handsets in 2002, in fact, there was very little impact and the market was very good. There were over 15 million handsets shipped in 2002 and we’re looking for similar performance in 2003 on a base of subscribers which is about 32 million. The replacement rate is very high because of the introduction of these new devices.
EV-DO is being launched most significantly first in Korea – SK Telecom and KTFreetel – both believe that this technology will enable them to deliver new services very cost effectively and to continue to increase their revenues. Their data average revenue per user has been rising rapidly over the last three years as they have introduced data applications. With EV-DO that makes a major advance for delivering video and audio content to the handset.
Slide 10 – Japan’s 3G CDMA Leadership
KDDI is expected to launch 1xEV-DO in October 2003. There is a nice bar chart showing KDDI’s impressive growth in the past year, especially its huge growth in 1x in the past 3 quarters. It had 5.3 million 1x subscribers through January.
There are 4.1 million gpsOne capable handsets. KDDI will only be offering camera phones [they have been so popular]. Increasing resolution for camera phones will demand more network capacity where CDMA does well.
Japan is in many ways a similar market to Korea in that the consumer has adopted new technology very willingly. The head of our Japanese office said, “Black and white phones are almost in museums in Japan.” We’ve seen the adoption of gpsOne, in particular by KDDI, driving replacement of handsets. That capability has been fully exploited by KDDI by introducing a lot of applications that take advantage of that position location. We see this as a leading indicator of what will happen in all of the other markets around the world over the next couple of years. Particularly in Japan, we’ve seen camera phones – in fact, KDDI sells only camera phones now. You cannot buy a phone that doesn’t have a camera. That will drive replacements for us; it will drive new applications. This year the cameras on the phones have relatively low resolution but that will be increased and improved over time and that will demand more network capability, demanding use of CDMA to deliver cost effective transmission.
Slides 12-13 – North America Replacements Driven by Color Screens, 1x, Data and gpsOne
Verizon expects to sell 100% 3G 1x handsets throughout its markets by mid-2003. 90% of the handsets sold by Sprint in the December quarter were 1x and Sprint expects to have 50% 1x penetration by March 2003. North America ended 12/2002 with over 65 million CDMA subscribers – 46% of the market. They are accelerating handsets with MSM6100 integrated gpsOne position location to meet E 9-1-1 requirements.
Verizon has done extremely well – has a leading position, as does Sprint – it has a differentiated position. As the applications and content grow, that differentiation will become more and more evident… It is Verizon’s plan to sell only third generation devices this year… It is important because our market share in third generation 1x is higher than it was in CdmaOne – it certainly helps improve our revenues and profits. Sprint also has already transitioned pretty much to third generation devices…
We have over 65 million CDMA subscribers in North America, a major achievement – 46% of the market despite this major competition. EV-DO has been introduced by Monet in a small way in the U.S. Ubiquitel is a Sprint affiliate that’s also been trialing EV-DO. Verizon is currently doing trials in San Diego and in D.C. We are very excited about the potential for development of EV-DO in the U.S.
Slide 14 – Caribbean and Latin America – CDMA Growth and Data Acceleration
TT: There is a significant mix of TDMA and CDMA and the transition is ongoing to CDMA but also to GSM. Some of the operators have been influenced by the AT&T and Cingular direction and have followed that direction, which we think will make their life in the long run difficult but in the short run they’re formidable competitors. In Mexico, Iustatel, which is owned by Verizon and Vodafone, launched a third generation system. They’re extremely pleased with it. They’re aiming at the very high end of the Mexican market and competing with Telcel – a spin-off of Telnet, which has the dominant share in Mexico – but with the capabilities now with 1x and other associated capabilities will be a very strong competitor.
Slide 16 – Current Brazil Mobile Operators – Technology Choices
TT: In Brazil, we’ve been fighting a severe battle and our investment in Vesper has been an important part of this battle. The market there.. has been quite fractured between different operators and those operators have been making their decisions on what to do to succeed TDMA.
In the blue [on the slide] which represents the joint venture between Telefonica and Portugal Telecom – known as Brasilcel – they just recently announced the acquisition of another operator, called TCO, which was extremely important for us because they owned the operator in Brasilia. Brasilia did not have CDMA coverage. That joint venture has declared that they are going to deploy CDMA throughout the network (one part of their network was TDMA and TCO was TDMA – so they are going to convert all that to CDMA).
We are currently working with the Opportunity Group [8.2% of Brazil market per slide], which has several operators in their family – they are TDMA – and we are hoping to get them to convert to CDMA. Then you see [on the slide] the other operators that have either deployed GSM or expecting to go GSM in the future.. [BellSouth is included in this category; the other one is Telecom Americas which is affiliated with Telcel in Mexico]. While BellSouth International in Latin America in general is converting to CDMA, in Brazil they expected to sell out their interest – perhaps to Telecom Americas or others – and will go GSM.
Slide 17 – CDMA Footprint in Brazil
Brasilcel joint venture will have a user base of 16.8 million and a market share greater than 50%; it will have 11 million more users than the second mobile operator.
.. There are still two holes in mobile service, which are actually covered largely by Vesper. We believe that Vesper will play a role in completing this CDMA footprint in the coming year.
Slide 18 – QSI – CDMA450 and Inquam
TT: ..Inquam is looking to acquire licenses in Europe at 450 MHz, which we saw as being a very important frequency for coverage of rural areas but also, of course, to provide new innovative data services into the major cities. Romania.. has been doing very very well – we achieved 75,000 subscribers, growing about 10,000 subscribers a month. The average revenue per subscriber is very high – in Romanian terms at least – because of the data services. Most of the customers we are getting are heavy data users.
In the rest of Europe, Inquam has been acquiring licenses but has not yet in general, with a couple of exceptions, got approval to go CDMA. They are trying to get that approval but just recently in France, which is the first major Western European country where they applied for CDMA, they were refused. They are challenging that position but we’ll have to wait and see whether they can break through. Clearly, the incumbent operators in Europe are quite reluctant to open the doors to any kind of competition given that they’ve invested so much in their new spectrum at 2.1 GHz where they plan to deploy WCDMA. Obviously we encouraging them to deploy WCDMA because it would be good for us. So we’re not going to push too hard the 450 although we’d like to see it happen.
Slide 19 – QSI – Vesper Wins Mobile Licenses
Anatel, the Brazilian regulator, has denied use of Vesper’s existing licenses for mobility. The slide says mobility is critical for Vesper’s financial viability and that Vesper and others are challenging the decision.
In closing, just on Vesper, Vesper is an operator that covers a large portion of Brazil shown in blue and in November last year acquired mobile licenses in the dark blue areas which coincide with the CDMA holes that showed in the Brasilcel map, particularly ion Minas Gerais and in the Northeast, which is a very popular vacation area in Brazil.
However, we have also experienced a little difficulty with the government regulator here in that they approved mobile usage at our existing frequencies so that we could use our existing equipment with a few minor changes but we recently got a contradictory input from them, which is difficult to understand. We are currently challenging that along with our partners there, infrastructure providers, the joint venture Brasilcel and also the Opportunity Group who are interested in seeing CDMA prosper. Essentially their decision is very much biased towards the GSM operators. So we’ll see how that develops. Clearly Vesper needs to have mobility in order to be economically feasible and it’s a very valuable asset for Brazil for the population as a whole so we’re hopeful that we’ll be able to resolve this, but at this point – no certainty.
I just would like to summarize again by saying the opportunity is very much ahead of us. We’ll see certainly ups and downs in terms of on revenues on a quarterly basis but that really isn’t the main point. The main point is that with 13% penetration of CDMA in today’s world, we have the opportunity to get another 80%-plus share over time plus we’ll continue to up-sell. So I think over time we really feel good; we’re in an excellent position for the long term. |
