Meeting notes - Part 4 - Q&A and Dr. J's Closing Remarks
Q&A [lasted 48 minutes beginning at 1:36 mark]
Regarding the French decision in Inquam, I think our government should be incensed and we should involve our government and involve the WTO. With all we did in WWI and WWII, I cannot understand how they could be so anti-America and anti-Qualcomm. Comment on the 450 MHz decision by the French?
IJ: Certainly, Inquam is working very hard to see if that decision can be changed. I think it does reflect a view in Europe that with all the money invested in third generation and – although this technology is not a direct threat to third generation, it’s providing a set of additional services to largely small businesses – it is perceived that way and the regulator came up with what we regard as a rather surprising ruling. There are a number of small businesses that are being supported by the technology now which would be much better supported by CDMA .. data services in a much more cost-effective fashion for them and they are writing letters and indicating that this is not benefiting their businesses.
This is a situation where the regulators are taking one position, in fact having a negative impact on a number of the businesses. One of the things that we were a bit surprised about is the statement as part of their rejection that CDMA was not yet a mature technology. Clearly, they may not be reading.. the right… That’s obviously mistaken. I suspect also that they may not realize is that, although they call their third generation technology “UMTS” and that’s the one they trying to move to, indeed that is CDMA as well. I can’t give great hope for having that decision reversed. Many political considerations, many economic considerations come into all these decisions. But we are going to work very hard on that..
We typically do get support [from the U.S. Government if it’s a level playing field issue]. I have often talked about Qualcomm starting out as a research and development company; then we went through a period growing production capabilities to get CDMA up and going well; then for some period we were almost a banking company for the infrastructure business; then we were very much in the legal business with intellectual property; now I think we are more and more getting involved with governments and government issues and trying to understand those better. We have very good people; it’s an educational job. But CDMA will be present in these countries – I think that path is just going to proceed ahead but along the way there are unfortunately bumps.
Why aren’t we being more liberal with the dividend?
IJ: This always is an issue – a balance we try to achieve... When you have a dividend, the intent is that it is something that never goes down. There can always be some circumstances that you can’t control but the whole thing is that we want to continue to grow that.. Going forward, one of our concerns is having enough cash to make sure that if a variety of opportunities come along that can provide even further shareholder improvement that we’re in a position to take advantage of that.
There was also the question of the balance between dividends and stock repurchase.. We will be watching it very carefully, watching our cash flow, which right now does look very promising, and then we’ll be making decisions going forward. So hopefully this is our first step and things will continue to improve.
Jim Mullens: I am excited about the MSM6300 chip. An article said it is currently being manufactured into phones now and should be available for commercial deployment by mid-year. It appears to me that the analysts community and the financial media are totally misunderstanding Qualcomm because it seems that this is a significant change since it now makes the whole world the marketplace. I would think that the Unicom and Vodafone operators should be enthusiastically looking at this because it should be a tremendous seller in the replacement market. Is Qualcomm pricing the MSM6300 so that handset manufacturers can price it competitively against GSM single-mode handsets?
IJ: The “6300” is our nomenclature for a chip that does CDMA20001x but also does GSM/GPRS. It is one of the chips that I mentioned that will power a world phone, a phone that will work indeed everywhere in the world and can do so automatically.
Those chips were sampled a few months back, are in the hands of manufacturers, a lot of the testing – of course, they are more complicated to test because its not only CDMA but also GSM/GPRS – on many different infrastructures; that’s actually been going on well. Those chips are currently being included by at least two, if not more, manufacturers into a world phone. We expect to see the first ones probably end of summer – beginning some time early fall. I myself agree with you point that indeed this is going to make a very significant difference, one that is not recognized very well, in that it allows the phone to be used everywhere that technology is being used. So it really does open up opportunities.
You mentioned Vodafone, a GSM major operator worldwide but also owns a share of Verizon. This allows them the opportunity to have a phone where they can have the GSM service in Europe and then people that roam in the U.S. can roam on the Verizon network, rather than on another GSM network here. By the way I think that will improve people’s – in Europe – opinions of U.S. cellular service – they’ll be seeing an outstanding service. That I think is indeed going to make a difference.
You mentioned also the situation with China Unicom who currently operates a large GSM network and is now very rapidly expanding a CDMA network. Some of their focus is indeed on this type of phone is to offer their GSM users – they have a large number – they don’t want to pull them off – a potential data service on CDMA.
And so it does open up lots of opportunities. As we continue to provide multi-mode phones – ones that operate with the different technologies – ... all that does open up. I think that those phones will become a significant parts of our business. The pricing – clearly if you have a GSM-only phone, that will still be a less expensive phone. I think many of the high end phones and the phones where you want to take advantage of a significant data service will indeed benefit from the introduction of these chip and our sense is to price them in a very competitive fashion.
Don Schrock: Vodafone and Unicom are extremely excited about these chipsets. It can appeal to some high-end consumer that will roam from country to country. In addition, the RF chips that go in it will dramatically lower costs of GSM and CDMA in one phone – that’s one of the real strengths of the complete chipset. Then, as this takes off, what we are looking at for future generations is to segment that GSM/CDMA marketplace – not only the high end but, as you’re pointing out, come down to lower end chips also to address the markets throughout the world.
Article said GSM licenses running out in 2008; WCDMA significantly less expensive to operate than GSM; operators won’t renew GSM licenses; and there won’t be significant GSM operations past 2009. Comment?
IJ: .. Hopefully, they will begin to upgrade to a real 3G system but as you can tell the regulators are not necessarily open to rapid change. I would imagine many of them will get renewals if they don’t have them now. It will take at least another decade or longer to get most users off GSM into one of these CDMA third generation technologies. That may but overly optimistic as far as how soon it will occur but I think that is the path. That is very valuable spectrum that is being used for a much less efficient technology and one that does not support data very well. Hopefully, economics – ability to support your subscribers – your businesses – will make the difference and that transition will begin earlier but take perhaps longer to be completed.
We are working closely with operators with WCDMA to get that rollout to occur early to get them to have a very effective system as soon as possible – also, of course, having the opportunity to talk about these other possibilities.
Question about royalty income.
Steve Altman: Generally, we like to keep the royalty rate the same and not have any changes based upon the country. But we have made a couple of exceptions to that. Probably the most widely known is China, where, in exchange for getting a commitment from China to deploy CDMA nationwide, we agreed to have a lower royalty rate for certain designated Chinese manufacturers with respect to their manufacture and sale of subscriber units and infrastructure in China. In exchange for that, we got commitment to use our ASIC chips, commitments to support BREW and, of course, higher royalties outside of China. Although we try to keep the royalty rate the same country-by-country, in certain strategic areas we have been willing to make exceptions as long as we believe that the value we are getting in exchange for that is equal to the value we are giving.
Question about Leap Wireless which questioner thought was in Chapter 11. Will there continue to be a relationship with Leap Wireless? What will be the outcome?
TT: .. Leap is not technically in Chapter 11at this point. They are discussing their restructuring which could probably lead to a .. Chapter 11 restructuring. So they are talking with various lenders, of which we are one. We happen to be in a group of bondholders. There’s also a group of creditors who are secured on the equipment and licenses with slightly different interests. We believe though that Leap will be able to restructure. It’s just a question then of what form they take when they come out of that restructuring and whether they are able to aggressively grow. We’d like to see that but at the same time we are expecting other investors to provide capital for that growth.
Question from man over 80 years old about more and more complicated handsets. Can the handset themselves be used to make it easier to use – a decision tree format?
Paul Jacobs: .. One of the things that BREW allows us to do is to download customized interfaces for a particular segments of the market. And so I think we’ll start to see that happen over time as many of the handset manufacturers are now moving to put their interfaces on top of BREW.
In terms of teaching you how to use the phone, one of the things that we’re also looking at is taking the phone and allowing applications to be downloaded into it and when you buy it actually have it with a video. When you get your phone, you could actually be taught through a video how to use the phone. And then when you are done you erase the video and leave the space open so that other applications can be downloaded.
People who don’t have a BREW-downloading type system won’t be able to do that kind of service so we think that’s going to be a great differentiator for CDMA operators who will actually be able to teach their subscribers how to use the phone better.
What are you plans concerning privacy and the virus issue?
IJ: .. Privacy is a major concern of ours. On the privacy side, if a phone now has position location, there are many times when you are not going to want people to know where you are. We are very focused on being able to protect the privacy and allow you to only make your position known when you want it to be known – maybe a chat room of friends; maybe dialing 911 if you want that position to be known. But the other cases you want to be sure that it is denied. Much of the software is in the handset and the handset can be set not to cooperate with the network when you don’t want it do and therefore deny that position location information. There’s voice and data security, a whole range of issues, that we are very much focused. We have very capable people within the company working with groups around the world on the activity. There are situations where we are working with governments to make sure it has government levels of security even though they are using a commercial system..
Now we have phones that have the capability of being always connected to the Internet so the virus issue is a key issue. In designing BREW, one of the key considerations was to ensure the application you were downloading was the same one that the application designer prepared and that we had tested. And so we put on top of that a privacy code, a digital signature, to make sure that it is unchanged and the phone actually checks that. There still is the issue, as you download content and content is corrupted, what part of the phone can you work through. I suspect going forward this is always going to be an offense – defense; many people are fighting to find ways to attack, we’re trying to find ways to defend. That aspect will go on indefinitely. But we are very much focused on it…
Paul Jacobs: One other benefit of BREW is that, because we have the over the air downloading capability, if it turns out that a developer has actually put buggy code into the application, the application can actually be recalled over the air or upgraded over the air. The subscriber doesn’t have to bring the phone back into a service center to get the application upgraded. We really did think a lot about the issue of virus protection when we were designing the BREW system.
IJ: That’s a very good point because this latest attack – worm attack – had to do with service that was not updated – the type of code had been known for many months. So the ability to go and force a corrected version – take the bad version off the phone and put the new version in – is a capability that we have included.
Does the 6000 multi-band chips support the 450 MHz spectrum?
IJ: The ZIF currently being shipped does not but we will shortly be having ZIF chips that do support 450.
Question about using synchronization in WCDMA.
IJ: This question relates to the fact that in the designing of WCDMA, as opposed to CDMA2000, there were several changes in the design activity – nominally to improve things but in fact some of them have caused degradation of capability. One of these was the synchronizing the different base stations – if you talking on the phone and moving, you’re being handed off from one base station to another. If those are synchronized within a microsecond or so, using, for example, GPS – although there are other ways of doing that – then the handoff process becomes easier.
It is possible to do it without the synchronization, but it does have some cost to it. So in designing the WCDMA specification, one of things we have done is to point out that there are the advantages – battery life, better handoff, capacity – in having a synchronous. The infrastructure currently being designed does not include the synchronization software capabilities, I would say in general, and so that’s something that can be added in. The ability to make use of that in the handset, is not just a software as opposed to a hardware issue. An upgrade of the software will then at some time in the future allow that advantage to be achieved.
We expect that as people begin to get more experience with WCDMA, there will be some of these changes that will get brought in to provide further improvements. I will say that WCDMA will be a significant improvement over GSM/GPRS. So just going to that will be a significant improvement and then there are some other things that can be further improved, as there are with any technology.
I know that there is reluctance on the part of some European countries to depend on the GPS satellite system. Are there other ways to synchronize? Are there CDMA networks that are working on alternate ways to synchronize?
IJ: Right now I don’t think people are focusing on the software to provide synchronization. There are a variety of ways of doing it. But GPS is available worldwide. Some of the governments that claimed they claimed they did not want to use GPS, such as China, because it was made by others are in fact using GPS on their CDMA systems today – many functions around the world today – a whole variety of uses of GPS. I think that argument was at best incorrect.
The European Community is going ahead to design its own version of GPS and launch that; if that is launched successfully, it does provide an alternative method using satellites. There are other ways of doing it. Every phone has a GPS receiver. It’s very inexpensive. It allows other savings in the base stations. My guess is that people will go ahead and make use of that.
What are Qualcomm’s plans for WiFi?
IJ: We have prepared a cell that goes on our standard MSM chips that takes care of 802.11. We have not yet found the right economic case for including it on the phone at the present time. But we suspect there will be a good reason to do that on future phones – probably in the 7000 series some of our chips will include it. Right now there are some difficulties on power consumption; there are some difficulties on security. Both of those can be ameliorated.
But the question comes up – although 802.11/WiFi is spreading quite a bit .. – the economics underlying … become quite questionable. We see some hotspots – coffee shops, etc. – being supplied; but there is a cost to that – it needs to be connected back to the Internet and it needs to be maintained. At some point people will be charging one way or another for the service.
EV-DO service might be widely available, not just in hotspots, you’re paying something for that and getting a large amount of capacity; then the question is whether the economics justify an additional on a case-by-case basis. The economics we are watching very carefully – very good technology – but what’s the right thing to be doing with the phones is open. [UCSD system on a bus – 1xEV-DO connection to bus and WiFi within the bus]. There are ways the two technologies can work together.
Prior to rollouts of 1x, GPRS, and DoCoMo WCDMA, you used to have a slide that dealt with you point that speed is important from the standpoint of operating costs. As I recall, GPRS was 42 cents; WCDMA 7 cents; 1x was 6 cents and 1xEV-DO was 2 cents [IJ: 2.3]. In light of the actual rollout and the actual experiences with GPRS, with the WCDMA problems and particularly with reference to a problem that I’ve read about that WCDMA seems to require a lot more cell sites than had been anticipated, do you have an update on those numbers or some general comments? Are the numbers still the same or have 1x and DO done better?
IJ: Well, we’re getting more and more experience with 1x and 1xEV-DO and so we feel more and more confident about those numbers and indeed the price of infrastructure is coming down. I think you see with those technologies – substantial uses at very reasonable pricing, allowing the carriers still to make a significant profit. I think carriers are still trying to understand what their business model is for data and the importance of being able to deliver it – large amounts at very low price. But I think that will be more and more self-evident and I think that is the direction we will go.
As far as the other technologies, there were some optimistic claims. For example, on GPRS as to what data rates one would achieve on the forward and reverse links. We tended to discount the ones that were really crazy – they talked about 177 kbps.. they’ll never get there – just a theory. But the ones that were practical, we did use the more optimistic numbers and obviously they are not being met. There are questions.
The reason we haven’t redone those slides and provided them is we are actually seeing experience in the field – what people are charging in different areas – and watch those trends. Rather than have it on slides, its going to be available more and more in the cost data. But if there is interest, yes, we can continue to can continue do those on our website.
The number of cell sites on WCDMA?
IJ: On WCDMA, there’s two issues. One is that it is at 2.1 GHz. Because it is at 2.1 GHz, as I showed in that little diagram, the coverage is a little less – that means you need more of them [cell sites]. The other issue is what data rates do you wish to support. You need to have smaller cell sites if you are trying to support the 160 kbps and higher data rates. Indeed, some of the early CDMA phones – not using our chips – actually had limitations down to 128 kilobits or 64 kilobits; they really weren’t third generation in the sense of giving a high peak rate – never mind the average rate. How operators will weigh those out is open.
I believe that what will happen is that there will be some fairly dense provisioning of cell sites in urban areas – a limited number of urban areas – to support higher data rates and then outside the question is what do you do. Well here you have the opportunity, again as one of the slides showed, of going to a 1xEV-DO type capability. Until operators begin to get experience with WCDMA – look at the experience with 1x and 1xEV-DO – they’re still not quite sure about how best to proceed ahead. I think looking ahead we have a very good opportunity. First of all, the sooner WCDMA gets out there.., we’re very pleased about that. But I suspect there has to be supplementing it – using lower frequency to get broader coverage – to make sure that these advantages are countrywide, rather just city wide.
Is there any risk that the pessimist of two years ago in Cannes will now be regarded as an optimist [about the timeframe for commercial quantities of WCDMA handsets could now be viewed as optimistic]?
IJ [chuckling]: Cannes is coming up again – that’s the worldwide GSM Congress. We will be there, showing some equipment. I would hope that now with some of the phones using our chips being available, working very nice – some launches have been announced but they are still very very soft launches – it’s getting close – that people will become a bit more optimistic.
Don Schrock: We have Samsung and LG and Sanyo who will be at our booth and have some very spectacular UMTS/WCDMA terminals, including GSM as well. So we think it’s going to be quite exciting for the Europeans to see the Qualcomm chipsets in these phones that are being brought to the market during the latter half of 2003.
Question about royalties on WCDMA to Qualcomm if 100 companies are claiming WCDMA patents – especially regarding Nokia.
Steve Altman: We have 100 license agreements and probably about 50 of them cover WCDMA. Under those agreements, including Nokia’s, they will pay royalties when they start selling WCDMA equipment. We welcome them to the market when that actually occurs because that will be a nice royalty stream for us. Their patents that they have with respect to WCDMA doesn’t impact our agreement whatsoever. We have rights to sell our WCDMA components and we don’t pay them royalties.
If other companies have WCDMA royalties, that doesn’t impact the royalties paid under our agreement. The way we protect ourselves with Nokia is no different than the way we protected ourselves in any other agreement. The royalty stream is the same whether they use one claim or all of the claims of our patents.
If a company has an agreement, they pay the full royalty regardless of other companies’ claims to WCDMA patents?
SA: That’s absolutely correct.
IJ: ..The royalty rate is the same. It’s a contract. They agreed to pay it. The one significant issue that’s open is, “What might other companies ask that manufacturer in the way of royalties?” The full royalty load on WCDMA is not yet clear. It will be higher because some other companies will ask for royalties but the extent is unknown. But we already have that agreement and this is the royalty rate that will be paid…
Regarding dropped call – coming down from Orange County, he was dropped by Sprint. Is there any hope for improvement?
IJ: The coverage is always an issue. Whenever there are questions given to users as to what their major concern is, the first major concern obviously is high quality, high reliability coverage so the operators are very much focused on that.
There are two ways that things get better. One has to do with improving technology; CDMA2000 gives you greater coverage for cell sites that cdmaOne did and also gives greater coverage than any of the other technologies. But still you need to be adding cell sites in areas where they may not have proper coverage. Sometimes that is very slow because the community, for one reason or another, may object to the ability of the cell company to put the cell site there. Cell sites are becoming less expensive; they are much less intrusive. There are no known health problems with cell sites… But there still is a reluctance to have them.
Sprint is one of the more recent companies in the sense that it was not a cellular company. The cellular companies in 800 MHz had wider coverage for cell sites. The PCS companies went to the higher frequencies with a little less coverage for cell sites but also they were later in establishing them..
We are getting better and better. Although we are never satisfied, ..the system here works quite well. If you travel in some cities in other countries, you’ll have repeated drops going through the city itself. Your issue is one that operators as well as developers and chip designers are very much concerned about.
Closing Remarks of Dr. Jacobs
.. “It has been a very exciting year.” We’re off in 2003, I think, to a very strong start. There are very positive aspects happening worldwide. Despite some of these setbacks, overall our general gain in the use of CDMA technology and ongoing improvements that I think you will find very exciting.. I think things ahead are looking very very positive going ahead and hopefully the next time we get together one year from now we’ll have even better news to tell you. |
