Breakthrough Ideas (continued)
CDMA2000 in Korea.
With half of all households having a broadband connection, Korea is one of the world’s most wired nations. Of its 47 million people, 64% carry mobile phones. In 2002, 70% of all new handsets sold had color displays, and 90% were 1X. Thornley recently stated, “South Korea is really an indicative market of what’s going on in the leading edge of the wireless space.” For instance, with about 80% of its population connected to the Internet at home, Daum, an ISP with 32 million users, introduced a service that allows users to forward e-mail from the PCs to their handsets for $1 per month. It became an instant hit.
According to Bloomberg, reporting July 15, “SK Telecom Co., South Korea’s largest mobile-phone operator, said its second-quarter profit almost doubled as it added subscribers and more of them used their phones to connect to the Internet.” SKT added just under a half a million subscribers in Q2, lifting its total to 16.5 million, with a market share of 53.3%. Qualcomm recently presented a slide showing that SKT Data ARPU increased more than 100% from June ’01’s $1.43 to June ‘02’s $2.88. SKT expects profits to surge 50% this year to $1.5 billion.
SKT was the world’s first operator to commercially deploy a 3G network on October 1, 2000. Sung Lee, CTO and Network R&D Director said, “Since our CDMA2000 launch …SKT has achieved a more than 70% increase in voice capacity …our network capacity has increased to more than 231 Erlangs in 10 MHZ spectrum. …Our use of CDMA has enabled us to be the global driver in advancing the wireless communications market. CDMA has given us the compelling advantage of delivering compelling data applications without compromising voice quality or using additional capacity.” These advances came from using 153 kbps phones, which means upgrades ahead from Release 0 to Release A and gpsOne.
On January 8 2002, SKT rolled out a commercial 1xEV-DO service with data transmission speeds of 800 to 1000 kbps. Launched initially in Incheon and Seoul, SKT is expanding high data rates from the present 26 to 83 cities across the nation in 2002. SKT plans to spend $2.5 billion dollars on the networks because EV-DO’s high data throughput is very cost effective; whereas, at present, data service costs up to $1.30 a minute. According to the company, data traffic already represents 8% of sales and is expected to top 15% next year. Handsets for DO are in short supply, but as they arrive the company expects 300,000 HDR users by year-end. Consumers appear willing to spend $300 for the phones in spite of the band on government subsidies.
According to a Korean journalist, “For instance, a customer can download video clips at a speed of 300 kbps, a speed that compares favorably with the Internet on personal computers, while in a vehicle traveling at 60 kilometers per hour.” Only five years ago, when the 2G phones first gained popularity, the data transfer rate was 9.6 kbps. Today, SKT plans it future on always online EV-DO services like voice recognition using the Samsung SCH-X430, which automatically dials when the caller speaks a name from the phone’s directory and features a liquid color crystal display, multimedia messaging services for voice, images, text, and music, and a small digital camera with 180 degree rotation so that users can take digital pictures, send them to other mobiles, store 100 still images, and use a favorite image as the phone’s desktop background.
An official at SKT indicated that the tools of voice recognition would transform the users of mobile technology from a “thumb tribe” to a “voice tribe.” Voice recognition technology enables users to manage their menus and other information in their phones, like directories or PIM, through voice commands . With data speeds 16 times faster than current 1X networks, new EV-DO phones will enable videoconferencing that will change its society’s culture: A date will begin with videoconferencing; the couple can call up movie-previews or sports-clips to decide what they prefer to do and where to meet.
GPS-enabled phones will provide location-based services. For example, entrac, a GPS car navigation system provides the driver’s exact location on a map, tracking the driver within 10 to 20 meters. It can also download software that serves as a speed camera warning service, issuing a verbal warning to the driver 500 meters before the speed camera.
In an agreement with Visa International, SKT will market phones that serve as credit cards. Machines will begin to interact with other machines over the network to check on credit worthiness and to make payments.
Although consumer acceptance of high-speed data services in Europe lags behind, South Koreans love it. KTFreetel (KTF), with about 10 million CDMA subscribers and a 33% market share, launched its 1X network on May 1 2001 and its DO network on May 8 2002. Pouring 160 million dollars into network development for mobile Internet, it expects 800,000 DO scribers by December. KTS can also boast the first BREW launch in November 2001, with 16 available handsets and about 350 applications that rung up 7.5 million downloads. BREW’s Magic ‘n Multipack, a GUI for applications, has attracted 1.2 million users. After 8 months, KTF Multipack BREW subs climbed to 10.9%, doubling i-mode’s 5% rate of additions during their first 8 months.
In the last quarter, KTF’s operating profit jumped 57% to $190 million. It projects 2002 net profits of $492 million, up 29%, but analysts are estimating a 53% rise in profits to $545 million. As of May ’02, Multipack total ARPUs reached KRW46,071 ($38.08), 66% higher than 2G and 15% higher than average 1X ARPU. A Qualcomm slide reported that for the March quarter, KTF’s Data ARPUs were: 2G data’s $1.19; 1X Grey Data’s $3.39; 1X Color’s Data’s $5.75; and BREW’s Mulitpack data’s $7.07. Voice ARPUs were: 2G voice’s $20.69; 1X Grey Voice’s $26.76; 1X Color’s Voice’s $28.06; and BREW’s Mulitpack Voice’s $29.04. Total ARPU’s: 2G total’s $21.88; 1X Grey Voice’s $30.95; 1X Color’s Voice’s $33.81; and BREW’s Mulitpack total’s $36.12. Note that 3G drove both data and voice ARPUs, with 3G data also stimulating 3G-voice demand above 2G levels. Most important, note the significant contribution of BREW, beyond those of 3G and 1X Color Screens: Increased Data ARPUs by $1.32; Voice ARPUs by $0.98; for Total ARPUs of $2.31. Thus, 1X, color screens, and BREW are all driver of ARPUs.
Commenting on the March quarter, KTF’s Kim said that BREW Multipack subs generated five times higher data rate ARPU than 2G subs, with highest revenues coming from the under-19 age group. Compared to OVUM’s forecast of 9.5% revenues globally, KTF has a “mobile Internet vision” and forecasts that data ARPU will rise from the March 8% figure to make up 24% of revenues in 2005. They expect M-commerce and 1xEV-DO to serve as key drivers of data revenues.
Relying on product innovation, KTF introduced a cell phone that doubles as a credit card, using infrared technology to send out credit and verification data. The phone moves transactions out from stores to subways, busses, and vending machines. In addition to offering video clips for movie previews, sports highlights, and karaoke services, subscribers can trade shares, bank online, and transfer money. The company hopes to earn $20 million in commissions from M-Commerce this year, rising to $160 million in 2005. KTF expects its subscriber base to rise to 15% by year-end to 11.5 million, with 6.1 million using high speed Internet.
In Korea, operators sub-brand their markets by age and gender. KTF reports that each sub-branded group reports higher ARPUs and lower churn than the standard KTF brand. Also, operators differentiate their download prices. On 1X networks, all operators charge half a cent a package (512 bytes) for text but only one-quarter of a cent for multimedia content to make downloading it more attractive. Educating and encouraging new markets through initially low prices or give-a-ways seeds success.
In Korea in 2002, 90% of the handsets sold have been CDMA2000 1X. There were color displays in 70% of new handsets sold. Data applications were successfully driving new or replacement sales of handsets. Penetration of 1X had reached 31% of subs by June, expected to grow to 50% by year-end.
Mobile digital camera phones were hot according to Strategy Analytics, who reported 16 million sold this year, with a 34% annual growth rate, expected to cumulate to 147 million by 2007, which would surpass sales of traditional digital cameras. Both Samsung and LG Electronics, who also serves as the third operator with 14% market share, have hot sellers.
Growing at 60-70% a year, LGE, has become the 6th largest handset seller in the world. A best design winner in Korea, the LG KH5000’s camera boom can swivel 270 degrees. One promo pointedly boasts, “the KH5000’s 2.2 inch screen is super cool regardless of whether you are surfing the net or watching TV/sports programs. At. 2.4Mbps, we don’t know how many times faster that is when compared to the Nokia 921c.”
In April, Samsung Electronics, a particularly important member of the CDMA value web, announced a technological breakthrough in creating the world’s fastest and lowest energy memory chip for mobile phones. The 16-megabyte mobile phone chip has 25-nanosecond access speed for storing and processing data, compared with 70-nanosecond rates for current chips. [This is an outstanding example of how a value chain can advance independent trajectories of performance that augment the value of Qualcomm’s RF chipsets and drive replacement sales.]
This kind of technological excellence enabled Samsung’s brand value to skyrocket 30% in just a year, the largest gain in the world, while Nokia declined 14% and Ericsson, 49%. [This skyrocketing gain in brand value attests to Korea’s growing prowess in mobile phones at Europe’s expense.]
In June, Samsung’s Manager for Overseas Business announced that its mission was to encourage GSM operators to adopt cdma2000 overlays, GSM1x and 1xEV-DO, instead of building WCDMA networks. [Thus, the value chain advances the gorilla’s value proposition.]
In August, Samsung, already the world’s 3rd largest mobile phone manufacturer, announced the SCH-V300, a 1xEV-DO handset with a market-first touch color screen. The handset has a built-in camera among other features like streaming video and enhanced storage. In Q4, Samsung plans to introduce an interactive videoconferencing phone that allows callers to see each other’s faces on the phone’s screens as they talk. [Can you imagine the value that this technology, when combined with overseas QChat, would offer a family whose son or daughter or husband or father or wife or mother was in the military serving abroad in a war zone? How reassuring would it be to see that loved face as you heard that loved one’s voice? The value of Qualcomm’s augmented whole product becomes revolutionary.]
In September, Samsung announced that total sales of color displays in Korea surpassed a monthly average of 1 million units in August. First offered 15 months ago, monthly demand in August had climbed to almost 1.5 million, another S-shaped curve inflecting. Samsung took 58% of the local market, followed by LGE with 23% and Motorola with 9%. [Notice how the augmentation of adding color to LCDs in phones drives replacement sales, and you can understand the potential power of the consumer electronics strategy as you add cameras, camcorders, and applications.]
Although Korea must be celebrating their mobile successes, this is not always apparent in their press. According to the Electronics and Telecommunications Research Institute (ETRI), a leader in the Korean fight against Qualcomm’s supposedly uxorious royalties, handset manufacturers had paid Qualcomm a cumulative total $1.31 billion in royalties by the end of 2001. This information was included, along with a comparison of Korean and Chinese royalty rates, in article in Korea Times on September 4th, entitled Samsung’s Chip Threatens Qualcomm.
The article began by stating that Samsung has developed a new 1X chipset “challenging Qualcomm’s dominance.” Korean analysts are cited as saying, “with the technical breakthrough, Samsung Electronics has gained an upper hand to negotiate with Qualcomm on a slew of controversy over unfavorable royalties.” The article continued by stating that this “will not only allow the company to save in royalties ordinarily paid to Qualcomm, but will also force Qualcomm to cut royalties for other Korean firms.” A new dual band, dual mode (GSM/UMTS) chipset was also reported to be under development by Samsung. A WCDMA company, KT ICOM was quoted as saying that it would use Qualcomm’s MSM6200 in it trials, but later might switch to Samsung.
Dear Reader, can you parse the accuracy of this account? First, let’s consider the royalty claims. Korea does not pay a high rate of royalty compared to standard practices. Last year, Dr. Jacobs wrote the MIC carefully pointing out that the Chinese situation included other provisions, including 80% Qualcomm chips as mandatory, which must be taken together and weighed in any fair comparison. My memory is that he stated that each contract was unique, given a series of factors that impinged on negotiations. He pointed out that Qualcomm had helped Korea become a significant telecom player on the world stage. The timing of the article, which comes before any official Samsung announcement of a “new” chip, suggests it is intended to add additional pressure to Jacob’s meeting the following week with the new MIC Minister.
Second, the unnamed analysts are mistaken, and they make inaccurate claims for the implications of any new Samsung chip. Samsung and all other Korean manufacturers will continue to pay their contracted royalty in any event. To the best of my knowledge, Samsung has yet to license 1X intellectual property for manufacturing chipsets from Qualcomm. But, I have not read the details of their license. Because I speculated that Samsung seemed a like a potential chip competitor, I would have noticed any such recent announcement. If Samsung has or does later license intellectual property from Qualcomm for this purpose, then it would pay the royalty specified in this contract on the MASP of the chipset. The contract would specify whether these chips were for the merchant market or for Samsung’s internal use only. If Samsung were licensed the right to sell to others, it would pay ASIC royalties to Qualcomm, but Qualcomm might lose ASIC share from losing the sale of its own chip to Samsung’s 1X chip-customers. The royalties on sales of Samsung’s own handsets using its own chips would still be based on the MASP. None of this would give Samsung any additional bargaining power with Qualcomm, much less the ability to change the contracted royalty rates for other Korean companies.
Third, until Samsung makes that information available, it is impossible to know how well Samsung’s chipset might work, what features it includes, does its interoperability testing, and follows all the dozen steps required to commercialize a chipset. Is it to be a high- or low-end chip? How can Samsung hope to keep up with Qualcomm’s rate of advances? Would it include gpsOne or BREW? Given that Qualcomm does not have to pay itself an ASIC royalty, how well will Samsung compete if it becomes a provider of 1X chips? Will other handset manufacturers use its chips in their handsets that must compete with Samsung’s own handsets? That is why Qualcomm got out of the handset business.
Fourth, why would Qualcomm not welcome Samsung into the market as a second source of CDMA2000 chips? Either Paul or Jeff Jacobs commented in a question and answer session some years ago that Samsung did the best job of assimilating and using Qualcomm’s R&D. Samsung probably understands that what Qualcomm offers them in intellectual property and support is far better and cheaper than starting from scratch and doing it on their own. Samsung is a welcome partner. Fair competition is part of the game. Qualcomm can take the heat. If Samsung announces this chip, what are the odds that Qualcomm is taken by surprise? What are the odds that such a chipset would have been developed hand in glove as, say, a second source of entry level chips? If market demand does increase as I imagine it will, Qualcomm might welcome a second source who is a trustworthy partner and who can generate a chipset that does not fracture Qualcomm’s complete standardized solution to seamless roaming across a harmonize global mobile network. I hope Samsung does have a chip, just as I hope the recently announced Taiwanese alliance centered on VIA succeeds in developing and commercializing a WCDMA chipset. Given increasing returns to scale, it’s the size of the pie that counts more than your slice of the share.
Addendum: After I finished writing the section immediately above, I found this post of an email response from Julie Cunningham, VP, Investor Relations: boards.fool.com
“Dear Mr. Baumgartner:
All our licensees can make their own chips for their own use – only Motorola and Nokia have done so to date (Motorola is now a QCOM customer, but they used to do their own chip.) Samsung has always been a customer for QCOM chips. Although they periodically say that they are working on their own chips, they have not been able to produce a chip that is competitive with ours. They are also not licensed to sell chips to other manufacturers.
Best regards,
Julie Cunningham”
[This is why many press accounts are best ignored. Assume many of them are inaccurate and even designed to shake out less knowledgeable investors. If you understand what the crucial issues and the facts are, then you can sleep soundly. This why wise investors learn the story of their stocks in detail. It is the reason that I present Qualcomm’s story in detail.]
Following the World Cup, long-time industry-analyst Herschel Shosteck reported on his travels to Asia in an article entitled, A Skeptic’s Addiction to New Services. Arriving in Korea, Shosteck was loaned a LG KH5000 phone designed to operate on KT Freetel’s 1xEV-DO network. According to Shosteck (emphasis added):
Message 17803283
“…both data ARPU and total ARPU have increased in the Korean market as a result of launching color display phones. In the 18 months between September 2000 and March 2002, total ARPU increased from $36.20 to $41.80 or by 15%. Data ARPU increased from $1.30 to $2.20 or by 69%. The effect is even more clear when comparing data revenue of monochrome and color phone users. As of March, 2002, data ARPU among user of cdmaOne monochrome terminals in the Korean market was $1.60. Data ARPU among users of CDMA 1X color terminals was $6.29, or 3.9 times greater. These statistics support our hands-on observation that color displays increases the value of the end-user experience, resulting in a rise in network operator ARPU – provided the network operator prices the services attractively. As cameras become prevalent, we anticipate that ARPU will continue to climb …The appeal of end-users creating content themselves was immediately felt. Sending pictures meets key requirements for successful new services, such as immediacy and instant gratification. Most importantly, it is addictive.”
Korean companies have become major telecomm powers in CDMA 2000 handsets and infrastructure. In calendar year 2002, the number of 1X subscriber will have increased from 4 million to around 15 million. CdmaOne users are rapidly being converted to new capabilities, devices, and services in spite of bands on handset subsidies that the government introduced in March. The Korean data demonstrate that consumers will pay more to purchase or replace handsets that offer valuable features and services, which drives down gross costs of acquiring customers (GCAC). With 1xEV-DO networks close to nationwide by the end of the year, focus on BREW and position location as you look to Korea to discover what’s new on the leading edge of where the wireless world is going.
Although Korea earlier seemed intent on also supporting W-CDMA, their ardor has cooled proportional to the dimming of UMTS prospects. However, Korea wants to and will give its vendors an opportunity to play on the world stage and to be recognized as a leading player in 3G telecommunications, including UMTS.
SK Telecom followed its rivals, Samsung and LG Electronics, into the China market, setting up a joint venture with China’s Dalian Daxian. Samsung had partnered with Kejian and LG with Langchoa. These partnerships are required in order to manufacturer handsets in China.
SKT signed a consulting contract last year with China Unicom to help it set up voice and data services and in July signed a JV with Unicom to set up wireless Internet. Korea leads the way in Asia; Japan leads in consumer electronics for wireless; and, China wants to match and then surpass their successes. Qualcomm opens the door to opportunity for Asia.
[In playing if first Asia card, by helping Korea become a leading edge player in 3G, Qualcomm advanced its Asian strategy. Korea’s success foreshadowed continued success across Asia. When the Korean MIC chose CDMA as its 2G network, it gave Qualcomm an opportunity to showcase its technology. Qualcomm gave Korea the opportunity to take control of its nation’s 2G-market and to assume a position as a worldwide leader in innovative 3G mobile telecommunications. Where others closed them out, Qualcomm opened both Korea’s national market and world markets to Korean communication products. They formed a partnership where demonstrating excellence proves excellence. And, in doing so, Qualcomm offered the less developed world a window to see Korea’s success and to emulate it. Anyone who can read this story can come to understand that Qualcomm is a trustworthy partner who will let a country benefit from its willingness to learn and work by sharing a prosperity that is advanced by Qualcomm’s breakthrough ideas that can be licensed and translated into successful commercial products by each partner, whether a carrier or a nation. Innovation drives capital markets; fairly sharing innovations drives markets worldwide. Ideas create wealth; fair and open licensing spreads the wealth.] |
