Breakthrough Ideas (continued)
CDMA2000 in Japan and China.
Japan.
Qualcomm’s second Asia card, Japan, is another leading indicator of market direction. In Japan, KDDI launched CDMA2000 1X on April 1, 2002. By the end of their fourth months of service in July, KDDI added more than 1.6 million 1X subscribers. With networks covering 90% of Japan’s and Okinawa’s population by year’s end, KDDI plans to end their first year of 3G with 7 million 1X users in March 2003, including a very rapid migration from 2G to 3G.
KDDI introduced the first nationwide gpsOne 1X services, launching in December 2001 and gaining 2.3 million subscribers as of July 30, 2002 for its GPS-Movie Keitai eznavigation services, with a million users. Eznavigation offers over 60 applications. Also, KDDI launched BREW in March 2002, offering the first gpsOne/BREW-integrated services, and the Panasonic BREW phone became the #2 seller. KDDI plans to launch 1xEV-DO test services in April and commercial services in autumn, 2003. Hitachi and Fujitsu will install the RANs for HDR for both 2GHz and 800MHz bands using equipment supplied by Samsung. The new HDR RAN will use existing CDMA 1X cell sites, towers, and antennae.
With 10.8 million CDMA subscribers out of over 12.8 million customers, KDDI is the second largest mobile telecom carrier in Japan, competing with NTT DoCoMo, with close to 47 million subscribers, and J-Phone, who is hot on their heels with almost 12.8 million.
KDDI’s 1X and DoCoMo’s FOMA, which launched in October 2001, represent the only current national competition for 3G dominance. In July, all of Japan added 528K subscribers; almost 261K were CDMA 1X converts. CDMA is a hands-down winner through July, attracting over 10 times as many subscribers in its first 4 months as FOMA’s 127,400 subs, which took them eight months. FOMA (Freedom of Mobile Access) provides too little freedom, being incompatible with Japanese TDMA’s PDC that is used by the masses of DoCoMo customers.
New & Analysis’s Barney Dewey summed up DoCoMo’s 3G Failure So Far: siliconinestor.com
“The devil is in the details. I believe DoCoMo’s failure stems from technical problems in the early stage of WCDMA technology. The WCDMA technology needs a lot of tuning for it to be a commercial success. The service does not deliver the data speeds promised yet, voice callers complain of dropped calls, the mobile phones are too big and consume too much power. The Japanese (or anyone else) don’t want to give up their small phones with great battery life for a phone that is twice as big and won’t hold a charge for a day. Of course, the reduced coverage of the FOMA system compared to the other system doesn’t help either. Here is the simple lesson. Any operator that implements a ‘3G’ system that doesn’t offer the same benefits as existing 2G or 2.5G systems will fail. One of the reasons CDMA2000 1X has been such a success is that it does not compromise anything in offering 3G. Until the WCDMA technology reaches the same ‘no compromise’ service level expect to see a lot of 3G failures. I think European operators need to wake up to reality.”
In July, KDDI added over 104K new CDMA 1X subscribers and converted about 158K of their existing PDC subscribers to 1X. KDDI markets their 1X services to existing customers as a better extension of existing CDMA services, encouraging PDC customers to switch and planning to drop older generation PDC handsets by the end of the summer. The relatively easy marketing to internal PDC customers becomes a simple handset replacement upgrade to receive better and faster data services.
The advantages to KDDI are that existing PDC customers are low cost, easy to sell, and generate higher ARPUs on 1X. The evolutionary migration path, with backward and forward compatibility for seamless roaming between the CDMA generations, makes any upward transition for cdmaOne customers a simple matter of purchasing replacement handsets for their color displays, cameras, and BREW application downloads of desirable position location services. Korea’s cdmaOne was based on IS-95A, but Japan deployed IS-95B, with its faster 64 kbps data rate. Still, KDDI sees its marketing challenge to be how much can we cut the cost of data communication to stimulate usage, hence, the 1xEV-DO addition next year that will enable them to sell a megabyte at a lower price, since the airtime cost is less than 3 cents a megabyte.
And, spurring 3G data usage pays off. For the June quarter, KDDI’s ARPUs for: 2G Data, $9.62 and 3G Data, $26.41; 2G Voice, $57.72 and 3G Voice, $61.52; 2G Total, $67.34 and 3G Total, $87.93. Once again, 3G data services not only demonstrated significant increases in DATA ARPUs, but also stimulated smaller increases in VOICE ARPUs, demonstrating the stimulus effect. Data services contributed approximately 12.2% of overall revenues. During the quarter, new handsets offering high-speed wireless web services helped the company retain customer. Churn dropped 25%, from 2.4% in March to 1.8% in June. Meanwhile, FOMA data revenues continued their decline, down 10.8% from the previous quarter.
KDDI announced total 1X subscribers reached 2 million on 23 August, up from 1 million two months ago, with about 40% new subscribers. Once all KDDI customers are on a unified network, operating and infrastructure costs are reduced, development costs are amortized over a larger base, and network externalities generate increasing returns to scale. The virtuous circle for operators is that investing in data services both increases data ARPUs, which lifts margins, and reduces subscriber churn and acquisition costs, which, in turn, provides further incentive for the operator to invest in more new high data rate services. This replicates, in miniature, the advantages of Qualcomm’s plan for a seamless complete standardized worldwide mobile communications network. Advancing data services drive the system and require a complete and integrated amalgam of cheaper, faster data throughput, exciting devices, and addictive services. Once a critical mass is achieved, scale escalates exponentially.
The major drivers of device sales to date, which also drive data ARPUs, are GPS services, color screens, and built-in digital cameras. J-Phone introduced the digital camera, and competing carriers quickly followed their lead. Now, the camera competition is turning to quality, which is determined by the number of pixels. By late 2003, cameral modules with one million-pixel resolution, which is equivalent to a low-end digital camera, are expected. The “eye” of the camera can be either a CCD (Charge Coupled Device) or CMOS image pick-up device. CMOS has been the standard due to economies of scale, but its problems are suppressing noise and enhancing sensitivity. Sanyo has begun to sell CCD camera modules, and Sharp and Fuji Film have joined the race, along with a new VMIS technology, which lowers power consumption.
At the same time, Sharp, Hitachi, and Toshiba Matsushita Display Technology are competing for technology improvements and market share in next-generation LCD panels, aiming to accelerate the introduction of high-resolution color screens to stimulate handset demand. The price for new screen modules, like the new quarter-VGA screen, which increases the number of pixels four times, and the number of colors from 65,000 to 260,000, runs about 40% more for a module that includes a two-inch screen, LEDs, and ICs. Kyocera is making Bluetooth modules, which in combination with Qualcomm’s CDMA, allow mobile phone to exchange information with nearby digital equipment. Another recent technology extension is Hi Corp.’s Mascot Capsule Engine/Micro3D Edition, the 3D polygon graphic engine, which is now compatible with BREW 1.2, enabling 10 frames/second imaging speed. Better imaging on better screens using better applications improves customer experience.
The growing number of electronic devices that can be combined within a phone or communicate to a phone makes the consumer electronics approach promising. For instance, KDDI is working to boost operations by supplying communication links built into products like automobiles, video game machines, and digital camcorders. Toyota, which owns about 25% of KDDI, announced a fixed-fee service offering a vehicle-based terminal capable of retrieving music and data such as restaurant information through KDDI’s 1X network. KDDI and Pioneer announced in August a project JV that will combine a 1X communications module with a Pioneer car-navigation system to create an in-vehicle client-server system, expected to go commercial this year. The ability of BREW to download, manage, and upgrade such systems is very valuable.
As many as 78% of Japanese users receive information on travel or stock markets and play games on their cellphones. With such services as e-mail, web browsing, and online shopping, Symantic Japan says phones are becoming targets of virus attacks. Using digitally approved BREW applications can avoid or reduce those potential problems and help service those phone with such problems over the air.
KDDI has declared that an imaging digital-camera is now a “standard feature” on its phones, with video cameras to follow in the future. In late August, KDDI announced plans to launch a video e-mail service in October on its 1X network. The service allows customers to send and receive 5-, 10- or 15-second videos on their handsets. Among the four available handsets for the service, one from Toshiba includes a secure digital memory card that can store more than 500 five-second video clips. KDDI will introduce a discount-pricing plan for the service to lure customers to 1X. The service is direct competition for J-Phone’s in place Sha-mail service on a PDC network. According to the President of KDDI, “We expect about 70% of our users to switch to high-end and feature-rich handsets.”
With leading technology in consumer digital products and display screens, both Japan and Korea will pioneer the transformation of the cell phone market into a consumer electronics market, which will further escalate phone replacement rates for innovators who must have the latest technologies. And, as each device scales, it becomes cheaper and attracts new interest from pragmatic consumers. Just remember the rapid roll out of DVD’s to imagine how fast this can happen.
China.
With China, Qualcomm plays its third and ace Asia Card. China’s MII understands both the needs for mobile communications as part of the infrastructure of modern commerce and for China to develop a domestic integrated learning base in 3G technology that will enable it to follow in Korea’s and Japan’s footstep as global electronic and telecommunication powers. The MII reported in June that 176 million people in China had mobile wireless phones, increasing by 31 million in the first half of the year. It is the fastest growing market with a mobile penetration of only 10-15%. By 2005, the market is expected to reach between 350-500 million. Outside of mobile sales, China also has the strongest PDA sales, with 1.6 million units shipped in 2001.
The MII wants to eliminate its dependence on foreign technology by creating its own research, development, manufacturing, and marketing prowess to ensure that domestic companies benefit from this internal growth. In pursuit of that goal, the MII licenses domestic companies, including 7 companies for CDMA infrastructure, 19 for CDMA handsets, and China Unicom as the first CDMA carrier. If domestic companies are to gain ground, their future lies with CDMA. The Chinese were locked-out of the GSM/GPRS market by its 29% royalties and, I presume, intent. With over 100 companies claiming WCDMA intellectual property, most asking for 1% royalties, that market is not inviting.
Dr. Irwin Jacobs understands how to sell this CDMA competitive advantage both in Europe and in China. In a September story written by reporters in both London and Tokyo, Jacobs discussed the complexity of licensing intellectual property related to WCDMA, which could further hold-back a European roll out, and said, “There are many companies that have, in the design of the (WCDMA) standard included their own intellectual property. The total royalty on that equipment is unknown at this time.” In this instance, Jacobs may intend that the European operators get the implicit contrast between Qualcomm’s knowable rate on the fully interoperable and currently available MSM6200 for GMS/GPRS/UMTS and the long-awaited and delayed Nokia multimode chip with its suspected interoperability problems. But, you can be sure that China’s MII knows how favorable a royalty rate it negotiated on CDMA and how costly UMTS might become.
Qualcomm provides China with the best opportunity because it offers not only a single-source low-rate royalty, but also willingness to cooperate, educate, and train the Chinese to do most of their own work to gain most of their own sales and profits. China Unicom’s has around 33 million subscribers on its present GSM network, which gobbles spectrum gluttonously when compared to dainty, efficient 1X. The big bet is that Unicom will become the first company to begin a transition to GSM1x using Qualcomm’s MSM6300.
Also, this royalty lesson is not lost on China Mobile, the #1carrier in China, which uses a GSM/GPRS network, but it appears to have stopped building out GPRS. According to Chinabyte on September 7:
telecom.chinabyte.com
“China Unicom’s pressure is capital. China Mobile’s pressure is 3G. Unicom’s 3G migration path is relatively clear, from IS-95 to CDMA 1X. It is not only technologically easier than the GSM to GPRS to WCDMA path, it is also cheaper. …China Mobile chairman Wong said that they are watching NTT and H3G in Europe before making a final decision. If they are unsuccessful, they, China Mobile, would consider other technology. The fact is, since Oct 2001, NTT’s WCDMA failed to attract even 150K subs. Many European carriers are also abandoning their WCDMA plans. …Even though it started earlier, WCDMA is not as mature as CDMA2000. Right now, the WCDMA technology is confusing and the standards are not united. Even if everyone uses WCDMA now, all carriers are still going to have roaming problems, not to mention the cost is expected to be 2 to 3 times higher than CDMA2000.”
In addition, MII has announced that two large Chinese carriers will also be admitted to the Chinese mobile wireless market. At the SBB Tech Conference on September 4, Tony Thornley said,
“The China market is actually the driver of the Asia market as a whole and, in the longer run, the worldwide market; because it is such a large market, it drives influence over other markets and it also drives scale. …Looking into next year most importantly, Unicom is investing most of its assets into CDMA, and we expect to see accelerating growth from the China market. We also have seen very good signs that the new operators that will come into the China market – today there are only two – will be using CDMA technology. One of the manufacturers in China announced they are going to manufacture equipment at 450 MHz, which is a band that we have been promoting on a global scale. This is just going to expand the availability of CDMA around the world and particularly in China.”
If the entire Chinese market chooses CDMA2000, then so will the rest of Asia, followed by the rest of the world.
Both domestic and foreign infrastructure and handset vendors are working to deliver CDMA2000 1X in Unicom’s 2.1 GHz spectrum at a cost of $2.5 billion. Motorola, Lucent, Samsung, Nortel, and ZTE were among 7 vendors who initiated 3-stage 1X trials in 7 major cities, with 1X services beginning later this year in about 10 cities. Also, gpsOne and BREW trials are underway with a launch scheduled for Q4’02.
By mid-August, China Unicom’s CDMA subscribers reached 2.2 million. Unicom Vice-President Shang Bain told China Daily that they were adding 20,000 subscribers a day (at an ever increasing rate, with 15,000 in July; 20,000 in August; and 30,000 per day expected for September, a figure that was recently endorsed by Thornley) and that the targeted 7 million subscribers by year-end will be reached. Qualcomm has been more comfortable estimating 3-4 million, but several analysts of QCOM won’t accept that figure as possible. A September Bloomberg story pointed out that not only did Unicom set a record for new subscribers in August, but also “the new customers spent twice as much as those using an older network based on a different technology that dominates China’s mobile markets, the world’s largest at 180 million users.” Unicom reported that ARPU was 156 Yuan for its new CDMA users, double the 72Yuan of its own GSM users.
Initially, CDMA subscriber uptake was slow due to: (a) a handset shortage, (b) network problems, both the usual new network hassles and others resulting from a new CDMA feature--China’s mandated SIM card and slot in the handset, (c) marketing that was focused on high-end data subscribers before such services were available, and (d) a distribution system that relied on general phone retailers who lacked specific incentives.
However, considering that Unicom was building a CDMA integrated learning base from scratch, progress has been rapid. After beginning a roll out of cdmaOne in January that covers 330 Chinese cities in 31 provinces, Unicom soon decided to follow Qualcomm’s suggestion to move the networks up to 1X. The marketing focus shifted to competing directly with GSM by introducing: (a) a direct sales force, (b) bundling 50-100k phone numbers to 6 large resellers who are contracted to pay Unicom a minimum monthly charge and a preset fee for five-years regardless of how much traffic new customers generate, (c) starting a prepaid service for college students and young consumers (40% of GSM customers are prepaid), (d) launching various promotions where customers pay as little as $24 a month for calls valued at $60 per month, (e) introducing a contracted “so-many minutes for a free handset” plan, (f) pursuing a “green” campaign that touts the low SAR (Specific Absorption Rate) emissions from CDMA handsets; and (g) beginning a prominent advertising campaign. In September in Beijing, Unicom ran full-page newspaper and TV adds that marketed CDMA handsets as “green phone” because they have lower radiation emissions, better voice quality, less interference, and more confidentiality than GSM phones.
Handset prices fell drastically from about $360 initially to $120 now. And, 18 handsets are now available. On September 12 in Beijing, Samsung signed a strategic cooperation agreement that included 700,000 1X handsets to be distributed by China Unicom. China Eastcom reach an agreement with Unicom to offer handsets at one-third of market prices, about US$48-72. Unicom would reimburse the price differential over time to Eastcom’s distribution arm, Face One, which expects to sell 800,000 to 1mm by years end. Recently, Unicom President Wang Jianyu met with Chinese members of the CDMA value chain to discuss further cooperation that will produce a win-win outcome for each company. [Thanks to Ramsey Su for translating some of this information from the Chinese.]
Reports are appearing in the Chinese press that say, “companies like Huawei Technologies and ZTE are making strong efforts in CDMA2000 R&D, betting it will be adopted as the 3G standard in China.” ZTE licensed 1xEV-DO in April and demonstrated it at the CDG conference in Hong Kong. General manager of ZTE San Diego said, “ZTE believes that CDMA2000 1xEV-DO is one of the best technologies to support China’s growing need for high-speed Internet access.” As a strategic partner of Qualcomm, ZTE offers CDMA2000 systems in 450MHz and 1900 bands, is installing 1X in 10 provinces, has 97% of WLL in China Telecom, and projects in Indonesia, India and around the world. ZTE also provides advanced switching solutions for ISPs, ASPs, and CSPs. In May, Huawei Technologies also took a DO license.
Qualcomm announced on August 26 that China Unicom had selected the BREW Solution as its platform to launch wireless data applications by the end of 2002. Separately, China Unicom and Qualcomm agreed to a joint venture to foster a domestic BREW developer community in China and to manage the BREW applications that developers’ produce. Note that this combination provides a complete standardized end-to-end solution. Qualcomm not only provides the server platform, digital certification, apps delivery, billing, and settlement, but also will kick-start the formation of a community of local developers.
To date 16 carriers have adopted BREW and its open network-agnostic platform that is on the chipsets produced by 26 handset manufacturers. The developer community has downloaded 16,000 SDKs. But, for Qualcomm’s future, nothing else compares with the significance of this BREW joint venture in China. China Unicom wants to become a data services provider; Qualcomm paves the way. Jointly, they will write a BREW success story that kicks off massive increasing returns to scale for CDMA2000 and BREW.
Because of China’s size and scale, this Unicom decision to adopt the BREW platform and distribution system may well influence their consultant, SKT, to adopt BREW as well, reducing any threat of a competing Korean approach. Will it have the same effect on their other consultant, Sprint PCS?
New initiatives include Unicom’s strategic cooperation agreement with China UnionPay to innovate services for a banking card mobile payment market, with over 400 million bankcards currently. The partners will leverage each other’s resources, with UnionPay covering bankcard payment services and Unicom providing telecom services. The SIM-card handsets, which Unicom required, make its terminals an ideal system for such mobile payment applications. Also, China Unicom is taking the initiative in setting up international roaming agreements, which are simplified by having the SIM slotted phones. BREW will make it easy to download software changes into handsets as these initiatives grow, mature, and proliferate. Also, SIM cards facilitate international roaming. China Unicom initiated roaming agreements with 14 international carriers.
First-half profits for China Unicom in June were $271 million, up 3% and beating forecasts. Unicom announced that it was looking forward to a better second half because capital expenditures have peaked and subscriber numbers were growing at a healthy rate. Unicom expects to pay a dividend this year. Also, the red-chip flagship Unicom announced that it may buy an additional 9 networks, said to be the best of 18 networks belonging to its parent company, from state-owned China United Telecommunications Corp.
To date, Nokia has not faired well in getting MII to accept another European standard for 3G CDMA. UMTS requires new spectrum. The Chinese government deeply resents its technology dependence on the west. If the U.S. won the first round with PCs and the Internet, and Europe won the second round with GSM and mobile phone, then China must win the third round with 3G and mobile Internet. After long and hard negotiations with Qualcomm, the MII secured a low, advantageous royalty for domestic 3G. China’s MII has been urging strong SAR (Specific Absorption Rate; specifically how much is absorbed into the body) controls. The FCC requires a safety limit of 1.6 watts per kilogram SAR; the EU recommends 2.0. China is considering mandating emission levels at half the level of Europe. MII labeled CDMA handsets as “green phones” because their low-power architecture produces the lowest radiation emissions. Some speculate that “radiation fears” may be MII’s way to lockout GPRS/UMTS from the markets, using a concern over dangers to Chinese health as an acceptable rationale. The proposed standards would apply to infrastructure as well as handsets, making it very difficult to keep partitioning GPRS cell sites into new sectors. All of which favors the adoption of CDMA2000 as the Chinese standard. |
