Verizon goes the LTE route with Vodafone, in huge blow to UMB
Published: Tuesday 27 November, 2007
In a huge blow for Qualcomm and its UltraMobile Broadband platform, its most valuable customer, Verizon Wireless, has officially committed to using LTE for its next generation build-out. The announcement came just days after the carrier dismantled another key foundation of its past strategy, its walled garden, and said it would adopt open access (see separate item). Together, these statements of direction show Verizon Wireless recognizing – as Sprint Nextel has already done, though Verizon is in stronger shape to execute successfully on its vision – that to take a dominant position in the mobile internet and 4G, and see off a host of new-style operators, it will need a brand new approach to infrastructure, devices and the user experience.
Verizon Wireless said in a statement today that choosing LTE along with Vodafone gave both companies “a unique opportunity to adopt a common access platform with true global scale and compatibility with existing technologies of both companies”. The partners have set out a coordinated trial plan for LTE that begins in 2008, with trial suppliers including Alcatel-Lucent, Ericsson, Motorola, Nokia Siemens, and Nortel. LTE testing is starting to gather pace even in advance of finalized profiles from the 3GPP. Recently, announced that the two companies completed LTE test calls between the former’s equipment and LG mobile device prototypes. The test used 2x2 MIMO systems over 10MHz channels. This effort was part of a broader testing regime being conducted under the auspices of the LTE/SAE Trial Initiative (LSTI), a group of operators and vendors established to ensure the rapid commercialization and easy interoperability of LTE systems, with the ambitious view to getting commercial products to market early in 2009, an agenda that would narrow the current headstart of WiMAX, but which seems quite likely to be unachievable.
Significantly, and again with echoes of Sprint, Verizon stressed that “discussions with device suppliers have expanded beyond traditional suppliers such as LG, Samsung, Motorola, Nokia, and Sony Ericsson, as consumer electronics companies anticipate embedded wireless functionality in their future products”.
CTO Dick Lynch said: "The company's move toward a 4G network is driven by our vision of pervasive wireless internet connectivity and mobility. With a host of new devices and applications, and a particular focus on embedded wireless in virtually every piece of electronics you buy in any store, we believe LTE is the best technology with global scale to deliver on the promise."
As Verizon Wireless’ co-parent Vodafone has also reluctantly accepted, along with many other cellcos round the world, the open internet model is now unavoidable in next generation mobile systems, despite the negative effect on margins, customer control and costs. Supporting open access has the potential to be extremely expensive, because of the high and unpredictable bandwidth requirements of unfettered internet and multimedia use, with the profit opportunities far from defined. And so a new breed of infrastructure is required too – one that combines high performance and capacity with ultra-low operating costs and cost to deliver each Mbps.
In this context, the choice of LTE is logical, given Verizon’s timescales – unlike Sprint, it believes its current EV-DO upgrades will support all the services it needs to offer its base for the next few years at least, so it can afford to wait for LTE, rather than leap to the more readily available WiMAX. LTE, like WiMAX, will incorporate many advances in areas like smart antennas and flexible channels that will allow operators to reduce cost of delivery and make more efficient use of their spectrum, and it will also, like WiMAX, provide the opex benefits of a flat all-IP network (although, of course, Verizon will have integration and backwards compatibility issues to address with regards to EV-DO, which will inflate costs compared to a greenfield operation). But on the cost front, adopting a common strategy, with shared testing and procurement, across the whole Vodafone empire, makes a lot of sense for Verizon Wireless. In the past, it gained competitive advantage from being so pre-eminent in the CDMA operator world, and so wielding heavy influence over Qualcomm’s roadmap. Now that the RAN network is becoming more commoditized, this factor is less important, and Verizon Wireless will look to differentiate itself, like other operators, though software, devices, user interfaces and applications, all of which will evolve similarly for any IP-based network.
The same argument applies to the other half of the marriage, Vodafone. The very public confirmation that it would collaborate with its US joint venture on LTE testing and procurement from next year – firming up strong hints that the CEOs of both parents issued to the same effect earlier this year – does not bode well for WiMAX, suggesting that, in the interest of economies of scale and buying power, the giant has decided to base most of its core roll-outs on one technology. This would hardly have caused anyone to bat an eyelid had Vodafone, always assumed to be firmly behind LTE, not made several statements this year that it might use WiMAX as well. It is still quite likely to use WiMAX for spot deployments where this is appropriate – because spectrum is available, for instance, or Vodafone wants to move quickly into an African or Asian market where there is not yet a 3G opportunity. But in the heartland territories, it seems the WiMAX hints were mainly designed to light a fire under the LTE market and ensure it did not lag behind Vodafone’s own business objectives.
A more aggressive move towards 4G-style roll-out from VerizonWireless – which had previously taken the view that there was no rush to move to 4G – will also hit WiMAX because it will squeeze the potential for a market lead in open mobile broadband that Sprint and Clearwire – assuming they get through their current uncertainties and stick to their respective plans – have in the US. This in turn could make LTE, rather than WiMAX, the centrepiece of mobile broadband in the US, especially as it will almost certainly also be adopted by UMTS player AT&T.
Verizon’s statement could not have come at a more painful time for Qualcomm, given that the chipmaker was just starting to benefit from a softening of opinion towards it, which in turn was boosting share performance. Most of the depressed value of the company’s stock recently is attributable to fears about its ongoing intellectual property and royalty disputes and the cloud these place over future prospects for this high margin side of the business. But the CDMA giant has done an effective job of announcing products that are both impressive and ahead of the market, the best way that it can restore the confidence of shareholders and customers, by diverting attention to its engineering excellence rather than its IPR position.
Last week, two influential financial analysts upped their ratings on Qualcomm, pointing to the fact that its R&D and product roadmap and the prospects for its core chip business remain strong. This led to Qualcomm stock rising by almost $1 to $42.18 last Wednesday, on a day when the technology market was slack. JP Morgan analyst Ehud Gelblum raised his rating based and also forecast that Qualcomm and Nokia would reach an agreement during the current arbitration process over their patent licensing dispute. Nokia has not paid royalties since the old agreement expired in April, though it has set aside a sum that it believes to be a reasonable one for these licenses – and is far less than Qualcomm has demanded. Gelblum believes the two companies will agree on a rate of 2% to 2.5%, half the 4% to 4.5% rate Nokia used to pay.
Stifel Nicolaus’ Blair Levin was also optimistic, largely because of Qualcomm’s relatively minor but still significant court victories against Nokia in recent hearings in Germany and the Netherlands. These rejected Nokia’s claims of ‘patent exhaustion’ – that because its suppliers, such as Texas Instruments, had already paid for certain patents, Nokia was not bound to do so too. Levin thinks these judgements are indicative that court rulings are beginning to break in the chip giant’s favour, especially as a recent ruling also limited the damages Qualcomm will face in the case it lost to Broadcom, over patent infringement, in a Santa Ana, California case. “The evolving win-loss record determines Qualcomm’s relative negotiating strength as its licensees—customers and competitors—push for better terms, but the courts take each individual case on its own terms,” Levin wrote.
But into all this good cheer steps Verizon, Qualcomm’s most important friend in the operator community and once the strongest backer of CDMA. By taking an increasingly hard line on CDMA, Verizon opens up a new can of worms for Qualcomm, the possible accelerated demise of the CDMA platform after the Rev A/B generation – and with operators in some non-3G economies likely to skip that generation too and move more quickly to an IP platform. The threat of the loss of CDMA will not be unexpected to Qualcomm, and its growing strengths in HSPA, multimode chipsets, multimedia and platform-neutral technologies like Brew show it has a powerful contingency plan for replacing the eventual loss of CDMA revenues. If this were a simple matter of revenues, there would be every faith that, like other engineering powerhouses before it, Qualcomm would weather the transition with a sharp refocusing of its product line. But of course, CDMA is far more than that and its loss is more easily equated with the challenges Intel faces should the Wintel PC start to lose its role as the technology client of choice. Both vendors can shift engineering and marketing for new, growth markets and leverage their existing customer bases and influence to ensure they accelerate their entry into new territories. But both will be losing a technology base over which they had complete control, and massive market share, both of which generated advantages in terms of margin, revenue and security that they will never have again.
In the next edition of Wireless Watch we will publish a full analysis of Verizon Wireless’ strategy in the light of its important statements on open access and network selection.
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