Thread:
Steve Malsin sent me a PM yesterday asking me what I think about the points Tero has been trying to make lately. The quick answer is that I am concerned that he may be right about a few important things.
1) There have been very few CDMA infrastructure announcements of any significance in quite a while which is going to cause a growth slowdown if things don't change soon. There's a fairly long lag time between when a system is announced and when it's ready to roll. We need new systems now to take up the slack after the initial push in the US, Japan, Brazil and Mexico is over. China is a mess, we're still a long way from big 3G deployments and I think we have to prepare ourselves for another round of the standards wars. There was another piece in the print edition of RCRNews about the lack of progress on harmonization. I'm speculating here but it seems to me that QCOM is taking the position that if there isn't going to be harmonization the royalty rates are going to have to be quite high, which sounds perfectly reasonable to me. So there's probably going to be another protracted fight which means we aren't going to be able to count on 3G related income for quite a while, I'd say at least 3 years other than licensing fees.
2) Except for Japan QCOM has not been able to capitalize on the slow and late arrival of new handsets from the major players. I look around NYC and see no handsets with the new MSMs. While it's way too early in the game to reach any conclusions, we all know the power of a/the major brand…Look at what ATT has been able to do with the one rate plan and Nokia phone…. McDonalds, Coca-Cola, MSFT, INTC, Startbucks, etc. And I'm not just talking about QCOM phones but also phones by Sony, Samsung and all the rest that are dependent on QCOM ASICs. Where are these new phones? QCOM made sure the new ASICs went to Japan first which is good, but this highlights the complexity of the handset/asic business model. The good part is that R&D is spread across all of these disparate manufacturers which should breed a tremendous variety of innovative designs. The bad part is that all of this has to be very well coordinated, and that Q competes with its customers. Q is going to have to build up a significant lead in the capability of these ASICs and get them out very early so that all these disparate manufacturers can get them to market ahead of Mot and Nokia. Getting them on the shelf at the same time may not be good enough. Mot and Nokia have an advantage in that they're manufacturing across all standards, they mix and match parts, already have enormous distribution systems. They can ship a phone to all the Radio Shacks in the country simultaneously which can be coordinated with a national advertising campaign. Can Q do that? I don't know. And most people would not recognize the brand. We still haven't hit crunch time in the CDMA phone market , a time when there are an excess of acceptable handsets and a real mktshare battle takes place .
3) And I sure hope the Thin Phone has a vibrating ringer. This would be the kind of mistake that is just totally unacceptable IMO. As an aside my cousin was visiting last weekend with his Sprint QCP2700. He told me he'd had repeated problems with the send buttoned being depressed accidentally which causes the phone to redial the last number called. He even related a particularly funny episode, for those not involved, with respect to this problem. He was in his car with his girlfriend. They had just finished a call with someone and as is not uncommon, were talking about the person they had just spoken with. Meanwhile the send button had somehow been hit and the phone had redialed this very same person who picked up the phone and unbeknownst to them was privy to this whole conversation. Needless to say, nobody involved was very happy. Anyway, my cousins conclusion was that the buttons should have covers. Will the vaunted ThinPhone have a cover? This is a the kind of problem the big guys don't really face. They don't have to get it ALL right with their one model.
So am I selling? No, but I think a fair amount of the easy money has been made for now although I still think the stock can go to new highs based on the upward EPS momentum gained from the infrastructure sale and the strong current subscriber growth, Tero's assertion that Sprint is having a sequential slowdown notwithstanding..
Will royalties alone be enough to justify an investment in QCOM over the long run? I think that the answer is almost definitely yes but if QCOM is forced for whatever reason to exit the handset business, or ASIC sales slow, we might go through another period where the company does not meet expectations and things are not so pretty for us shareholders.
These questions are going to be asked. Ignore them at your peril. What happens in the handset market this year may well define the future of the market.
Dave |
