Great letter by Dr J. and Q! Not only does it reasonably explain Q's view on royalties, but it uses the issue to tactfully express some of it's concerns with the way the Koreans are handling this issue and cdma in general, while also conveying the opportunity in China as well as the time-to-market advantages offered by CDMA2000.
September 10, 2001
Representative Kim Hyong-o
Chairman of Science, Technology, Information and Telecommunication Committee
National Assembly
Seoul, Korea
Dear Rep. Hyong-O Kim:
Thank you for your letter dated August 21, 2001. QUALCOMM greatly appreciates your history of support for
CDMA in Korea and I personally thank you for your foresight and leadership.
I believe the wisdom of your action as one of the first Korean parliamentarians to support the adoption of the
CDMA standard is well demonstrated by the large current export market for Korean CDMA equipment and by
the present dominance by Korean manufacturers of the domestic Korean market. In the early 1990's, before
QUALCOMM began its mutually beneficial cooperation with ETRI and Korean manufacturers, including transfer
technology, the Korean handset market was dominated by foreign suppliers.
With third generation networks based on WCDMA (asynchronous technology) now lagging badly in Europe and
Japan, with costs higher and with performance falling well below the third generation CDMA2000 1XRTT
(synchronous technology), Korean manufacturers and operators have even greater opportunities to expand world
market share of equipment and services. As noted in the Goldman Sachs Report entitled: "1XRTT in South
Korea-Lessons for the US", dated August 24, 2001, the initial launch in Korea has been highly successful, with
operators adding over 687,000 1XRTT subscribers in three months (with no subsidies). In my view, the major
shortcoming of the pioneering third generation effort in Korea, as well as a potentially costly decision that perhaps
should be examined by your committee, is the mislabeling of CDMA2000 1XRTT in Korea as 2.5G technology.
(IS-95B is 2.5G technology and the Korean deployments were the first of any 2.5G technology deployed
worldwide). This mislabeling of CDMA2000 has reduced the worldwide benefits to Korea of this great
accomplishment and allowed one company in Japan to continue to falsely claim the title of first with 3G despite their
repeated delays and performance shortfalls. Indeed, Korean operators are currently the only operators with
commercial services achieving the requirements of the ITU for third generation systems.
QUALCOMM continues to work closely with Korea to help introduce the latest technology ahead of others,
supported by early availability of advanced QUALCOMM chipsets and software. Through joint efforts on a
world-leading software initiative named BREW, developers can now rapidly introduce and operators offer new
data applications for download to the advanced handsets being introduced by Korea manufacturers. By exploiting
the capabilities offered by CDMA2000 1XRTT, Korean developers can earn significant revenues from BREW
applications not only in Korea but also in the United States, where we expect BREW to be launched before the
end of this year. Wireless communications remains an area where time-to-market confers a great advantage.
Recently, many articles have appeared in the Korean press regarding our license agreements in China and our most
favored contractual obligations to our Korean (and other) licensees. Our license agreements generally have
confidentiality obligations in all countries preventing lawful public disclosure of the terms including the royalty rates.
QUALCOMM fully stands by both the most favored and the non-disclosure obligations, but will respond to your
concerns within the confines of our confidentiality obligations.
First, with regard to China, our framework agreement with China Unicom provides the basis for licensing Chinese
manufacturers. Pursuant to this framework agreement, China Unicom, with approval from the Chinese government,
committed to rapidly deploy a CDMA network in China. In exchange, QUALCOMM agreed to grant worldwide
subscriber and infrastructure licenses to a reasonable number of Chinese companies that included, among other
terms, lower royalty rates for sales in China. In return for a lower royalty rate on subscriber units manufactured and
sold for use in China, Chinese manufacturers are required, among other things, to agree to (i) pay a substantially
higher royalty rate on sales outside of China (including any sales by them in the Korean market) and (ii) make a
worldwide commitment to purchase QUALCOMM's CDMA and related components for the life of the
agreement. I believe the framework agreement with China is highly beneficial to Korean manufacturers, who now
have a major new market which is both close at hand and one in which they have had little or no presence. If
Korean manufacturers choose to maintain their existing royalty structure, the vast Korean experience should offset
the small royalty advantage provided to the Chinese domestic manufacturers for the China market only.
I agree with you that contracts between two parties should be fair and reasonable to both parties, what I often refer
to as a win-win situation. In working out the win-win situation, one party may decide to stress an improvement in
one term balanced by a concession in another. In this regard, our most favored royalty provision with our Korean
licensees is a typical provision found in many license agreements of this nature. It requires that if the licensee elects
to change to a royalty provision found acceptable by another company, it must maintain balance by accepting the
full set of terms and conditions that were accepted by that company. It cannot pick and choose among terms and
conditions from different licenses to assemble the best of each, which would not be win-win. In this case, if the
Korean licensee accepts the lower royalty rate in China, it must also accept payment of the higher royalty rate for
sales outside of China, as well as commit to purchase QUALCOMM's components. Because of the large market
outside of China that the Korean licensees are benefiting from, some or all may decide that their existing
agreements are more favorable and suited to their needs, but that is a decision we of course leave to them.
We have contacted all of our Korean licensees and have offered them the terms of the recent Chinese license
agreements. We will have separate discussions with each of them, but will keep our discussions confidential.
Whether or not our Korean licensees accept the terms of the Chinese license agreement or maintain their existing
agreement, they will benefit greatly from the fact that they can use their leading CDMA expertise and market share
to export significant amounts of CDMA equipment to China. In this regard, we were quite pleased when Samsung
announced that it received a portion of the $1.5 billion CDMA infrastructure award* from China Unicom and when
Telson Electronics announced that it had signed a contract to supply handsets worth $61 million to China's Konka
Telecommunication Technology Co. We believe that this is just the beginning of substantial CDMA handset awards
to our Korean licensees.
It remains my strong belief that the royalty rate and the business terms and support provided to our Korean
licensees by QUALCOMM will continue to benefit our Korean licensees in the rapidly growing CDMA market.
This growth continues to be fueled by QUALCOMM's many activities, with a substantial part of the monies that
are paid to us by our licensees reinvested in these activities. We have spent and continue to spend a substantial
amount of money on QUALCOMM initiatives such as third generation CDMA2000 1X and 1XEV-DO, gpsOne,
BREW, and inexpensive world-wide roaming through multi-mode, multi-band chipsets including WCDMA when it
becomes commercial. We also invest in carriers around the world, including Korea, to expedite the deployment of
CDMA. We look forward to possible substantial growth in South America and India and smaller markets such as
Vietnam as well as in China and we are working with Korean manufacturers on many opportunities.
Korean subscribers and operators have benefited greatly from the transition to CDMA 2G, 2.5G, and now 3G.
Korean manufacturers have enjoyed great success in the worldwide CDMA market. Korean software developers
have a great opportunity to supply a worldwide applications market. We acknowledge and are thankful that these
Korean successes have also benefited QUALCOMM. It has truly been a win-win situation. It has worked because
we have cooperated fairly and moved quickly.
Thank you again for your past support. I believe we have a solid base of accomplishment on which to launch even
greater successes.
Very truly yours,
Irwin Mark Jacobs
Chairman and CEO
QUALCOMM |
