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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: edwin k. who wrote (146857)	12/7/2006 9:51:16 AM
From: waitwatchwander	Respond to of 152472

I think you are pushing matters beyond the edge!~

To: edwin k. who wrote (146857)	12/7/2006 1:59:21 PM
From: AlfaNut	Read Replies (3) \| Respond to of 152472

How does beating up on Qualcomm help Nokia calm the competitive wave? The handsets of Nokia's competitors are desired by the market for reasons beyond just containing a Qualcomm chipset. ….If they are serious about getting ahead, they might be better off focusing their efforts on developing superior solutions. Couldn't that be the real problem? Sorry, this is long. It's not just about making "superior solutions," it's also about the structure of the whole industry. Let’s take a step back and look at both the tactical and strategic levels. Edwin K summed up a lot when he said “…the only real problem for NOK is the fact that it is losing the catbird seat to an American company.” Much of what I will write below says the same thing, with perhaps a different spin. First, the tactical side. Nokia is taking whacks at QCOM as part of negotiating a license deal, i.e. how much will they pay in royalties. Nokia wants anything but to pay the “standard” rates to QCOM with the pass-through rights QCOM seems to demand. Why? A few reasons. First, if they pay less than their direct competitors they have a built in production price advantage, and this is a key competitive advantage not to be underestimated. Second, if they can get enough concessions from QCOM on licensing it may be enough that they be able to collect royalties like QCOM, thereby further enhancing whatever pricing advantage they may hold. (Note: For Nokia to go out and really start collecting WCDMA royalties would open a can of worms too large to go into here, and in the end I think it is highly doubtful, despite their stated intent.) Now take a further step back to the strategic level of things. This is where QCOM is truly Nokia’s worst nightmare. First, QCOM being part of the WCDMA mix and commanding an IP position large enough to dictate royalties, hold pass through rights and supply chips, drives the entire phone manufacturing industry rapidly toward horizontal integration. (i.e. an industry in which a given company can only compete at one level of the value chain, such as making chips, or assembling phones.) Horizontal industries typically have a low barrier to entry at certain levels, i.e. you can sign a deal with QCOM, buy chips and become a phone maker. Whala! Competition as QCOM describes. QCOM has dramatically lowered the barriers to entry for phone manufacturers. This is directly at odds with Nokia’s vertically integrated business, in which they research tech, design chips, make chips (or have made to their spec), assemble phones and sell them. For this type of structure to survive it must hold sufficient barriers to entry and be efficient enough at each level of the value chain that effective competition does not emerge. So, all that said, QCOM helping drive the industry toward horizontal integration damages Nokia’s business model on virtually all fronts. To compete effectively it must do chips as well as QCOM, manufacture phones as efficiently as the best builders and offer the carriers leading edge bells and whistles. This isn’t so easy to guarantee into the future given the pace of QCOM R&D and the rise of Asian phone manufacturers. (Side note: driving this horizontally integrated industry model is a key reason for QCOM’s level of R&D as a strategic investment.) To wind up these remarks, Nokia attacks QCOM’s IP and royalty position to gain both a key competitive cost advantage against other phone manufacturers, but also to gain as much “ownership” as possible in the standard in order to (hopefully) raise the barrier to entry for competitors, keep up with and help control the pace of technical innovation, and preserve the competitiveness of its internally developed chips and its existing business structure. If it’s no longer a competitive vertically integrated company then it’s just another phone assembler, and that is a business whose margins will become razor thin. If that happens, guess what? QCOM wins in a very big way – having the greatest control of the market by dominating the level of the value chain (chips) that determines what devices can happen and for which there is a huge barrier to entry. Attacking QCOM’s royalty and licensing terms is the only weapon, short of outperforming every specialist firm in the value chain, that Nokia has to try and preserve the competitive advantages it held in GSM.