Billions were at stake. Qualcomm, Ericsson in wireless deal [See bolded sections at bottom]
cbs.marketwatch.com
Two foes bury hatchet in fight over cell phone standard
By Jeffry Bartash, CBS MarketWatch
Last Update: 3:25 PM ET Mar 25, 1999
NEW YORK (CBS.MW) -- Qualcomm and Ericsson said Thursday they
have settled a bitter legal dispute that paves the way for the adoption of a
worldwide standard for the next generation of digital wireless phones.
The agreement also could help boost global purchases of wireless phones,
analysts say. There are now about 300 million cell phones in use
worldwide, a number expected to grow to 1 billion within a few years. It
will be several years, however, before such phones are available.
"It's certainly good news for the industry," said Jane Zweig, a wireless
analyst at consultant Herschel Shosteck Associates. "To have all the
warring factions is just good for the lawyers."
Under the agreement, the former rivals will jointly
support a single wireless transmission standard
called CDMA and share access to patented
technology, eliminating conflicts caused by
competing and incompatible standards.
"With the resolution of 3G and the cross-licensing
of our patents, Qualcomm and Ericsson have
paved the way for the expansion of global
CDMA-based wireless communications," said
Irwin Mark Jacobs, chief executive of Qualcomm,
in a statement.
Ericsson comes aboard
Ericsson, once an ardent foe of CDMA, has also agreed to purchase the
portion of Qualcomm's business that involves CDMA research and
development and the manufacture of equipment on which such wireless
networks operate. Terms were not disclosed.
The deal frees up Qualcomm to focus on chipsets and other more
lucrative products and stems its financial bleeding. "It's gotten rid of a
loss-making business," said Raj Srikanth of First Albany Securities.
Mark Roberts, an analyst at Everen Securities, estimated the CDMA
infrastructure division was losing $40 million a quarter. By shedding the
unit, earnings per share could increase 10 to 20 cents above Wall Street
projections in 1999 and by 50 cents in 2000, he said.
Before the deal, the company was expected to earn $2.66 a share this
year and $3.42 next year, according to a survey of analysts by First Call
Corp. Yet Qualcomm said it will take an undisclosed charge to account
for the shedding of its infrastructure unit, mitigating the near-term benefit to
earnings.
Shares of Qualcomm (QCOM) were up 7 15/16 to 95 5/16 in recent
trading. Ericsson's (ERICY) U.S.-traded depositary receipts rose 2 1/16
to 23 1/8.
Billions at stake
The two companies had been fighting for several years over which version
of CDMA -- code division multiple access -- would be selected for the
so-called "third generation" of digital wireless phones. The new standard
will be able to handle the increasingly important and lucrative services of
high-speed data transmission, to which current phones aren't suited.
European manufacturers backed Stockholm-based
Ericsson, the world's third largest maker of wireless
phones, and American firms generally sided with
San Diego-based Qualcomm, which pioneered
CDMA technology. The dispute even drew in
heavyweight political figures from the U.S. and
European Union, and no wonder: billions of dollars
were at stake.
The standard agreed to, aptly called CDMA 3G, is
supposed to be able to accommodate the three
main global standards under which wireless phones
operate. The other two are GSM, or global system
for mobile telecommunications, and TDMA, or time
division multiple access. GSM is widespread in
overseas, while TDMA is prevalent in the U.S.
The competing standards often make it difficult for
wireless phone owners to use their devices in
different locations throughout the world.
Satisfying everyone
The International Telecommunications Union, a United Nations body entrusted
with establishing standards for the telecom industry, still has to give its seal of
approval to a new standard and has been cajoling the two companies to strike a
deal.
The ITU's main concern is a single standard's compatibility with the billions of
dollars of existing technologies and that other phone equipment manufacturers
have access to it. Qualcomm and Ericsson say they'll license essential patents for
the CDMA 3G standard "to the rest of the industry on a fair and reasonable basis
free from unfair discrimination."
"We are ideally positioned to support any operator anywhere in the world
to migrate to 3G regardless of technology heritage or technology choice,"
asserted Sven-Christer Nilsson, chief executive of Ericsson.
While the deal's especially good for manufacturers of wireless phones, it's
not all that great for network operators. The operators support the idea of
a single standard, but it also means they'll have to spend gobs of cash to
make their networks compatible with new phones and older standards.
It's also unclear how quickly the next-generation phones will reach
consumers. Manufacturers seldom meet self-assigned deadlines for
shipment of advanced telecom products.
"Investors should be cautious here," said Roberts, a longtime Qualcomm
follower. "Generally, these new technologies are two years late." He and
other experts don't expect CDMA 3G to be available until at least
2001-2002. The companies haven't committed to a date yet.
Benefits for Qualcomm
While Qualcomm won't reap huge financial
benefits from deal for several years, the burying of
the hatchet with Ericsson aides its fortunes in many
other ways, accounting for a sharp runup in its
stock price over the past two days.
For starters, the sale of its CDMA assets to
Ericsson means the Swedish company will now
become a staunch ally in the spread of the
standard. It also means Ericsson will buy chips
from Qualcomm and pay it royalties from the sales
of Ericsson handsets based on current CDMA
standards. Right now Ericsson doesn't sell CDMA handsets.
The agreement also removes the threat of an adverse litigious result that
was hanging over Qualcomm's head like Damocles' sword.
Another critical aspect of the deal is that it likely means China will resume
support for a national network based on a CDMA version, exposing
Ericsson and Qualcomm to the prospect of hundreds of millions of new
customers in the world's largest country. The Chinese have been reluctant
to move ahead until a global wireless standard was determined.
Finally, the deal is likely to change how many Wall Street and industry
analysts view Qualcomm, whose reputation has suffered amid assaults
from Ericsson about the validity of its products and technology, Roberts
said.
Jeffry Bartash is a reporter for CBS MarketWatch.
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