The biggest piece of technology news last week, was also one of the
least noticed. On Friday, Qualcomm (QCOM) announced that it had settled
a patent dispute with Ericsson (ERICY) that will clear the way for a
global wireless standard based on Qualcomm's Code-Division Multiple
Access (CDMA) technology. Ericsson will also buy Qualcomm's money-losing
terrestrial wireless business in a deal worth around $1 billion.
Ericsson's surrender marks the culmination of Qualcomm's rise to the
forefront of the wireless industry. The company has been the leader in
developing, promoting and marketing CDMA, and has locked up much of the
engineering talent, design skills, and proprietary rights surrounding
this technology.
For the past decade, the wireless industry has been locked in a battle
over two competing, incompatible, digital technology standards that
specify how the bandwidth spectrum is allocated during a cellular call.
One method is called Time-Division Multiple Access (TDMA), the other is
CDMA. In 1989, TDMA was selected as a digital cellular standard, and
established a market base in Europe using TDMA-based GSM (Global System
for Mobile Communications). TDMA breaks up the spectrum into time and
frequency slots and cannot readily offer bandwidth on demand or switch
unused time and frequency spots to other users on the network. TDMA
increased the simultaneous user based by as much as six or eight-fold.
But the story doesn't end there.
A West coast company called Qualcomm, who had been in the business of
supplying the military with spread spectrum technologies used in things
like spy satellites, emerged with a better way. While TDMA attempts to
fit numerous calls into the same frequency channel, CDMA assigns each
call a unique identifier code that allows the base station to recognize
whether it's voice or data and process it correctly. It also allows
calls to utilize the entire frequency spectrum because of the unique
identifier codes. CDMA is more efficient and allows greater capacity
gains.
Interestingly, the creators of CDMA were also smart enough to add TCP-IP
to the CDMA architecture. TCP-IP is the standard protocol of the
Internet. This feature will soon allow Qualcomm phones to connect to the
Internet from a laptop without a modem.
Qualcomm has a multi-tiered strategy. The company has licensed its
patented technology to more than 60 manufacturers to date, who use
Qualcomm's intellectual property to manufacture handsets, infrastructure
and other digital wireless products. In return, Qualcomm receives
royalties for the use of its technology. The company also makes its own
phones, chips, and wireless infrastructure products. It also owns a
stake in the Globalstar Satellite Communications System.
CDMA is the heir apparent to the global digital standard for wireless
communications, and Qualcomm owns most of the technology's patents,
engineering talent, and other intellectual property. Dataquest expects
the number of worldwide CDMA subscribers to increase five-fold over the
next four years.
Qualcomm is already riding a tidal wave. Since 1997, the company has
increased revenues 60% to nearly $3.5 billion last year. But this is
just the beginning. As cellular phones displace PCs by becoming digital
communicators, Qualcomm makes money by licensing the standard, and then
making the chips, phones, infrastructure, and other products on top of
it. The next Intel (INTC)? We will buy 150 shares of QCOM on Monday
morning at 10:15 AM. The stock closed Friday at $111 1/2.
Qualcomm is not the only play on the emerging dominance of CDMA. Two
smaller companies, Spectrian (SPCT) and Microwave Power Devices (MPDI)
are also primed to be aggressive players in this space. Both companies
manufacture RF power amplifiers that are linear enough for new
generations of CDMA. In laymen's terms, these companies make the
technology that transmits a signal from a base station to a cell in a
wireless network. Powerwave (PWAV) is another player, but is not as
strong with CDMA systems.
Spectrian holds 16 patents with 25 pending for processes related to this
technology. It also has 150 engineers working on enhancing and
developing this technology. Nortel (NT) is the company's biggest
customer (almost 79% of revenues, NT is a big player in the CDMA
market), with Qualcomm and Harris representing the companies other large
customers. Microwave Power Devices is capitalizing on 32 years of
experience in creating power amplifiers for military projects. The
company still derives significant revenues from these areas. Microwave
Power Devices has had huge success in landing major orders from Lucent
Technologies (LU).
Shares in Spectrian and Microwave Power Devices were hit hard when
financial crisis in Asia struck. South Korea is one of the largest
cellular markets in the world, and Asia is a CDMA stronghold. Spectrian
stock traded as high as $60 per share in late '97, before crashing. The
stock currently trades at $10 per share with a $105 million market cap.
The company has little debt and nearly $7 per share in cash.
Microwave Power Devices has been less volatile due to its stream of
government revenues, but even so the company's shares have seen a
divergent $2 1/2 and $13 per share over the past 52 weeks. MPDI closed
Friday at $8 1/4. The company's market cap is $85 million, off a base of
sales of $56 million and $135 million in booked contracts. MPDI was
profitable last year and currently trades at a 35 PE.
These companies are highly raging, and represent solid plays on the
emergence of CDMA and cellular phones as digital communicators. On
Monday at 10:15 AM, we'll buy 1000 shares of SPCT and 750 shares of
MPDI.
Have a great week!
(Disclosure: Certain Raging Bull staffers or the author are long AFCI,
ATHM, CIEN, DIMD, EXDS, GMST, LCOS, MACR, OMKT, UNPH, YHOO.)
- Complete Portfolio Spreadsheet |
