Frenzy Over Wireless a Two-Edged Sword for Qualcomm
As in a gigantic poker game, billions of dollars are being wagered on the future of wireless telecommunications.
There are lessons for all business and particularly for technology investors in what’s happening in the wild wireless scene and its leading companies, including Qualcomm of San Diego, L.M. Ericsson of Sweden and Nokia of Finland.
Right now action centers on a small Bellevue, Wash., firm called VoiceStream Wireless Corp. European and Asian companies are vying to buy VoiceStream, which was put together only this year by mergers of smaller companies.
VoiceStream’s main asset is that its cellular services, for about 2 million U.S. cell phones, operate on global system for mobile communications, or GSM. That’s the same technology used on roughly 331 million other phones--the vast majority of the world’s wireless phones, mainly in Europe and Asia.
Spurred by a vision of setting up a global wireless network that includes the U.S., Deutsche Telekom of Germany, NTT DoCoMo of Japan and Hutchison Whampoa of Hong Kong are prepared to bid $40 billion to more than $50 billion for VoiceStream, which had $475 million in revenue last year.
Indirectly, the enthusiasm for VoiceStream affects the outlook for Qualcomm, the Southern California company that invented a different technology for cellular phones called code division multiple access, or CDMA.
Qualcomm’s system, which backs 67 million cell phones, mainly in the U.S., offers greater capacity than the older GSM system. And it is believed to be the key to the future of all cellular telephony, which will be advancing in the next few years to third generation, or “3G,” wireless phones that feature broad Internet access and undreamed-of services.
In preparing their own advance on GSM for that 3G era, Ericsson and Nokia have relied on Qualcomm technology to devise a system called Wideband-CDMA.
Until recently, those prospects put Qualcomm in the sweet spot. Qualcomm enjoys royalties from cell phones that use its CDMA or its competitors’ W-CDMA. That’s big money. Qualcomm earned roughly $230 million from royalties in fiscal 1999, which ended last September 30, and could bring in more than $440 million in fiscal 2000, estimates analyst Brian Modoff of Deutsche Banc Alex. Brown.
Looking toward a future in which such profit would continue growing, investors last year made Qualcomm the highest-flying stock on U.S. markets. It rose from the equivalent of $6 a share to $185, adjusted for a stock split in late 1999.
But the stock has fallen to $63.06 a share because investors this year see Qualcomm’s competitors working hard to curb its advantages.
What’s happening really has less to do with technology than with the realities of global competition and the pace of change--which is always slower than enthusiastic investors anticipate.
Qualcomm has taken a couple of lumps recently. It was confident of winning new customers in South Korea. But the country’s three main phone companies now say they prefer Ericsson-Nokia’s W-CDMA because it will match the standards used by most other nations in Asia and Europe.
China, too, was thought to be a major customer of Qualcomm’s system but is now leaning toward the Ericsson-Nokia technology. Experienced marketing, particularly by Ericsson, has a lot to do with those shifts. “I noticed when I visited China that Telecommunications Ministry officials were surrounded by Ericsson people,” observes a U.S. investment analyst.
Even though Qualcomm gets a royalty on W-CDMA, a customer’s choice of the Ericsson-Nokia system hurts the San Diego firm because it likely loses the accompanying sale of microchip sets that go into phone handsets. That’s big money too. Sales of chipsets supplied more than half Qualcomm’s $3.9-billion revenue last year and one-third of its profit.
Also, as Ericsson and Nokia add to their market dominance, “they gain leverage to make Qualcomm lower its royalty fees,” explains Jonathan Aronson, professor of international relations at USC and an expert on world business.
Meanwhile, the push to 3G wireless may not be as swift as earlier thought. The world’s acceptance of GSM is still proceeding full throttle--from fewer than 200 million phone users a year ago to 331 million today. When wireless phone use reaches 1 billion sometime in 2003, the majority will be powered by GSM.
To be sure, companies are placing their bets for 3G wireless. Britain auctioned 3G licenses this year and brought in $34 billion. And a U.S. auction this September could bring additional billions from America Online and other Internet companies, experts say.
But setting up an advanced network, with new base stations and equipment, will take considerable investment and time, explains telecommunications expert Peter Bernstein of Infonautics Consulting of Ramsey, N.J.
In the meantime, GSM answers most phone users’ needs. That’s why big foreign bidders see opportunity in VoiceStream Wireless. A buyer can build a global GSM network and profit for years while investing to upgrade VoiceStream’s system with W-CDMA technology as market conditions warrant.
What does all that say for Qualcomm? That it has excellent technology and business prospects long term. “CDMA is two years ahead of W-CDMA in development, and everyone agrees CDMA will be the standard for third-generation wireless,” says Richard-Sulpizio, president of the San Diego firm.
Qualcomm’s business will get a boost next year when Sprint and Verizon (formerly AirTouch), launch 3G wireless networks in the United States.
Nonetheless, global competition has applied a correction to last year’s expectations. “In the U.S., CDMA is great, but outside the U.S. the future doesn’t look so bright,” sums up telecommunications expert Bill Davidson of Mesa Consulting in Redondo Beach.
The stock market apparently agrees. Qualcomm stock is selling at more than 60 times earnings, while Ericsson and Nokia are selling at more than 70 times earnings.
The long-term future looks simply golden. A majority of the world’s people have yet to make their first phone call, but when they do it will probably be on a wireless phone. That’s what is driving the wagering of billions of dollars today.
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Where the Customers Are
The two primary types of wireless technology are GSM (global system for mobile communications), used primarily in Europe and Asia, and CDMA (code division multiple access), used in the U.S.
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Number of subscribers In millions
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Dec. 1999
GSM: 271
CDMA: 50.1
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March 2000
GSM: 292.5
CDMA: 57.3
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June 2000
GSM: 331.5
CDMA: 67.1
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Sources: GSM Assn., CDMA Development Group
Researched by NONA YATES/Los Angeles Times
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James Flanigan can be reached at jim.flanigan@latimes.com.
