Feeds

Analysis: Who wins from the Qualcomm-Ericsson deal?

They may not be fighting any more, but neither of the new CDMA partners looks that healthy

  • alert
  • submit to reddit

Top 5 reasons to deploy VMware with Tegile

Sighs of relief all around. The biggest winner of the Ericsson-Qualcomm dispute is probably Qualcomm - it could have ill afforded a protracted legal fight and the deal finally rids the company of its disastrous infrastructure division. But losing the network business entirely weakens Qualcomm's ability to influence third generation digital standard development and probably affects the long term success of the handset division. The trouble is that network technology evolves so rapidly that handset development has to take place concurrently with infrastructure development. But Qualcomm's network business wasn't robust to begin with - it was based mostly on selling base stations at a loss. The digital switch expertise that turned Lucent, Ericsson, Nortel and Nokia into network powerhouses didn't exist at Qualcomm. After the deal was disclosed Wall Street backed the "good riddance" view of the Qualcomm network business enthusiastically, and Qualcomm finally looks like a focused company; licensing income, chipsets and handsets. The benefits Ericsson derives from the deal are a great deal fuzzier and depend largely on how much leverage the company gained in the 3G development. The immediate prospect of folding a loss-making CDMA network division into Ericsson and launching an expensive CDMA phone project should be sounding alarm bells. Let's review some of Ericsson's PR coups from recent months. After announcing the weak fourth quarter results Ericsson deftly moved the spotlight from shrinking handset sales into the future by unveiling the new T28 handset. Then Ericsson used a huge Turkish GSM network deal to mask a simultaneous announcement that its vaunted GSM/TDMA/AMPS phone will be pushed into next year. Most newspapers fell for it; the network deal buried the product delay. More recently, the persistent worries about the delay of T28 and continued market share losses have eroded Ericsson's stock price. Then came the master stroke: Ericsson's first quarter profit warning was timed to be released just days before the Qualcomm deal was announced. Once again, the bad news was lost under upbeat press releases. Pure chance? Or skillful manipulation of Wall Street? Take your pick Ericsson is now milking the CDMA manufacturing angle for all it's worth - but like in some tacky horror movie, the mouldering corpse of Ericsson's 1999 profit picture is going to claw its way to daylight, no matter how deeply the company is trying to bury it. It's not that Ericsson's long term prospects are bad - the year 2000 handset line-up looks bright and a power position in W-CDMA development can be a genuine boost for profits in 2002-2005. But it seems unlikely that Wall Street will swallow the string of bad 1999 quarters Ericsson is poised to feed it. In contrast, Qualcomm's profitability is instantly improved by the deal. The CDMA division Ericsson bought is notoriously weak. We caught a glimpse of just how much synergy exists between GSM and CDMA network technologies after Motorola's attempt to leverage their GSM know-how into launching a CDMA network business - the CDMA specialists Lucent and Nortel pretty much knocked Motorola out. The CDMA handset situation is even more desperate. Nokia and Motorola are now invading the high end CDMA handset market after years of preparation. I doubt that Ericsson's belated CDMA epiphany will result in much headway in either infrastructure or handset markets. Welcome to Spin City The deal has plenty of real impact on the telecoms industry - but as usual, the hype surrounding the agreement spun rapidly out of control. The premise that Qualcomm and Ericsson will now have a genuine interest in collaboration and smooth technology transfer is absurd. Vicious backstabbing, byzantine intrigue and outright slander - following the past relations between these two firms has been like watching a rerun of "I, Claudius" without the orgy scenes. The ink on the agreement wasn't dry when the companies already started to leak conflicting information on the specifics - Qualcomm hinting at high licensing fees and Ericsson insisting that they were able to push the fees down considerably. I wouldn't take the word of either party at face value until all the fine print has been deciphered. The big issue concerning 3G is the one that few are willing to discuss. Is there actually a market? Will the consumers go for handsets that cost around $1,000 and weigh a lot? The Iridium project was based on the premise that people will pay practically anything for a satellite phone, even if you can brain a bull moose with that lump of metal Motorola is currently pushing. Consumers disagreed. The current "creeping" improvement of existing, second generation digital networks is bringing the data transfer rate above 100 kbps with much smaller investments from operators. It's a long way to 2002 when 3G solutions are expected to premier outside of Japan. Valuing a company based on 3G revenues is a risk investors are assuming - not a one way bet. The giddy media reaction to the deal seems slightly unhinged. Wall Street Journal gushed over "short term benefits" like multi-mode phones - apparently ignoring the fact that a GSM/CDMA phone is highly unlikely to surface before the year 2002. GSM/TDMA phones that are much easier to produce are arriving next winter after several years of development. And these two standards are kissing cousins technologically. Combining GSM and CDMA in one unit is a monstrous challenge. The leading companies can build these kinds of models right now. But they couldn't sell them. One consumer poll after another has shown that people are not willing to accept a substantial price or weight premium in multi-mode phones. That's the reason Nokia and Ericsson are debuting GSM/TDMA phones only next winter - it's the earliest they could come up with models that weigh under 150 grams and can be sold in the US market for under $300. I'm not sure just how serious Qualcomm's hints at "expanding to Europe and China" are. In the long run, operating a successful handset business demands synergy benefits with the infrastructure side. Moreover, total lack of brand recognition and distribution networks would make Europe and China fiendishly difficult markets to enter. There are no examples of succesful handset companies that do not have a double digit global market share; Siemens, Philips, Samsung, LG, Denso, etc. are not making any profit from handset manufacturing. The only exception is Alcatel, which seems poised to enter the front rank of mobile phone companies this year, largely at Ericsson's expense. And that success is rooted in Alcatel's 30 per cent market share in the phenomenally growing Mediterranean markets and a solid 10 per cent on China. Meanwhile, Qualcomm would do well to finish 1999 with 10 per cent market share even in its US home base - not a good launch pad for global expansion. Qualcomm's share of the CDMA chipset market in USA has topped 90 per cent and has provided the company with a near-monopoly position with all the associated benefits. That share is set to collapse in 1999 - Nokia and Motorola are not using Qualcomm chipsets for their new CDMA phones. By next autumn Sony is also switching to non-Qualcomm chipsets. The end result will be a rapid market share erosion for Qualcomm. Even more worryingly, leading American CDMA operators are showing signs of embracing Motorola and Nokia as their preferred handset providers. Sprint is elbowing Qualcomm's Q-phone aside and positioning Startac as its top high-end model; Primeco is considering using Nokia 6185 as its leading spring model. And Qualcomm had several years to consolidate its position as the premium CDMA brand before real competition arrived. That wasn't enough. What Qualcomm needs to do is to consolidate its position in the American market; if it yields the $200-plus market segment to Motorola and Nokia it will end up with a very tough competitive position in the future. The product cycle of this company is excruciatingly long. Apparently the new smartphone, pdQ, will have spent three and a half years in development when it finally debuts this summer. Launching a global expansion without a solid home market showing would be the most likely risk for Qualcomm's future success. Similarly, Ericsson's CDMA expansion is a chancy move. Being years behind the competition is bad enough - but Ericsson is also saddled with interminable product cycles. It has not kept up with the GSM phone development of Motorola, Nokia or even Alcatel. So where will the extra zip to catch up in CDMA phones come from? Qualcomm is so small that it can use Ericsson licensing revenues to fund considerable R&D projects. But Ericsson's licensing revenue from GSM and CDMA patents is dwarfed by the sheer size of the company. While Qualcomm's handset profit margins have risen due to lack of stong competition in the US CDMA handset market, Ericsson's margins have been eroded by going head-to-head with the big competitors in the fiercely contested GSM market. I would think that Ericsson's near term risk of profit problems is considerably higher than Qualcomm's. Nokia now faces the prospect of Ericsson's hegemony in determining the future of a third generation standard. W-CDMA's position was strengthened by last week's deal - but it's no longer an ostensibly equal Nokia-Ericsson project. Ericsson probably will get higher licensing revenue thanks to cross-licensing deals with Qualcomm. It is also well positioned to fine-tune the technical details of the standard to suit Ericsson better than other companies. CDMA2000 looks embattled. Now the development of this standard rests mainly on Nortel and Motorola - both of which have considerable investments in W-CDMA as well. Whereas several W-CDMA handset prototypes already exist, CDMA2000 product development seems to be falling behind. For Qualcomm, this may not mean much, since it gets licensing fees from both standards. But North American companies like Motorola and Lucent may fall behind in W-CDMA development if they split their early R&D among two, separate standards, both demanding enormous cash infusions. One big question the Ericsson-Qualcomm deal poses is how it will influence the sales growth of second generation standard GSM and CDMA. That's hard to gauge - now that W-CDMA is free from litigation worries the development of this GSM upgrade standard can be accelerated. Qualcomm is stressing that all 3G standards will be "compatible" with IS-95, the second generation CDMA standard. That may be - but it appears that Ericsson now has the power to determine the actual meaning of "compatible". And these guys could teach a thing or two about hair-splitting to Bill Gates. What is certain is that Ericsson will do its damnedest to keep W-CDMA much easier to overlay on GSM than CDMA. Operators now making choices between GSM and IS-95 will have to weigh the implications. ®

Beginner's guide to SSL certificates

More from The Register

next story
Facebook pays INFINITELY MORE UK corp tax than in 2012
Thanks for the £3k, Zuck. Doh! you're IN CREDIT. Guess not
Big Content outs piracy hotbeds: São Paulo, Beijing ... TORONTO?
MPAA calls Canadians a bunch of bootlegging movie thieves
Google Glassholes are UNDATEABLE – HP exec
You need an emotional connection, says touchy-feely MD... We can do that
Just don't blame Bono! Apple iTunes music sales PLUMMET
Cupertino revenue hit by cheapo downloads, says report
US court SHUTS DOWN 'scammers posing as Microsoft, Facebook support staff'
Netizens allegedly duped into paying for bogus tech advice
Feds seek potential 'second Snowden' gov doc leaker – report
Hang on, Ed wasn't here when we compiled THIS document
Verizon bankrolls tech news site, bans tech's biggest stories
No agenda here. Just don't ever mention Net neutrality or spying, ok?
prev story

Whitepapers

Why and how to choose the right cloud vendor
The benefits of cloud-based storage in your processes. Eliminate onsite, disk-based backup and archiving in favor of cloud-based data protection.
Forging a new future with identity relationship management
Learn about ForgeRock's next generation IRM platform and how it is designed to empower CEOS's and enterprises to engage with consumers.
Reg Reader Research: SaaS based Email and Office Productivity Tools
Read this Reg reader report which provides advice and guidance for SMBs towards the use of SaaS based email and Office productivity tools.
Storage capacity and performance optimization at Mizuno USA
Mizuno USA turn to Tegile storage technology to solve both their SAN and backup issues.
Simplify SSL certificate management across the enterprise
Simple steps to take control of SSL across the enterprise, and recommendations for a management platform for full visibility and single-point of control for these Certificates.