Nokia backs away from CDMA

Original URL: https://www.theregister.com/2006/06/30/nokia_qualcomm_battle/

And steps up battle of wills with Qualcomm

Posted in Networks, 30th June 2006 05:02 GMT

Comment Just four months after announcing a CDMA handset joint venture with Sanyo, Nokia has cancelled the plan and its own R&D in the area, claiming the technology is "financially prohibitive", especially for emerging economies.

While the Finnish giant has steered clear of the ultra-low cost handsets spearheaded by Motorola, citing the impact on margins, it is formulating its own approach to the high volume growth markets such as Brazil and India—one in which it aims to sideline both Qualcomm/CDMA and the GSM Association's operator-driven handset programs. It is promising low cost 3G devices, but will focus entirely on UMTS, reserving any remaining CDMA activity for the US.

All this is part of the broader battle between Nokia and Qualcomm, which is epitomising many of the key issues for the cellular sector. Nokia may have failed in CDMA, but it is determined to blame the chipmaker and so strengthen its own case that Qualcomm’s licensing policies not only make it very hard for other chipmakers to enter the market, but also make CDMA financially non-viable for emerging markets.

It may be using its own weakness in this area as a stick to beat Qualcomm, but the latter is stepping up its own response, opening up many new options that will keep it competitive even if the CDMA market does decline - an outcome that has been predicted many times before, wrongly.

As for Nokia, the Sanyo decision, coupled with the new joint venture with Siemens on the infrastructure side, show new CEO Olli-Pekka Kallasvuo making some key strategic moves, and naysaying criticism that he would be unable to take decisive stands on key issues facing the company.

The most critical focus for handset makers this year is how to address emerging mass economies with low cost models and still retain decent margins. Nokia's conclusion – this isn't possible using CDMA. The Finnish giant has cancelled its proposed joint venture with Japan's Sanyo to combine CDMA handset operations, announced only in February, in a move that steps up its psychological warfare with Qualcomm another notch.

It claims the "financially prohibitive ecosystem" surrounding CDMA technologies make it non-viable as a platform for bringing mobile communications to the developing world – a thinly veiled stab at Qualcomm's levels of royalty fees for its core patents, which are at the heart of an escalating war with Nokia and others over the chipmaker’s business practises.

The two official reasons for ending the JV relate to ROI – the potential profits were outweighed by the level of investment that would be required, leaving Nokia to say "the terms and conditions of the proposed partnership were not satisfactory and in the best interests of Nokia's long term success" – and worsening market conditions – Nokia stated: "In addition to an already financially prohibitive CDMA ecosystem in general, recent developments may indicate that the CDMA emerging markets business case is looking more challenging."

As a result of the cancelled venture, Nokia will take a restructuring charge in the third quarter of this year of around $189m. Its main remaining focus will now be the US market, where Verizon Wireless, Sprint Nextel and Alltel are all engaged in major CDMA2000 updates.

Bill Plummer, Nokia’s head of external affairs, said: "We see the US market in general as a major and important wireless marketplace. Going forward, with convergence taking place - and mobility, frankly, being the value add for convergence - the US will be the leading market in that respect. We will have a special focus here in CDMA."

The anti-Qualcomm spin

Just as the announcement of the Sanyo JV at the 3GSM show earlier this year had a strong element of anti-Qualcomm spin about it – offering the prospect of a top three CDMA handset vendor that did not rely on Qualcomm's own chips, instead using those of Nokia's alliance with Texas Instruments – so the statements issued about the dissolution of the Sanyo partnership also reflect a broader Nokia position on the Qualcomm issue.

While the Finnish company will continue to pursue CDMA business in the US and address other opportunities ad hoc through original design manufacturers such as Korea's Pantech, it cannot be long before it exits this space altogether – it is already cancelling its R&D activities, which will be wound down by next April.

This strengthens two arguments beloved of the anti-Qualcomm camp – that the US company's market position makes it virtually impossible for any other chipmaker to enjoy commercial success in CDMA; and that the CDMA market is in decline anyway, with second generation CDMA operators likely to switch to UMTS, and new providers in emerging economies turning increasingly to GSM.

Kai Oistamo, head of Nokia Mobile Phones, said the high cost of making CDMA handsets, partly a result of Qualcomm's patents grip, makes the platform too expensive for emerging markets. "In this fragmented [emerging economy] market, making money with low end CDMA handsets is very difficult," he said. Nokia claims low end GSM phones have a 25 per cent price advantage over CDMA equivalents.

For its part, Sanyo said the would-be venture partners had found it hard to make concessions in sharing patent rights and other company assets. The Nokia plan was a cornerstone of Sanyo's planned restructuring efforts, as it faces deepening losses and hefty cutbacks.

Certainly the usually invincible Nokia has consistently stumbled in CDMA handsets, partly because of its refusal to buy Qualcomm chips. Instead, it relied first on its own silicon, and then on that of TI and STMicro, but the companies have been unable to achieve the volume and price efficiencies of Qualcomm itself, nor can they control the R&D agenda – Nokia and TI focused their R&D heavily on the planned EV-DV iteration that was to follow the current EV-DO Rev A, only to have this canned by Qualcomm in favour of further revisions of EV-DO, which would better suit the needs of key operators such as Sprint.

Assuming Nokia moves out of CDMA, that will spell the end of TI's activities in this arena, another casualty among many littered along the CDMA road.

But aggressive defense of its market position is hardly a crime, especially as Qualcomm is now facing unprecedented challenges, of which the heightened and concerted hostility of its competitors is just one. Growth remains buoyant in the CDMA market this year, driven by the major upgrades by Verizon, Sprint and others, but there is certainly a question mark over how far the platform will gain new market share, and the legal and regulatory challenges from Nokia, Broadcom and others will not improve operator confidence in Qualcomm platforms.

The defection of Australia's Telstra rocked confidence in CDMA2000 as a long term 3Gplus infrastructure, and the forthcoming decision by Sprint Nextel over what technologies to use in its 2.5GHz spectrum will be critical – a strategy based on expanded CDMA2000 plus Qualcomm's Flash-OFDM would make a lot of technical sense and would restore faith in the Qualcomm roadmap, while a choice of WiMAX or TD-CDMA would have the reverse effect.

Qualcomm’s reaction

Qualcomm, as we have tracked in recent months, is making robust efforts to open up its options, even should CDMA's market share start to fall off rapidly among new deployments. Of course, it now has an important royalty revenue stream from the W-CDMA 3G standard – the heart of the battles with Nokia, Ericsson, Broadcom et al – and is starting to generate business for its own W-CDMA chips.

Just as importantly, it is working hard to support multiple platforms within highly integrated architectures, recognising that post-3G will be a complex patchwork of technologies in which the simple dominance of the past will rarely be an option. So we see Wi-Fi, OFDM, assorted broadcasting standards and other radios incorporated into the Qualcomm family.

This reflects rising doubt over the future of CDMA as a separate platform, with many carriers considering other options for their next generation networks, and eyeing the bellwether Sprint Nextel decision closely.

In a note to investors, CIBC World Markets analyst Ittai Kidron speculated that two specific CDMA operators are behind the Nokia decision to break with Sanyo. Reliance in India and Vivo in Brazil are both considering switching away from CDMA to GSM/W-CDMA.

Both these providers are in high growth markets that are among Nokia's most important targets for the near future. In particular, it has invested huge efforts in gaining Indian brand presence and building manufacturing capacity, and would have hoped this would create a ready market for the Sanyo joint products – a picture that will look far less rosy should Reliance defect.

If CDMA will inevitably decline as a standalone platform, Nokia is seeking to derive some consolation for its own failure in this sector, by using admission of that failure as a nail to drive into the CDMA coffin.

"We couldn't make it in this market because the market is dying, and that's partly because Qualcomm has made it commercially non-viable" – is the subtext behind the blandly worded phrases of the official statements.

Nokia CEO takes charge

This action is the second major decision to come since Olli-Pekka Kallasvuo took over the CEO role, following hard on the heels of the creation of the Siemens joint venture.

The brace of brave actions arouses confidence in the new CEO, who took the reins amid fears that he would prove too operationally focused and lacking in vision or strategic thinking. Instead, he is building on the extraordinarily far reaching strategy laid down by his predecessor Jorma Olilla, but with his own twist, and is clearly prepared to take a firm line on some areas where there has been doubt about Nokia's way forward.

One decision that needed to be taken was whether to exit the infrastructure market or expand activities, which has been clearly addressed with the Siemens move; another was the future of the troubled CDMA strategy, and again the action has been clear and logical.

Another area where Kallasvuo, like all CEOs of handset majors, must clarify his thinking is that of ultra-low cost handsets for emerging economies. These represent the best opportunity for volume growth and market share, but with an obvious threat to margins.

Nokia has more margin to play with than arch-rival Motorola, but is also more keen to preserve it at all costs, and to date has been less enthusiastic about sub-$50 handsets. It chose not to participate in either of the two Emerging Markets Handset competitions run by the GSM Assocation, both of which saw Motorola selected as provider of the ultra-low cost handset requested by an operator collective.

The Finnish vendor argued that its own drive to serve emerging markets, in conjunction with the downward price pressure brought about by market forces, would be sufficient to meet the cost requirements of developing marketoperators.

'3G for everyone'

Now Nokia is refining its approach to new economies. While Motorola remains the cheerleader for ultra-low cost GSM handsets, and aims to balance the impact on margins with increased sales of its premium models such as RAZR, Nokia is pinning its hopes on '3G for everyone'.

This initiative – which steals the thunder, and almost the name, of the recently announced GSM Association program '3G for all' - focuses on bringing down the cost of 3G for power users in emerging economies, and this offers Nokia the double benefit of increased presence in key growth target countries, such as Brazil, along with a less brutal effect on profits.

To support its new approach, Nokia has released the world's lowest cost W-CDMA phone, the 6151, priced at €240 before taxes and subsidies. This shows the Finnish company jumping the gun ahead of the GSMA development, which has no firm timescale, but will see a group of operators creating a specification and then inviting phonemakers to design a low cost unit to fit it.

Again, there is a political message behind this commercial decision by Nokia, just as with the Sanyo announcement. Nokia believes natural competition will decide pricing and uptake levels, and resents the intervention of the GSMA.

It seeks to demonstrate this by releasing low cost 3G models ahead of any collective effort, claiming costs will be driven down by volume as countries like China introduce 3G and develop an increasingly large middle class with greater income and data requirements (it also uses its argument to make another swipe at Qualcomm, claiming lack of volume and royalty charges combine to make CDMA handsets non-viable for developing world roll-outs).

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