Qualcomm's Double Whammy
A double dose of pretty bad news in one day can be hard to weather, but few companies have as many bases covered as Qualcomm.
The first slap on Nov. 29 was the European Commission's decision to recommend that its 27 member states adopt a mobile TV technology that competes with Qualcomm's (QCOM) MediaFLO platform. That same day, Verizon Wireless—a cornerstone customer of Qualcomm's core wireless technology—announced it would build its next-generation mobile network using a European-led technology called Long Term Evolution (LTE) rather than the standard being peddled by Qualcomm.
Neither decision came as a complete surprise, which helps explain why Qualcomm's stock barely suffered a scratch after the two announcements.
While Qualcomm had conducted two successful trials of MediaFLO in Britain, the European Commission was known to be leaning toward a mobile TV technology called DVB-H (or digital video broadcasting-handheld) for months. The commission was no doubt leery of bolstering the fortunes of a company that has long infuriated Nokia (NOK) and other European technology companies with the hefty royalties it collects on key cell-phone patents.
Verizon, meanwhile, had been dropping hints for months that it has been considering LTE. The rationale is fairly obvious, given that one of Verizon Wireless' two corporate parents is the British mobile carrier Vodafone (VOD), a devotee of the non-Qualcomm cellular technology that dominates the global market.
But even if the decisions had been unexpected, Qualcomm has a knack for weathering bad news (BusinessWeek, 11/5/07). The secret to that resilience is Qualcomm's habit of hedging its bets with multiple irons in every wireless fire. It also doesn't hurt that neither of the technologies involved in these two defeats has a certain future.
Sure, if mobile TV takes off, Qualcomm will miss out on a healthy new revenue stream in Europe. But the market, and the underlying business model, are unproven. The company's U.S. mobile TV network has probably cost Qualcomm more than $800 million in investments. So far, only Verizon Wireless is selling the service commercially, though AT&T (T) plans to roll out MediaFLO in early 2008. As with any new service, uptake has been relatively slow, and Qualcomm's MediaFLO unit lost $61 million in the latest quarter alone. Few industry analysts will hazard a guess as to when it might break even.
EU Member Compliance Not Assured
It's also worth noting that MediaFLO may yet make it into Europe. True, the commission's directive says "all EU Member States will have to support and encourage the use of DVB-H for the launch of mobile TV services, thus avoiding market fragmentation." But several EU members, including Britain, oppose the imposition of a DVB-H standard and could go their own way.
And regardless of government edicts, Qualcomm's partner in its British trial of MediaFLO, British Sky Broadcasting, may decide to stick with that technology. "The European Commission can say what it likes, but at the end of the day Sky TV will do whatever it wants," says Richard Windsor, an analyst with Nomura Securities. "Sky's decision is very important because the U.K. is the most advanced market in Europe and is likely to go to mass-market mobile TV first." Sky has tested both platforms, he notes, "and MediaFLO kicked DVB-H in terms of performance, so there is a good chance they will choose to go with MediaFLO. If that happens, it could set a precedent."
Either way, European mobile TV may not be a do-or-die market. "I don't think this is a large revenue opportunity," says Lawrence Harris, an analyst with Oppenheimer & Co.
More important, even if all of Europe does go with DVB-H, Qualcomm will benefit to some degree. The company already makes DVB-H semiconductors. In fact, earlier this year, Qualcomm announced it's testing a chip that can process the signals from three kinds of mobile TV networks, including MediaFLO and DVB-H. Thus, Qualcomm would benefit from a mobile TV boom in Europe anyway.
A Troubling Next Generation
Verizon's decision to go with LTE for its next-generation network no doubt marks a more substantial setback, both financially and symbolically. Verizon has been among the most prominent adoptees of CDMA, or code division multiple access, Qualcomm's patented cellular technology and a major source of revenue from licenses and chips. Yet Qualcomm has hedged its bets in this arena, too, and the actual financial impact sits well down the road in this case.
For starters, any LTE network build-out isn't expected to begin until 2010 at the earliest. Verizon Wireless owners Verizon Communications (VZ) and Vodafone plan to start testing LTE in 2008, and unforeseen glitches might delay actual deployment beyond 2011. "This could be off by five years," says Mark McKechnie, an analyst with American Technology Research.
By then, another next-generation technology might emerge with superior attributes, prompting Verizon Wireless and others to drop LTE. After all, only a year or two ago, Sprint (S) and other prominent wireless operators were clamoring for a technology backed by Intel (INTC) called WiMAX. But WiMAX is no longer the shoo-in it once seemed. Sprint's commitment to building a WiMAX network has suddenly turned uncertain (BusinessWeek.com, 11/9/07). The same fate could befall LTE. "There may be many changes that occur by then," says John Lau, an analyst with Jefferies & Co.
And even if LTE does take off, Qualcomm stands to make money. For starters, Qualcomm is seeking to complement its CDMA portfolio with patents relating to LTE. Just how many it might hold is unclear, as the LTE standard is still being finalized. Yet, "we are probably one of the largest contributors to LTE," Qualcomm Chief Operating Officer Sanjay Jha tells BusinessWeek.com.
Some analysts believe Qualcomm may acquire other patent holders or their related intellectual property to become a heavyweight in LTE. In 2005, the company paid $600 million to acquire Flarion Technologies, the owner of many patents that could potentially underpin the LTE standard.
A search of the U.S. Patent & Trademark Office's database reveals other potential LTE-related intellectual-property holders may include network gearmakers such as Nortel Networks (NT) and Ericsson (ERIC), cell-phone makers Nokia, Motorola (MOT), and LG Electronics, as well as Intel. But some smaller companies, such as SOMA Networks and NextWave Wireless (WAVE), may end up holding LTE-related patents as well.
Either way, Qualcomm believes that, in the first 10 years of LTE's deployment, all carriers that adopt the technology would still need chips that allow phones to run on both their old CDMA networks and the new LTE infrastructure. During that time, Qualcomm expects to see "no impact on royalties," Jha says.