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Author: propitious One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 47751  
Subject: Xmas Card- 10 Reasons to hold Q Date: 12/22/2000 3:52 PM
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Colleagues of the Board

In recent weeks I have had time to be not just an appreciative reader of the Board, but to make a few contributions. That window on my time may close soon, and I may go back soon to being just an occasional visitor taking advantage of your efforts and not giving anything back; so I wanted to say thanks to all of you for insights, humor, prejudices and commitment to our common cause, QCOM, and to put my thoughts down on why you should be asking Santa to put some Q stock in your stocking (and your children's stockings).

My Xmas greeting card comes as "Ten Reasons to Own Q". I like to own stocks as to which the good news is not yet known or understood. It's easy to admire Q for technology, financial performance, management and vision -- but these qulaities have been widely appreciated. For each of my ten reasons to like Q, there is a misconception of the press, the securities analysts or the competition which muddles investor appreciation of Q. As the reasons prove right and the misconceptions prove wrong, Q should prosper. So enjoy the upside; some of these observations won't prove out for a year or two years -- and some may be incorrect. Any tech stock is a risk stock; I hope you all have other holdings. But keep your Q under the mattress; we have a good one here.

Disclaimer: i have no inside info; i am not a techie. i read a lot and take some leaps of analysis from business logic which may be wrong. do your own analysis.
Apology: sorry, this is a LONG post.
Defined terms: Q = Qualcomm; IJ = Irwin Jacobs; Pressconception + misconception of the analysts, financial press, competitors; IPR = intellectual property rights; lots of others which you better know if you follow this stock.

So here are my ten reasons to own/ hold Q:

1. GSM is yeterday; CDMA is tomorrow. GSM was a tech advance and a superb collaboration. But GSM is a legacy system; there is no alternative to cdma for 3G (I consider EDGE irrelevant).
Pressconception: The press tells us GSM has >300M subs; cdma has ~75M subs; carriers want to go with the dominant system. Choices like ATT for GPRS/W-CDMA and Korean carriers for W-CDMA are seen as GSM "winning" the 3G race and Q losing.
The muddle here is that cdma is both a 2G system (cdma95) and a 3G system; GSM is a 2G system which will have to be replaced. Change from gsm to w-cdma is no easier/ cheaper than change from gsm to cdma2000 (see IJ interview in Bus Wk this week). GSM handsets will continue to be sold and will work fine just as analog phones are still sold. But carriers cannot elect GSM as their 3G strategy. CDMA offers a forward/ backward migration path from 2G to 3G with minor capital costs to upgrade base stations and service and handsets than can be used (with 2G performance) in 3G service areas until the subscriber elects to upgrade to a new 3G handset. There is no path from GSM to w-cdma; it's a system replacement with corresponding capital costs.

2. Q owns essential IPR for every "flavor" of CDMA.
Pressconception: NOK puts it out that cdma is an "open standard". most investors are confused about what Q owns and what is in public domain and many assume that the big players will invent around Q when 3G becomes big.

CDMA as a mode of communication which is hard to jam and hard to de-code has been known and used by military for fifty years. But the crucial tech for multiplexing and mobility, power control, rake receivers, soft handoff and other elements, were invented and patented by Q which holds ~1300 patents on cdma tech. no commercial flavor of cdma can be practiced without infringing the Q patent position. When you read that Q and TI have signed a comprehensive cross-license of TI's DSP and semiconductor IPR and Q's cdma IPR you can infer that TI, a giant in chips, has decided to work with Q and not to try to beat their tech position. (NB: this is not royalty bearing so Q is getting some substantial benefit not yet disclosed.) When ATT says w-cdma is not cdma and we won't pay any royalties to Q, the first statement is false and the second statement is misleading; whoever sells telecom equipment to ATT for w-cdma will have a Q license authorizing them to "make, use and sell" products embodying Q IPR and purchasers of those products (such as ATT) will benefit from that license and in the purchase price compensate their seller for the royalty payable to Q.

3. Q focus is exclusively on cdma.
Pressconception: it is good to be agnostic; other players, ERICY and MOT and LU and NOK, are more broad based because they have capaicty to produce for all wireless standards, and, therefore, are better positioned than Q which has put all its eggs in the cdma basket.

Q's sole focus is on the development of cdma; patents, joint ventures, investments -- all focused on cdma. Q will spend the next ten years on rollout of cdma. if you believe, as i do, that no other modality can solve the needs for greater capacity, faster datarates, lower power usage and lower (unit) cost, then focus is a good quality. The other telecom equipment companies like NT and MOT and ERICY are much larger companies but concentrate far fewer resources on cdma; NOK is a major manufacturing and design and marketing company; for cdma, they have had to source handsets from Telson of Korea.The other chip companies, INTC and TI and dozens of others, are selling silicon for many purposes and doing R+D all over the communication space (as well as in their base product markets). . In addition to being first mover, Q is biggest mover in dedicating 1250 engineers and ~$300M of R+D annually to cdma research. It's going to be a long time before the competition invents around the Q position.

4. Q patent/product development is dynamic.
Pressconception: Q has a patent portfolio on which it collects royalties so the company is depicted like a landlord with an apartment building collecting rent on a fixed asset. When patents expire, Q will lose its royalty stream. Anyway Q is too small to keep up with the big boys in semicon and telecom research and development.

R+D expense was increased by Q in 2000 reaching 13% of revenue, up from 9% for prior year. Q's patent position increased from ~1000 patents on cdma in 1999 to ~1300 patents, about one-third issued and two-thirds pending, at present. Q, just in the last few weeks, has announced major tech developments in power control (collaboration with RFMD), simplification of broadband/ RF conversion (ZIF product to be called radioOne), the WAG combi-system for position location (combining GPS and base station location for much faster, more accurate location). Q has announced its product spex for w-cdma chipsets both handset and base station, and has clarified that radioOne and WAG will be embedded in the w-cdma chipset. Q has added media capability to its chipsets, MP3 for music, video stuff and other elements I don't understand. Help me Board members: does any other company offer the cdma capable features that Q is offering on its chipsets. Am I correct that Q is ahead of the pack??

Furthermore, now I am making an informed guess because I have not read the relevant license agreements, the Q licenses are probably NOT time limted or patent specific; I infer that they are licenses of the body of the Q IPR for cdma, including patents added in the future so as some patents expire others are being added, and, therefore, the royalty obligation continues. In such a license, which is industry typical for a collection of IPR, the license is for specified applications (roughly speaking for a 3G license, 3G wireless telephony) and the royalty is computed as a percent of the value of all products made and used or sold by the licensee. There would be no tracing of which patents are used and which are not in any particular licensed product and no variation of royalty depending on the "value" of the patents actually used by the licensee. If my guess is correct, there will be no tapering off of the royalty stream as certain patents expire, although a licensee probably has the right to terminate the license at some date provided the licensee no longer uses any licensed IPR.

5 Q is not in competition with its customers. Q sold its infrastructure division in 1999 as soon as the commercial success of cdma was established; the termination of the ERICY suit against Q established that cdma was the new standard in the industry because ERICY, the persistent opponent and denigrator of cdma, took a broad license and purchased the Q intrastructure division. Q sold its handset division in 3Q'99 to Kyocera. Both sales were effected to eleimnate any competition between Q and its customers who purchase base station and handset chipsets from Q.
Pressconception: The press has not understood what a unique position and advantage Q enjoys.

Q is in a unique position to support and encourage the development of a "clone phone" industry. Newcomers to the telecom business, for example in Japan, Korea and China and in a few years Brazil, want to make handsets and infrastructure systems. In China alone, Q has twelve local licensees under R+D licenses; ERICY has commented that local producers may obtain a 30% market share in a few years. MOT and NOK are not going to put competitors into the business by selling chipsets; they want to sell products not components. Q can license and teach and supply a new generation of manufacturers. Furthermore, Q can put supply second tier companies with leading edge asic chipsets with performance and features which are the "Pentium" standard for the industry. The first tier phone manufactueres want to, have to, make their own chipsets and have to compete with Q to improve their products and offer features which the clonemakers do not have. But how much research and development can you afford when you are making chipsets for your own use only, and how much advantage of scale will Q gain as the clonemakers who are its customers gain market share?

6. Q is the technical partners of its Licensees. Q, and here my knowledge is very sketchy, does not merely license and supply its customers. It becomes their partner. In growing the commercial success of cdma in Korea, Q worked with Samsung to make it a first tier telecom equipment company in wireless and the leading cdma maker, and Q also supported Hyundai and LG. Q is doing the same thing in China where it is working with local telecom suppliers who want to grow.. Its choice of Kyocera as purchaser of its handset division was strategic, to have a partner in Japan and not driven by highest price.
Pressconception: Q has to fight for position in the fast growing markets, Japan, China, Korea, by lobbying and using its influence with the U.S. government and the Special Trade Rep Office to open access for cdma to these markets.

In my opinion, the strongest advocates for Q as it tries to accelerate the introduction of cdma are its partners. Samsung and Hyundai now have huge cdma businesses; In Korea cdma is the universal standard. Telecom exports are a leading, perhaps the leading Korean export. When Korea reserves a 3G license for cdma2000, it is not to be nice to Q. It is because Samsung is battering their door down at the Ministry. When the Korean premier urges his counterpart in China to adopt and rollout a 2G cdma system, he is not currying favor with the U.S.; he is trying to position Korean companies to have a supply advantage for sales into China.

In China the Q licensees have clearly turned the government from a "follow the leader" policy (do what the Europeans and Japanese are doing as the 3G successor to the GSM system) to a decision to authorize China Unicom to build a substantial cdma 2G system. In my opinion, based on straws of info in the wind, the Chinese telecom companies, which are very talented and very ambitious, want to introduce cdma 1xMC and 1xEV as soon as possible and with the partnership of Q to gain a market position which would take much longer to establsih if the game is played by the Japanese/ European rulebook.

7. HDR (now under the new ITU standard called 1xEV) competely alters the wireless data/Internet game.
Q's genius Andrew Viterbi has written a readable account of the advantages of HDR, a data-only trasnmission technique developed by Q, for up to 2.4mbps data rate over a standard 1.25mhz band (find it at the CDG website under Technology).
Pressconception: The Japanese, with i-mode, and the Europeans are miles ahead of American technology in data applications for cell phones. They will lead, with GPRS and EDGE and w-cdma, and America will follow in due course.

The ITU 3G standards called for a new technique for shared voice/ data cell telephony with minimum levels of increased traffic capacity, higher data rate and improved power consumption.the Q approach, cdma2000, met the standard with a bandwidth three times the present standard, using 3.75mhz of spectrum. The Japanese/ European approach, taking a wider is better line, uses 5mhz. The Viterbi article quoted describes the Q experimentation with various band allocations before deciding that the 3.75 was the optimal blend of capacity and spectrum efficiency. Then he tells us why a band dedicated to data only can generate far more efficency and datarate than could be achieved on one-third of the 3.75mhz band. This led to the High Data Rate standard which has been incorporated into an ITU standard as 1xEV. From articles I have seen and do not begin to understand, there is enormous interest amont telecom equipment producers in 1xEV. Apparently eight papers were presented at the recent ITU meeting in Hong Kong by e.g. Lucent and Nortel and some wireless new compaies, on adaptations and improvements of 1xEV. This could be of great importance for Q in accelerating cdma expansion in Japan and Korea using 2G bandwidth.

8. 3G is NOW.
Pressconception: 3G will be first introduced in Japan when NTT DoCoMo initiatesconstruction of the first w-cdma system. Although commercial usage will not start until '02, the Japanese will show their leadership in 3G systems by starting to construct the replacement for their present 2G system (which is a unique japanese standard).

In october 2000 SK Telecom in Korea initiated service in the 1xMC standard. This is the first phase of Q's 3G service. 1xMC is service on existing spectrum allocations which provides for twice the capacity of voice calls on the allocated 1.25mhz band and for superior power usage standards (both as per the ITU defiition of 3G) and for a data rate of ~115kbps. This data rate is more than ten times faster than current datarate available to GSM service users. This service will be rolled out in the next few months to cover the whole nation; service is originally in the Seoul area and one other city. This makes Korea the first 3G country, and Japan through its cdma carrier, KDDI, as well as Sprint PCS in the U.S. will rollout the cdma 1xMC service in the first half of 2001. I do not understand exactly how one links the service under 1xMC will be linked to service by 1xEV, but when those two parts are offered, voice and data service are at the full 3G standard. it will be very interesting over the next months to watch the subscriber takeup of new service. The competitive implications for service competitors are also dramatic. When Sprint switches on 1xMC, doubling its voice capacity, Sprint effectively reduces its cost per call by one half, providing a major profit improvement over other carriers.

9. Q does not puff its position or its prospects.

Pressconception: It seems that the press and the industry always assume that a company overstates its position and its prospects in the market, so company claims are usually discounted or qualified.

One of the good qualities of the scientists and engineers who manage Q is that they stick closely to the data and the provable. They do not pump their stock or exaggerate the achievements of their company. They appear to be willing to wait until the financial results prove the success of their efforts whereas many other tech companies want to be given credit in the market for technology before its financial results have been established. When IJ say, as he recently did, that he is "cautiously optimistic" about the development of a cdma system in China, you can infer that he has a high degree of confidence. When he says that favorable results of the cdma developments in China will probably be seen in the second half of '02. ne is certainly not trying to move the stock price today. So patience will be required but patience is more likely to be rewarded.

10. Q gets there first.
Pressconception: The pioneers are the ones who get the arrows in their back.

Q was founded to do scientific and experimental work in communications. Innovation is the company seal. There are risks in being the first mover and there is a possibility, as some commentators will remind you, that if cdma is indeed the standard for the more than one billion cellphone users NOK expects by the end of '02, then Q will be trampled by governments wanting to avoid a "royalty tax" on their wireless communication system and by the gian telecom producers and carriers who can deliver product and service at that scale of operation. But it is also possible that there will be a huge first mover advantage. The knowledge and the reputation and the talent amassed by the first mover will be hard to displace if Q stays smart and tough.

So friends, this is my Christmas card. I hope my optimism and confidence prove well founded in the year to come and they years to follow. I wouldn't waste your worry time over Q failing to hold its recent close above 100. Morgie will have his dance at 130 and does it really matter which month he dances. Do you have a better company to which you would trust your investment dollars? So let IJ do his thing and watch the FUDmakers explain every three dollar price movement.

Sorry to be so long-winded. And sorry not to have a research asst. to help me put in links and more specifc factual data and sources.

propitious
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