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I've heard a lot of people postulate whether QCOM will
receive royalties if 3G goes the W-CDMA route. Does anyone definitively have the answer to this one? If W-CDMA is adopted, will there be another patent infringement battle? From the posts on this board, I suspect another battle is inevitable.

JaneAusten
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JaneAusten..."I've heard a lot of people postulate whether QCOM will receive royalties if 3G goes the W-CDMA route. Does anyone definitively have the answer to this one? If W-CDMA is adopted, will there be another patent infringement battle? From the posts on this board, I suspect another battle is inevitable."


I know that others see this differently but worrying about another IPR battle on 3G for Qualcomm is not among the things that keep me up at night as a Q shareholder. Here's some background....

Prior to March '99 Ericsson claimed IPR on cdmaONE, W-CDMA and CDMA2000. They sued Qualcomm alleging that they had violated it's soft-handoff (as well as other ones) patents and claimed damages. The cynical among us may think that they were simply attempting to stop the spread of CDMA and to eventually gain a better position as it came to 3G licsensing. They failed miserably.

In March '99 Qualcomm sold their money losing infrastructure division to Ericsson and simaltaneously licensed Ericsson for cdmaONE, CDMA2000 and W-CDMA. The interesting portion to the agreement was that Qualcomm stated that Ericsson would be paying the same percentage regardless of the mode they used. They also stated that Ericsson would be paying in the same range as other cdmaONE licensees. What does all this mean? Ericsson will be paying somewhere between 2.5% and 6% royalties on every piece of CDMA equipment they make. This includes W-CDMA.

Nokia and other manufacturers may battle....but since carriers like NTT Docomo will have options (CDMA2000) they had better not take too long.

Here's another take from Gregg Powers. He helps run a fund which was Qualcomm's largest shareholder for a long-time.

http://talk.techstocks.com/~wsapi/investor/reply-11238048

Slacker

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Slacker-

I'm not an SI member. Could you cut and paste the text on that Gregg Powers comment?

Thanks,
JaneAusten
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Slacker-

It appears George Gilder agrees with you. A reply to my question on the Gilder Technology Message Board.

Gilder: "As I understand it, Qualcomm will get royalties regardless of the choice. But they
will do best if they develop the chip sets. As always, execution will be critical over
the long term."

JaneAusten
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I didnt think that you had to be a subscriber to read it....sorry about that.

"Let's discuss what really transpired. Remember that QC was intent on achieving one worldwide standard that ensured backward compatibility with existing, i.e. IS-95, networks. ERICY was intent on balkanizing IS-95 and creating a new standard, based on proprietary protocols, ostensibly free of any royalty obligation to Qualcomm. Also recall that QC had initially offered to reduce its overall royalty rate in exchange for said convergence.

We ended up with a single standard, with three modes, that is backward compatible with IS-95. Ericsson acquired IS-95 and W-CDMA licenses from Qualcomm AND MUST PAY ROYALTIES AT THE SAME RATE REGARDLESS OF WHATEVER TECHNOLOGY IT SELLS. Moreover, the royalty rate is substantially equivalent to the baseline rate for IS-95. Do you get it? Ericsson capitulated completely. It is basically paying the same royalty as the Koreans and the Japanese, regardless of whether or not it sells IS-95 equipment or W-CDMA equipment. Even better, Qualcomm did NOT have to reduce its overall royalty rate (to Ericsson or anyone else) in order to achieve convergence. Simply put, Ericsson has agreed to converge 3G around CDMA and Qualcomm will receive royalties from EVERYONE who deploys equipment to the converged standard, regardless of the mode selected.

Viewed from a long-term perspective, this outcome is, in my judgment, even better for Qualcomm than the single standard, single mode approach that the company first championed. Think about it this way. Compatibility with multiple modes will require substantially more sophisticated ASICs and will increase barriers to competition for this key Qualcomm business unit. It took MOT three years to get a basic IS-95 chip to market while Nokia is still trying to perfect theirs (notice their slipping next generation CDMA handset). These boys are now back to the starting board, while QC can be ready with product relatively quickly. As far as I am concerned, this deal was a win for all equipment suppliers and a modest loss for the wireless operators. Reduced complexity, i.e. a single-mode, single-standard, would have provided for an accelerated manufacturing learning curve, more rapid equipment price declines, and higher returns on capital for the carriers. Increased complexity equates to greater technological differentiation, i.e. technology fiefdoms, which will slow the decline in average selling price for all related equipment.

As for the sale of the infrastructure group, what did Ericsson actually buy? Qualcomm retained its manufacturing facility, so all ERICY really got was the ability to build equipment to QC's design specifications, the overhead of associated R&D personnel, the associated, non-Nortel, customers, and the "right" to purchase QC's infrastructure ASICs. Qualcomm, in contrast, exited a money losing, capital intensive business, while retaining the key technology driver, i.e. the ASIC. Remember…most of the value-added in a piece of cellular infrastructure, or a handset for that matter, derives from the brain, i.e. the ASIC…which is Qualcomm's particular expertise. ERICY's nominal consideration, i.e. division's purchase price, is really irrelevant. The 'true' consideration is as follows: cash at closing PLUS the net present value of infrastructure losses transferred to ERICY PLUS the net present value of ASIC sales to ERICY in support of infrastructure and handsets PLUS the net present value of the royalties gained PLUS the net present value of convergence itself. Now a bad day's work in my opinion.

With the convergence cloud lifted, IS-95 deployment should accelerate (since this equipment is available today and guaranteed compatible with anything that is deployed in the future) plus Qualcomm will be paid royalties AND participate directly in all 3G CDMA deployed ANYWHERE in the world (through royalties and equipment). The company's economic opportunity has been dramatically expanded.

The deal substantially changes the business economics for Qualcomm. The elimination of roughly $150mm in pretax infrastructure losses should add $1.35/shr to the company's FY2000 earnings. Assuming a calendar 1999 run-rate around $3.00/shr EPS, then FY2000 goes to $4.35 assuming no growth. This is obviously an excessively conservative assumption, so one can understand how the clever Street analysts are modeling to $4.50 to $5.00 for FY2000. The real challenge is to calibrate the acceleration that will occur in the 2001 and beyond timeframe as 3G deployments accelerate on top of 2G growth. With the Holy War over, and Qualcomm positioned in a 'Microsoft'ian position with respect to royalties and an 'Intel'ian position with respect to ASICs, it is a real challenge to appropriately value the equity. I am working out it….

Best regards,

Gregg
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"cdmaONE, CDMA2000 and W-CDMA. The interesting portion to the agreement was that Qualcomm stated that Ericsson would be paying the same percentage regardless of the mode they used. They also stated that Ericsson would be paying in the same range as other cdmaONE licensees. What does all this mean? Ericsson will be paying somewhere between 2.5% and 6% royalties on every piece of CDMA equipment they make. This includes W-CDMA."

This is quite interesting. Do you still have anywhere a copy of the agreement that you could post here?

Teemu
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Teemu..."This is quite interesting. Do you still have anywhere a copy of the agreement that you could post
here?"

Unfortunately no....The only real information that was released at the time of the agreement was during two conference calls. The first was a joint call with the CEO's of both ERICY and QCOM. The second was a QCOM only call. I personally listened to both and came away with my above observations. If you really want it confirmed I would suggest calling QCOM IR....they should be able to answer your questions or perhaps send you transcripts of the call.

On another note....it really kills me that QCOM is having an all day meeting today that is not open to the public. Unless they are simply reading from a press release they are going to be giving material information to analysts and large investors before we get it. I know this is simply the way it works but I cant see how it is legal.

Slacker

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"If you really want it confirmed I would suggest calling QCOM IR....they should be able to answer your questions or perhaps send you transcripts of the call"

Thanks. QCOMs future boils down to chips and license fees. In CDMA ASICS they clearly have the lead, but license fees have not been that evident with W-CDMA.
If ERICY actually agreed to pay all this it is great evidence that others will as well.

Teemu
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