Tuesday, March 20, 2007

How much will Qualcomm make from TD-SCDMA?

Qualcomm had partial success selling CDMA to China, as I recounted in a teaching case called “Qualcomm in China” (that later was used to flesh out the China portion of Dave Mock’s Qualcomm book). Alas, for Qualcomm, cutting the royalty rate in China for Chinese manufacturers has brought a nonstop round of threats (and bluster) from Korean manufacturers and their allies in the press and the government.

For years, Chinese telecommunications officials have been vowing to introduce its own 3G technology that has a different set of patents than the Qualcomm’s cdma2000 or the Euro-Japanese W-CDMA. Now the goal is to have a live network in time for the Beijing Olympics. On Tuesday, unstrung reported that the country’s largest carrier, China Mobile, plans to let a $3 billion contract for TD-SCDMA equipment, with European firms hoping that local partnerships will give them a slice of the business. For most carriers, not having a license would be an impediment, but I guess being a state-owned enterprise means never having to say you’re sorry.

The idea that China could design a CDMA technology that doesn’t overlap Qualcomm’s hundreds of CDMA patents seems implausible. On the other hand, as with any other question of foreign IPR in China, it’s not clear how many patents have been granted in China and how (or if) they would be enforced by the courts.

Western firms have agreed to pay Qualcomm royalties on TD-SCDMA, but the intentions of Chinese firms are far less certain. One possibility is that Chinese firms will pay a lower rate domestically but close to a standard rate for export. This would be consistent with Qualcomm’s 2G policy. I don’t think it really matters whether it’s because Qualcomm has less patents granted or whether its patents are less enforceable. I would rule out two other motivations: that vendors have their own patents has not swayed Qualcomm in the ongoing W-CDMA disputes, and a claimed lower ability to pay has not led it to cut royalties in India below its standard 5% rate. (I never quite understood the “ability to pay” argument for a percentage royalty, since cheaper phones pay lower royalties).

Qualcomm doesn’t seem to be saying much about TD-SCDMA royalties, and I’m sorry to say I didn’t think to ask about it at last week’s annual meeting. I wrote the earlier “Qualcomm in China” cases because the twists and turns of Qualcomm’s 2G efforts in China struck me as an ideal illustration of the concept of political risk. Given the impact that uncertainty had on Qualcomm’s stock price nearly a decade ago, my surmise is that they’re waiting until things are resolved before commenting.

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