Qualcomm’s (QCOM) cell phone tax has been clashing with carriers in developing markets recently. The San Diego giant has a patent portfolio that lets it take a percentage of every CDMA handset sold, including patents for 3G.
Over the past few weeks, three carriers with large CDMA networks — China Unicom in China, Reliance in India, and Vivo in Brazil — have been reported to be investing in GSM networks in part to avoid the Qualcomm toll system.
While the carriers and cell phone makers will all upgrade to 3G eventually, delivering Qualcomm their payoffs soon enough, in the short term, possible losses on CDMA in developing markets could be a real concern to the San Diego giant–those carriers are estimated to make up as much as 5% of Qualcomm’s sales for 2006!
Qualcomm’s senior director of corporate communications Jeremy James had a pretty strong statement on the situtation. He said that the companies that are making the most money off of GSM, like Nokia (NOK), and Ericsson (ERICY) are creating “fear, uncertainty, and doubt” over a “false notion” of how Qualcomm’s royalties effect the availability of low-cost handsets.
He also said that GSM network companies like Ericsson are making CDMA carriers in developing markets “very attractive” offers to build and run GSM networks as “a last ditch effort” to try to maintain their traditional GSM shares as long as possible before the 3G future.
There might be some truth to Qualcomm’s complaint, but with a grain of salt. Analysts like Aman Kapoor from Packetology say that Reliance is probably building a GSM network just to better negotiate with Qualcomm over current royalties for CDMA when it expands that network. Since Qualcomm doesn’t disclose its fees beyond a range, it’s hard to tell exactly how much the royalty fee affects the total cost of the handset.
Nokia’s VP of external affairs, Bill Plummer, responded to Qualcomm’s statement by saying “that is certainly one way to look at the evolution of the wireless market. Another way would be to acknowledge that this is a highly competitive market where operators recognize the inherent benefits associated with open, non-proprietary, globally scalable networks like GSM.”
The real truth is that as all the carriers move to 3G, Qualcomm can quadruple its addressable market in the long term. As 3G handsets start to become more popular, Qualcomm is already growing sales and profits — last week the company reported $1.95 billion in revenues, with $643 million in net income for the third quarter, up 44% and 15% respetively.
But when it comes to its relationships with competitors and vendors the company seems to have few friends out there. Jupiter analyst Sharon Armbrust points out some of the data behind the complaints by the Nokia camp. But with complaints in various countries about its aggressive practices, the company can’t afford to alienate the world’s fastest growing markets India, China and Brazil.