QualComm: The Nokia War

By Vijay Nagarajan, Guest Author

Over the past few articles, I have taken a look at QualComm’s potential revenue flow over the next few years if it got its way. Before I proceed to look at the effect of the lawsuits and the industry consolidation on the company’s revenues and long term interests, I wish to diverge and look at the company’s recent bickerings with Nokia (NOK).

Let me begin by re-iterating the unstated fact, ratified by my previous analysis: It is all about who gets those percentage margins per phone sold. Nokia, with close to 40% of the market share, has been a prominent QualComm licensee in the past. With the migration to WCDMA/HSDPA picking steam, the Finland company will pay royalties to QCOM on most phones it sells in the near future.

The center of all the lawsuits between QCOM and Nokia is the cross-licensing agreement that expired this summer. The parties were in discussion to renew the cross-licenses that span CDMA, GSM and now UMTS (WCDMA/HSDPA). Nokia made a strategic move to walk away from CDMA. There are atleast 3 reasons that came out during my exchange with industry veterans and confirmed by the analysis so far –

• Nokia is betting away from CDMA2000 and EV-DO. The Finnish giant may stand vindicated with the handset shipments of these standards likely to stagnate over the next few years. With its weight away from CDMA2000, I believe it has been instrumental in some of the migration away from CDMA2000 in emerging markets giving the QualComm-standard a perception of high cost as compared to the more ubiquitous GSM. QualComm’s past aggression to capture market share in the CDMA2000 space has exacerbated this situation with the lack of competition.
• Nokia wants a more even position at the licensing tables. Neither party disputes that QCOM should be paid royalties. It is a question of how much. If it continued to stay in the CDMA2000 business, Nokia would have had to negotiate with the patent value heavily skewed in favor of San Diego. On the other hand, for 3GPP, at least in terms of the number of patents, the two giants are on equal terms (based on publicly done studies). I do think that the QCOM patents are still the heart of the phone and by that logic perhaps more valuable. So, Nokia will probably be happy with around 2% of ASP or slightly higher as the fee to QCOM. (This is a number that has popped up in the EC anti-trust case.) QCOM might also be willing to budge but for the ripple effect with other vendors and continents resulting in its licensing model breaking down. The upside of such an agreement is perhaps a higher chipset market share for QCOM.
• Royalty as a percentage ASP may no longer be acceptable. This is an important point that I had overlooked thus far. As illustrated earlier, QCOM gets its royalty as a percentage of the handset ASP. So, while the chipset itself costs only about $24, QCOM makes the same amount of money on the higher-end phones just on royalty. On the other hand, in laptops, QCOM makes royalty money as a percentage of the CDMA components alone implying that the value is closer to $2 or so. With data-centric HSDPA phones taking center-stage in the future, the phone manufacturers would like to get the licensing model closer to the laptop model and not the handset model. As a friend pointed out, this makes sense in a device which predominantly connects to the net through WiFi or WiMax with EV-DO or HSDPA being used sparsely and on the move.

The move away from CDMA2000 is only one sign that all is not well with this almost imperative industry relationship. With the license extension discussions moving to a deadlock, the two companies have engaged in lawsuits and counter-lawsuits since 2005 with no end at sight. These lawsuits span 3G and QualComm’s essential IP in GSM/EDGE (Yes, GSM!). For a concise history of the lawsuits, please refer to this zdnet article. It appears that QCOM allowed Nokia to use its GSM patents until now in return for CDMA royalties. With the discussions falling apart, QCOM has been filing for infringement in GSM so it can impact Nokia’s immediate productization thereby forcing an early resolution in its favor. Nokia, on its part, has been seeking ‘fairer’ terms of licensing. For now, the posturing has taken a formal structure with the lawsuits and the outcome of the EC antitrust probe will be quite decisive for the industry with the 3GPP community centered in Europe.

While I am not willing to take sides, I definitely think that Nokia has made calculated efforts to lower QCOM’s patent play led by its CDMA2000 pull-out. What gives the handset vendor more leverage and support is the pervasiveness and competition in the UMTS/GSM standard. So, I will keep a close watch on the EC case. Its outcome and QCOM’s strategic options at that stage will be crucial to its future.

This segment is a part in the series : QualComm