First Quarter Report, Continued, and Company Visits
CDMA advertisement in People's Square in Shanghai. (Look at the exact center of the picture for the CDMA sign.)
You can see this picture in color on the qgmi.com website by clicking on the April 30 report.
A discussion of innovation from last the July, 2000 report makes an appropriate start to this report:
"Innovation is normally a laborious process. Humans do not enjoy changing the habits that work and make us feel secure. Innovation starts small. Emerging from beneath established institutions, it quietly displaces legacy leaders, regardless of their size and power. Innovation is powerful, and inevitable. It is hard to understand, and even harder to execute. If the innovation improves the lives of its users, they carefully, and inevitably, accept it. Established institutions tend to fail to understand the disruption until it is too late, because both they and their customers are succeeding with old habits. When they detect the change, they often try anything to delay it until they have time to understand and participate, so as to prevent damage to both wealth and ego. We have seen telecom giants profess that CDMA will not work, influence their standards bodies and governments to exclude CDMA, and even attempt to invent new flavors of CDMA of unproven viability, all to slow the disruptive innovation. This disruption continues nevertheless, because it gives the service providers better economics and the end user new services."
I have stated the importance of tracking the relative technological progress in 3G CDMA made by QUALCOMM (QCOM 60) versus members of the GSM/WCDMA camp such as Nokia and NTT DoCoMo (Nippon Telephone and Telegraph's wireless unit.)
Let us review some recent news stories to examine the progress. First, we will look at progress in the GSM/WCDMA camp.
DoCoMo
eats humble pie on 3G
By Dan Roberts in London and
Michiyo Nakamoto in Tokyo
Published: April 24 2001 18:25GMT | Last Updated: April 25 2001 12:01GMT
The risk of worldwide delays to third generation
mobile phone services intensified on Tuesday as NTT DoCoMo revealed clues about
why it was postponing its launch in Japan.
The
Japanese operator has repeatedly promised to become the first company anywhere
to offer a commercial 3G service, and was due to host a high-profile launch
event on Thursday.
However,
DoCoMo was forced to admit on Tuesday that the rollout of services would be
delayed by at least four months to allow continued testing to iron out
technical problems.
These
are understood to include difficulties maintaining connections when customers
move between neighbouring radio base stations.
This
"handover" problem is also thought to be a major hurdle in producing
reliable handsets for so-called 2½ generation phones in Europe.
Another
worrying issue identified by DoCoMo is the failure to agree on a common set of
3G technical standards among operators in Europe and Japan. These have not yet
been finalised, and one source suggested this was because each revised standard
produced more software bugs.
A
shortage of manufacturers able to produce 3G handsets has also hampered the
large scale trials needed to ensure mass market reliability.
These
worries confirm earier warnings from Qualcomm, a US company advocating a rival
3G standard called cdma2000. Irvin Jacobs, Qualcomm's founder, sparked
controversy last month when he suggested problems with the technology favoured
by European and Japanese operators could delay mass market services for up to
three years.
Mr
Jacobs singled out handover and lack of agreement on specifications as major
problems, but was dismissed by many rivals in Europe who said he was biased in
favour of Qualcomm's own technology.
NTT DoCoMo and Nokia, the world's largest handset manufacturer, were the most vocal in arguing against any risk of delay. DoCoMo had insisted that it was on schedule to launch its 3G service in the Tokyo and Yokohama areas, even as other operators announced plans to delay their services due to problems with equipment procurement and standardisation issues.
Karl Cushing
It is feared that the
rollout of the GPRS network may be delayed even further due to technological
problems. In a clear case of history
repeating itself, operators are still trying to resolve a technical glitch in
the system that could jeopardise the entire rollout.
It is believed that the
problem concerns the so-called ‘hard handover’ between base stations – similar
to a problem that dogged the early days of the GSM network. Hard handover
refers to a problem that
occurs as the mobile phone user crosses the boundary between areas or ‘cells’
covered by different
base stations.
Mobile operators in the UK
have been marketing GPRS with the promise of ‘always-on’ connectivity for
mobile phones. If users were to lose this connection every time they switched
between base stations, GPRS could be viewed as unreliable.
Another problem with GPRS,
dubbed ‘cell breathe’, means that although performance is good when only one
user is in the base station’s coverage area, data rates fall when other users
enter the cell.
Data rates of around
13kbit/s have been achieved with a single user in a cell but when more users
enter the area the capacity is shared and rates plummet to levels that would
make accessing the Internet on a GPRS handset farcically slow.
(April 06, 2001)
Nokia Corp. may have to
recall millions of cell phones due to a software glitch that renders them
inoperable with the third-generation (3G) networks that major U.S. carriers
plan to start using this year.
An official at one
carrier, who declined to be identified, doesn't accept Nokia's argument,
however. "It's their problem, and
since we have a quarter-million of their phones in a warehouse, we think they
should take them back and put in a new chip set. We don't want to sell these phones to our customers," the
official said.
Excerpt from: Dialing up trouble
Apr 20th 2001
From The Economist Global Agenda
Sorry, no network 
It
looks as if mobile operators will need all the help they can get with 3G. On
April 19th, British Telecom's mobile-telephone subsidiary, Cellnet, staged a
glittering ceremony to unveil a new network and handsets which use an interim
technology that will provide some of the features of 3G. To the dismay of
company officials, hardly anything worked.
Europe's mobile operators are taking an enormous gamble with 3G-probably one of the biggest bets in business history. Companies have splashed out as much as $150 billion, often at auction, to buy licences to operate 3G services in Europe. This has increased massively the debt carried by firms such as British Telecom and Deutsche Telekom. To get their money back, operators need to roll out 3G networks as fast as possible—something that could cost another $150 billion. However, there is little sign of progress.
Will GPRS Comply With
SAR Standards?
By Peggy Albright
April 30, 2001
Wireless Week
As
if the GPRS industry did not have enough problems with slower-than-hyped data
throughput, it may have another issue to deal with–specific absorption rates.
The
FCC's regulations for SAR compliance–a parameter used to limit radio-frequency
energy emissions–could prevent GPRS handsets from operating at faster data
speeds.
The
possibility that SAR issues could limit GPRS data speeds may add to the
headache for current and future GPRS operators and vendors who have faced a
slew of performance and availability problems since the technology was supposed
to launch a year ago. First, they contended with a lack of devices. Now, GPRS
devices are available but only offer data speeds of about 20 to 30 kilobits per
second, much slower than the potential 115 kbps data rate promised and not much
better than good old-fashioned CDPD. Now add SAR compliance to GPRS companies'
list of challenges.
Meanwhile,
the following are news stories from the CDMA2000 camp, the users of Qualcomm
chipsets.
World’s First cdma2000 1X Network, Developed by 3Com
Corporation and Samsung Electronics, is Deployed by SK Telecom in Korea
SANTA
CLARA, Calif., and SEOUL, Korea, October 10, 2000 -- The world's first CDMA2000
1XRTT (1X) wireless data and voice network, developed by 3Com Corporation and
Samsung Electronics Co., Ltd., is now in commercial service, the two companies
announced today. SK Telecom of Korea, among the world's leading wireless
telecommunications operators, unveiled its third generation (3G) network on
October 1.
The
new 3G CDMA2000 1X network from 3Com and Samsung allows SK Telecom customers to
access mobile data services at speeds of up to 144 kbps dramatically faster
than data transmission speeds common today. Other features of the CDMA2000 1X
network include support for simultaneous audio, video and text data services;
advanced packet data technology for enhanced network efficiency; and a two-fold
increase in wireless channel capacity.
Telecom
Mobile demonstrates superior data speeds with CDMA2000 1X trial
April
16, 2001--Data speeds of up to 144kbps have been demonstrated as part of a
technology trial of CDMA2000 1X, the next advance on Telecom’s cdma mobile
phone network. To date, GPRS networks have demonstrated average data speeds of
20–40kbps in testing environments.
The
Waikato based full field trial is the first of its type conducted by Lucent
outside of the United States. It is being held in parallel with two other major
operators in the USA and has attracted the attention of people from a leading
Japanese mobile phone operator, KDDI (one of the largest CDMA operators in the
world), who are coming to New Zealand to observe first hand.
“With CDMA2000 1X Telecom Mobile has demonstrated it can achieve actual data speeds of up to 144kbps – that’s faster than any other current mobile standard and double the speed that most users access the world-wide-web,” says Telecom’s General Manager Networks, Lorraine Witten.
Sprint
and Lucent Technologies Conduct Fastest 3G Data Call In The U.S. on Sprint PCS
Wireless Network
LENEXA, Kan. and MURRAY
HILL, N.J., April 10-- Sprint and Lucent Technologies have completed the
fastest- ever third-generation (3G) over-the-air data call for a U.S. mobile
wireless carrier, at speeds of up to 2.4 mbps. Within the next two years, these
high-speed data rates promise to alter the way people traditionally use
wireless services and will enable Sprint PCS customers to take advantage of 3G
advanced mobile phone applications such as streaming video and audio. The successful call was conducted on April
5, 2001, at Sprint's test site in Lenexa, Kan., using a new technology protocol
called CDMA2000(TM) 1xEV-DO(1x Evolution-Data Only). This 3G Code Division
Multiple Access (CDMA) technology makes it possible to transmit data up to 165
times faster than what now is available on wireless voice and data
networks. The successful call was
conducted on April 5, 2001, at Sprint's test site in Lenexa, Kan., using a new
technology protocol called CDMA2000(TM) 1xEV-DO(1x Evolution-Data Only). This
3G Code Division Multiple Access (CDMA) technology makes it possible to
transmit data up to 165 times faster than what now is available on wireless
voice and data networks.
Users
of QUALCOMM chipsets are finding success: HUIZHOU, China--(BUSINESS WIRE)--
April
2, 2001--Qiao Xing Universal Telephone, Inc. (Company) (Nasdaq NM: XING) today
announced the successful interface of its Qiao Xing-Hyundai CDMA Base Station
System with Huawei Corporation's Mobile Switching Center, in a move to
establish compatibility of its base station, through Huawei switching, with the
large-scale CDMA networks being planned in China.
Recently
acknowledged delays in GPRS (the data mode of GSM) and WCDMA are gradually
bringing the world closer to the QUALCOMM purebred 3G solution, CDMA2000. European carriers are feeling increased
financial pressure to get a wireless system up and producing revenues in the
excruciatingly expensive spectrum they purchased last year. Decades old loyalties to European
infrastructure suppliers are being tested as their heavily promoted progression
of GSM to GPRS to EDGE to WCDMA is looking somewhere between late and plain
hype.
Meanwhile,
the first CDMA2000 system is already operating commercially in Korea, and it is
working well.
Just as GSM came to market before CDMA, and
became by far the world’s most popular wireless standard, CDMA2000 is beating
WCDMA to commercial operation, and will have the first-to-market competitive
advantage. This in turn leads to
economies of scale, driving down the cost of building CDMA2000 vs. WCDMA.
Adding
to the pressure is a growing sense of the economic advantages of CDMA2000 over
GPRS and WCDMA in transmitting data.
Let us compare base station capacity and cost per megabyte of data for
several wireless technologies, assuming 2 X 5 megahertz bands of spectrum.
|
Technology |
GPRS/GSM |
WCDMA |
CDMA2000 1x RTT |
CMDA2000 1x EV |
|
Circuits
per base station |
48 |
300 |
396 |
396 |
|
Data
cost per megabyte |
41.7 cents |
7.4 cents |
6.4 cents |
2.5 cents |
How
can a GSM operator with 48 circuits per base station compete with a CDMA2000
operator with 396 circuits?
How
can a GSM operator with a cost of 41.7 cents per megabyte compete with a
CDMA2000 operator at 2.5 cents?
System
operators have to use the most efficient technology to compete. The more callers and megabytes of data a
carrier can get over a given amount of infrastructure investment, the more
profitable it can be. More efficient
systems require fewer base stations, less infrastructure investment, leading to
lower network operating expenses and lower depreciation. The lowest cost operator can price lower and
put the competition out of business.
To
ease the transition from GSM/GPRS to CDMA2000/WCDMA, QUALCOMM has announced the
first GSM/GPRS/W-CDMA/CDMA2000 multi-mode chipset. I hear it is running well in QUALCOMM’s labs, and has been
promised in commercial quantities early next year. This is the "missing link”, enabling the manufacture of
“world phones” that will operate on any of these systems anywhere in the world,
with complete transparency to the user.
Now the bad news: The
delays in WCDMA and the weak US economy will negatively impact QUALCOMM's
chipset sales and royalty income.
Clearly, if NTT DoCoMo has delays in their WCDMA rollout, there will be
delays in their royalty payments.
QUALCOMM recently reduced guidance for this year's growth in CDMA phone
sales, chipset sales and royalty income.
This may portend modest stock performance for a quarter or two. Then, in the last quarter of this year,
CDMA2000 1x systems will be opening up in Korea, the US, and Japan, countries
populated by 107 million CDMA users, driving a substantial increase in chipset
sales and royalty income. Next year,
new systems will open in China, India, Malaysia, New Zealand, and Vietnam,
driving growth even harder. I expect
QUALCOMM stock to be a leader as the market comes out of its current malaise.
Guidant (GDT 40) Guidant has the technological lead over Medtronic and St. Jude Medical in the application of implantible defibrillators to prevent congestive heart failure (CHF). This new field is the biggest opportunity these companies have ever addressed, quite possibly worth $4 billion in annual revenues. However, there is a concern in how compelling the offering will be to cash-strapped healthcare systems. Unlike the current defibrillators, these devices only prevent possible death of the patient, rather than preventing certain death. Fear of dying provides a pretty strong motivation to spend money. The supporting argument is that CHF is the leading cause of death in people over 65 years of age and is the biggest expense to our healthcare system. CHF therapy postpones big expenditures, giving an additional 5 years of life expectancy to the lucky patients who get the device. I know that I would certainly want one if I had heart problems!
Guidant’s lead in this hot new area is not meant to take away from my high optimism for Medtronic – it will certainly get its piece of this market. It is just that Guidant has time to market advantage and, with $2.5 billion in sales versus $6 billion for Medtronic, is just likely to give more bang for the buck. Also, there are other opportunities ahead for these companies totaling about $10 billion in annual revenues over the next five years.
In addition to producing cardiac rhythm management devices, Guidant produces angioplasty catheters, stents, aortic grafts, and devices that facilitate bypass surgery without stopping the beating of the heart. Future notable product developments include catheter-delivered radioactive restenosis therapy driven by the economics of reduced hospital stays, blood vessel graphs to prevent aneurisms and strokes, and drug eluting stents for drug delivery. A particularly important new product awaiting FDA approval is a catheter that allows pacemaker lead insertion into the left side of the heart. Guidant has a crucially important lead in this difficult part of the CHF technology.
I am pleased to add Guidant to the shortlist of companies I would like us to own. The stock is down from a high of $75 due to reduced earnings expectations for the first three quarters of this year. Management believes the fourth quarter is likely initiate a long, strong updraft in earnings growth due to several important FDA approvals expected in the third quarter. This gives 4 or 5 months to seek a price opportunity. The price opportunity is necessary, because 1) the stock is selling over my estimation of the company’s intrinsic value, and 2) the improvement in profit margin from 9% of sales to 19% of sales accomplished over the past 6 years is largely over, requiring all future earnings growth to come from revenue growth.
Steven L. Ré, CFA April 30, 2001
The above is for information
purposes only and is not to be construed as a recommendation to purchase or
sell securities. The above information
is from sources deemed reliable but is not guaranteed. It should not be assumed that investments in
any of the above mentioned securities will be profitable, and past performance
is not a guarantee of future results.
Earnings projections often miss, and markets don’t always go up. The employees and families of Quality Growth
Management, Inc. may own the above-mentioned securities in their own accounts,
and may trade them at any time without notice.
Links you might find helpful or interesting:
QUALCOMM's glossary of wireless technology terms: http://www.qualcomm.com/cda/tech/aboutcdma/0,1704,35,00.html
NTT DoCoMo isn't shy about promoting their version of WCDMA, which has the marketing acronymn "FOMA":
http://foma.nttdocomo.co.jp/english/englishtop.html
The photo of Hyundai's CDMA ad in People's Square can be purchased through Yahoo:
A number of conflicting descriptions of what defines a wireless technology as 3G have appeared in the press. Despite the confusion different interpretations give, the ITU and FCC definitions are very simple. Basically, a wireless technology qualifies as 3G if it meets the following data bandwidth requirements: 144kbps in a vehicle, 384kbps walking, and 2,000kbps fixed in a building.
The bible on disruptive innovation, absolutely required reading for any technology investor, is The Innovator’s Dilemma by Clayton Christensen. Once you read this book, you will understand why the world is inexorably drawn to CDMA, why it is a painful process at times, and why the most successful manufacturers of legacy infrastructure, GSM in particular, just don’t get it, and just won’t get it. READ THIS BOOK!