August 2006 Update and Company Reports
QUALCOMM (QCOM 38), as discussed in detail in the last report, is the subject of a complaint by Broadcom before the U.S. International Trade Commission (ITC) for patent infringement. Last April, an ITC staff attorney wrote a brief summarizing the first in a series of hearings, opining that QUALCOMM had infringed on two Broadcom patents. The staff attorney felt that certain evidence submitted by QUALCOMM should be disallowed, including QUALCOMM’s CDMA standards book originally submitted in 1990 to the Telephone Industry Association. That evidence could have invalidated Broadcom’s patents, and will probably be allowed in appeals. However, judges do not always follow the recommendations of their staff attorneys, and also do not like being overturned on appeal. The deadline for the judge’s ruling was to be August 21, 2006. If the administrative law judge wished to go along with the staff attorney, or Broadcom or QUALCOMM for that matter, he easily could have announced his decision by this deadline. Instead, he has postponed his recommendation by 50 days, stating that the case is unusually complex. This is good news for QUALCOMM. Although we do not know what the judge’s decision will finally be, we now know that he is not just going along with the staff attorney’s opinion. Meaningful filings since April have been sealed for confidentiality, so it is impossible for the public to know exactly what is going on. We’ll be waiting for October. A settlement between the parties is the best solution.
In other news, Sprint has announced that it will build WiMAX networks in major cities, on top of its existing CDMA networks. WiMAX, a high-powered version of the WiFi wireless networks now popular in homes and offices, is an option for connecting to the Internet without wires. It can handle voice if VoIP (Voice over IP) is enabled. WiMAX is an acronym for Worldwide Interoperability for Microwave Access. Promoted actively for several years now by Intel, WiMAX has to date been very long on promises and equally short on performance. However, it does make sense as an alternative to cable and DSL for connecting your home to the Internet.
Sprint will be the first to build a full scale deployment
of WiMAX, initially limited to the larger cities in which it has spectrum. When it acquired Nextel, the nation’s largest
position in broadcast radio spectrum at 2.5GHz came along with it, providing an
unusual opportunity to build a new system without acquiring expensive new spectrum.
WiBro, the Korean version of WiMAX, has
been tested in
The core technology used in WiMAX is called OFDMA (Orthogonal Frequency Division Multiple Access). The majority of OFDMA patents are owned by QUALCOMM. The acquisition of Flarion last year fortified QUALCOMM’s ownership of OFDMA, because Flarion owns the “pioneering” and “enabling” patents, without which mobile OFDMA will not work. To quote Ira Brodsky, president of Datacomm Research, “QUALCOMM’s purchase was an acquisition that Intel should have made to insulate WiMAX from Qualcomm’s patents. QUALCOMM has really solidified control of the mobile phone industry for the next several years.” And, QUALCOMM dominates the radio space with patents required for mobility, such as power control, handoff, and radio resource management. Of course, getting the Nokias of the world to pay for inventions seems to require patent court actions. As we know all too well, it has been a battle to get Nokia to pay for CDMA/WCDMA, even though it is widely known that the WCDMA standards group needed QUALCOMM’s input and corrections to make WCDMA work. It’s a little like the story of the “Little Red Hen.” Someone does all the work, and then others want the product for free. QUALCOMM historically bats virtually 1000 in the patent courts, which will be the final adjudicator of the current disputes.
Sprint claims its WiMAX network will handle a data downlink bit rate of 2 to 4 Mbps (Mega bits per second.) Most cable customers are pleased if their connection works that fast. Although Sprint calls the network “4G,” the data rate is no faster than the newest 3G versions of CDMA and WCDMA, and likely will be slower than the versions of CDMA and WCDMA (Wideband CDMA) available in 2008. Both CDMA and WCDMA are targeting 10Mbps by 2008. Sprint is currently upgrading its CDMA network to Revision A of CDMA2000 1xEV-DO, which claims a maximum speed of 3.1Mbps. Note that real world average speeds are somewhat slower than claimed maximums. The chart below from the Global Mobile Suppliers Association is a year old, but illustrates the bit rate performance of existing wireless networks. To help you understand the chart, note the definitions of the following acronyms: HSDPA is the data version of WCDMA, while 1xEV-DV and 1xEV-DO are data versions of CDMA. EDGE and GPRS are data services for GSM networks that are being replaced by WCDMA.
Technologically speaking, OFDMA takes one large bit stream
and splits it into a bunch of small ones, like water passing from a pipe
through a shower head, thereby increasing the amount of data that can be sent
reliably. The only “flavor” of OFDMA
proven to work reliably in a mobile environment is called Flash OFDMA, from
QUALCOMM’s Flarion division. The first
FLASH (Fast Low Latency Access with Seamless
Handoff) network was opened a year ago in
http://www.techworld.com/networking/news/index.cfm?NewsID=4596
The chances of success of a technological standard largely depend on device pricing, which in turn, depends on device volume. CDMA/WCDMA device volume is generally projected to be somewhat over 200 million units in 2008. Total CDMA/WCDMA subscriber count in 2010 could reach 1 billion, while WiMAX and FLASH OFDMA subscribers are likely to be around 50 million.
In summary, WiMAX is too slow to be a competitive threat to CDMA/WCDMA. However, future advanced versions of this technology could be, and also are likely to be a source of new royalty revenues for QUALCOMM.
Steven L. Ré, CFA August
16, 2006
This report contains the
current opinions of the author and such opinions are subject to change without
notice. It has been distributed for
information purposes only and is not to be construed as a recommendation to
purchase or sell securities. The
information contained herein 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 no guarantee of future results. Earnings projections often miss and markets
go up and down. 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.