Trade Wars II: China shuns Qualcomm

In what's sure to be a bone of contention in forthcoming Sino-American trade negotiations, China is determined to adopt its home-grown cellular air interface, and the big losers are both Qualcomm and the GSM camp.

Despite pressure from the US government, the 3G Planning Group of the State Information Office in the People's Republic now wants to waive royalties for its preferred TD-SCDMA, a GSM overlay which it developed in conjunction with Siemens. Naturally Qualcomm, which holds 40 per cent of the patents on CDMA, isn't too pleased.

A royalty-free TD-SCDMA would mean nothing for either Qualcomm or the GSM patent holders.

And so the door appears to be closing on the largest untapped market for Qualcomm's CDMA.

Four years ago Qualcomm executives boasted that CDMA would have the largest share of the 2G phone business. When the world went GSM, they then promised that the world would run Qualcomm's cdma2000 3G standard. But Europe and Asia have already plumped for WCDMA in volume, which gives Qualcomm a much smaller royalty. (Qualcomm also markets WCDMA). So it's ceaselessly talked up the potential of the Chinese market: the only one left undecided. And the Chinese are determined to do it their way.

(This mirrors China's investment in Linux, and its determination to produce an x86 compatible processor, the Dragon Chip).

Regretful Seoul Perhaps South Korea's experience with Qualcomm in popularizing CDMA helped shape their decision. South Korea is the only country outside the United States in which CDMA is more popular than GSM:-

"Seven years ago we did not have international experience, we are just now starting joint venture work," Seon Jong Chung, president of Korean Electronics and Telecommunications Research Institute (ETRI) is on record as saying. "So seven years ago we followed Qualcomm and the US way. At the time, the US way was more advanced than ours. Later on we found that the US way was not the international way. I'm very sorry, but we committed to such a mistake. We didn't use the modern, standardization approach."

Qualcomm has already signed a deal with Nortel where Nortel's TD-SCDMA equipment would gain the former a royalty. But because China wants to stimulate demand for its own royalty-free TD-SCDMA kit, Nortel's is immediately less attractive.

If China can prove that its TD-SCDMA technology can be made to work - early trials were mixed - although the People's Daily reported a successful trial in June - it has a delicious implications for Sino-American trade relations.

It's debatable whether the US government continue to fight so hard on behalf of a company that's admitted false accounting practices, and its non-standard technology, when other US companies stand to gain much more. Why should it? Qualcomm's loss is Motorola, Lucent and Texas Instruments' gain. Qualcomm's success in identifying itself so closely with the national destiny has obscured the fact that many other American companies gain from being standards neutral: and these include of some of America's biggest technology giants. The net gain for the nation could be substantial.

And if China refuses to pay Qualcomm a cent for CDMA, what will Qualcomm do? Send in its green-ink, letter writing militia? Call for "Supreme Dragonlord" himself?

Qualcommn has to have forseen this. Why would a country of potentially 500M customers ever pay a royalty? They'll develop their own stuff and make the cell phones for it.

This is a biggie for Qualcomm! After all China was a major target for their CDMA tech since it has such a huge potential market! I remember their strategy for 1999-2000 entailed a progressive foray into China since cell phones were set to proliferate throughout the entire region at some point in the future, and whatever companyw as at the forefront of that spread would make great loot!

However if the Chinese are serious about saying no to CDMA then i guess it is time to take a Bear Spread out on its stock! Maybe even a Put option!

Maybe!

However if the Chinese are serious about saying no to CDMA then i guess it is time to take a Bear Spread out on its stock! Maybe even a Put option!

Maybe!

From what I understand of CDMA is akin to various web standard protocols like HTTP and SMTP. No one would ever think about paying a royality for that as a) its too hard to collect money for it, and b) someone will devise a free standard anyway.
Qualcomm is sort of stuck like Sun and Java -- its a great product but no one is going to "pay" for it. The best that Qualcomm can hope for is to become a training center for the protocol. There's a lot less money in consulting then watching the money pour in through royalities.
Maybe they see the writing on the wall and that's why they brought out Brew. They'll have to keep on coming out with new protocols and standards and try and milk the market for the immediate future of the product as eventually no one will pay for it.

I've seen royalty agreements for CDMA and GSM and while I can't go into specifics, I can say that Qualcomm was very greedy, with royalties several times the normal level. A more rational royalty structure would yield greater revenue to Qualcomm in the long run.

small percent of big number >> large percent of zero

Jack

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