1996-1998... once in a while it's good to look back on old predictions and consider how they turned out to match reality. I don't think anyone in this board would have believed two years ago that a predominantly GSM company like Nokia would increase its stock price 270% while Qualcomm's gain would be 27% in the next 100 weeks (pure GSM-Ericsson following Nokia's lead). I think there are good reasons to stop and think what it all means. For short periods of time, Wall Street can be blamed for being myopic... but in this timeframe, I think that a marked difference in the stock prices tell something important about the mobile standard competition. |
First of all, by now it should be obvious that GSM's main advantages; wide customer base, large production volumes and unique strength in handset manufacturing have given it viable in a way that most CDMA-supported did not predict in 1996. There are now no realistic prospects that CDMA will overtake GSM in the foreseeable future. The R&D investment avalanche has meant that in handsets, GSM has kept a distinct lead over CDMA handsets. From consumer point of view, GSM phones have more advanced battery technology, display technology, software and size.
The introduction of new CDMA models from leading manufacturers Nokia and Motorola have produced either phones that are technologically inferior to GSM phones (Nokia) or massive production postponements (Motorola). As a result, CDMA phone market is dominated by companies with negligible global market share in handsets (Qualcomm, Sony, Samsung). There's a rule in high tech businesses in general that states that only companies with big volumes can be truly succesful. This is reflected in the fatc that Qualcomm's profit margins in phone sales are miserable. Nokia, meanwhile, boasts 18% profit margin in handsets. I don't think the prospects of a company that has 1% global market share are very good in the future, either. The winter -97/-98 was crucial: during this time Qualcomm was supposed to have a clear edge over handset competition. Instead, the company fumbled the golden opportunity. The profit margins in the low-end models have been around 2%.
When Nokia started out manufacturing GSM phones, the initial profit margins were around 40%. Why? Because there was no digital phone competition. However, CDMA is coming late to the market and has to compete with entrenched competition from other digital standards. In this kind of squeeze, it's hard to envision a small company with no manufacturing experience, no brand, negligible market share and ruthless competition coming up roses. Everybody in this thread talked about how -98 would be Qualcomm's halcyon days... but now that it is obvious the company is unable to convert its technological know-how into profitable handset business, there seems to be no acknowledgement of this. I think this is a dangerous way to analyze a stock. There should be some kind of post-mortem after failed predictions.
Isn't it obvious by now that Qualcomm is never going to make much money in the handset business? That the Asian competition will flatten it now that the headstart advantage is gone? The Asian impact itself is much worse than you'd think from reading this thread. Just weeks ago people were talking about a turnaround. Now it's obvious that both Korea and Japan are diving into a deep recession. Retail sales in both countries dived by over 10% in March. New vehicle sales tanked by 50% in Japan. And this is the time to launch CDMA, a third digital network in Japan? The Achilles' heel of CDMA sales projections always was the narrow international base. Too much was laid on the shoulders of Korea and Japan. There is no way those projections will hold now that the economies of those countries are heading south.
High hopes were pinned also on China. And now it appears that GSM is simply overrunning that country. 34 million unit sales in 2000. Is CDMA going to achieve even 5% of this? Who's gonna pour money into the conquest of China now that the Korean CDMA companies are reeling, Motorola is in the ropes and Qualcomm can't make handsets profitble even in its homeground? Nokia and Ericsson are making 2 Billion US$
profit each this year and have been focusing on China for half a decade now. And now it turns out that the countries that CDMA had bet on for Asian growth are shriveling while China is still projected to grow by 7% annually the next couple of years. This remarkable reversal of fortunes has been pretty much ignored by CDMA proponents. But it has not been ignored by Wall Street and I think that is why talk of QCOM catching up with the Nordic companies is a pipe dream.
And that GSM-overlaid CDMA. How much did that project cost QCOM? Has anyone heard of *one* European operator actually buying the notion? Europe is busy buying GSM 1800 networks to complement the existing GSM 900 networks and the number one company here is Nokia. There is nobody here who's even considering moving into IS-95. And while Nokia is having 40% profit margin on that GSM 1800 gear, Qualcomm's European overtures are a dead turkey.
QCOM has the revenue stream of all those patents, yes. But it's squandering that money into lavish projects like full line of handsets and CDMA/GSM networks which will return a decent profit on the invested capital. That is the reason this company has spectacularily underperformed the telecom market in 1996-1998. And there is not one reason to think next two years will be different. Both yen and won are in a state of perpetual devaluation. Asian companies can run QCOM handset biz into ground and not miss a beat. Whereas they have been powerless to challenge GSM handset leaders, simply because the technological advances there are so rapid. By next September Nokia will have the infrared port in nearly all its product segments, from 6100 via 8810 to 9110.
The 8810 has internal modem, five line display, 120 hours of standby time, call grouping, fax, e-mail, conference calling, clock, calendar, alarm and it still weighs little over 100 grams. I've seen interesting *concept* phones from the CDMA camp. But back in the real world, Nokia is introducing a second generation smartphone 9110; in just 250 grams an external and internal display, WWW-browser, fax, capability to send digital photos, IR port, etc, etc. And the first CDMA smarphone is yet to hit the stores, 30 months after Nokia introduced the 9000 Communicator. The gap between CDMA phones and GSM phones just does not appear to shrink. Intel and IBM invited Nokia and Ericsson to create the groundbreaking "Bluetooth" technology that will link portable devices to pc's and printers. QCOM and Motorola are following their lead in adopting the standard. But they did not get to create and shape this standard. And that's a huge difference.
Best Regards, Maurice