3G outlook unsure as Qualcomm and TI enjoy contrasting prospects

Qualcomm's fortunes in 2007 were dominated by its series of legal battles with Nokia and Broadcom, and the threat of a European Union investigation into its business and licensing practises, petitioned by Nokia, Ericsson and others. Most significantly, its patent cross-licensing agreement with Nokia expired in April last year, and the two companies have failed to agree terms since, leaving Qualcomm without royalties from the holder of 40% share of the handset market for almost a year. Despite this and more court setbacks than wins on patent actions - and professing itself willing to spin off the licensing business if this proves essential - Qualcomm's main business in chip technologies has withstood the storm with remarkably resilience. Most companies' stock might have been expected to have suffered a downward slide in these circumstances, but it has held virtually solid for the past year, with regular upward leaps when strong results have been announced.

Qualcomm has executed ahead of the market and more effectively than any other major in W-CDMA and now HSDPA and HSUPA/ HSPA+, which is adding credibility to its aggressive LTE road-map. The chip company has convinced many doubters that it could, if it really had to, lead its market even without the benefits of its high margin, tightly controlled IPR business. It could even survive the likely loss, over the coming 5-8 years, of significant new CDMA silicon business, as operators look to LTE and WiMAX for their next generation roll-outs, rather than a CDMA follow-on. Significant realignment and revaluing of the company will be necessary if CDMA declines more rapidly than expected, or Qualcomm is forced to hive off IPR, but this looks like a supplier that can weather the storm on the back of its engineering excellence, strong understanding of operator needs, and accelerating expansion into software and services (see separate item). None of this optimistic view can realistically come true, though, without at least some rapprochement with Nokia, especially if the Finnish machine maintains its current massive market lead.

Most immediately, any level of royalties from Nokia would obviously boost Qualcomm's earnings power. A settlement on the patents front - if spun effectively to appear, at least, that concessions had been made to Nokia's views on reducing total handset cost and the new balance of power in handset IPR - could finally open the door to Nokia's adding its traditional enemy to its increasingly broad list of chip suppliers. This will not be a decision made lightly in Helsinki - remember that Nokia arguably blew its chances to compete in CDMA handsets by remaining obdurate against buying Qualcomm silicon and seeking, with TI and STMicroelectronics, to create its own alternate supply. The dominant vendor was able to leverage its grip on the R&D roadmap to shift the goalposts every time TI jumped, leaving it with a second rate product. While its grasp of the agenda, and the market, in W-CDMA and HSPA is significantly less, if Qualcomm carries on the way it has been lately, Nokia could face a similar dilemma again - stick with its usual suppliers and settle for a second class product, or swallow its pride and go with the most advanced features on the market.

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