Faced with the possibility of losing Indiaâ€™s leading CDMA mobile operator, wireless technology company Qualcomm could soften its negotiating stance and reduce royalty rates it charges even as it hints that fresh negotiations with other providers around the world are in the offing.
According to reports, Reliance Communications Limited (RCL) may be planning to migrate its business to the competing mobile technology, GSM. Presently the CDMA worldwide subscriber base stands at 318 million, which is less than 20 percent of its GSM counterpart whose reach is over 2 billion cell phone users.
Qualcomm is facing challenges on various fronts. When handset maker Nokia said it would stop making CDMA phones in June, Qualcomm shares dropped 15 percent, an $11 billion loss in market capitalization. The company is also facing the ire of CDMA operators in developing countries such as India and Brazil for allegedly charging high royalty rates.
In June, Qualcomm chief, Paul Jacobs met Reliance Communicationsâ€™ chairman, Anil Ambani, who is seeking a reduction in royalty levies either on handsets or networks for faster growth of CDMA-based (code division multiple access) telecom services in rural India.
Qualcommâ€™s volume discount offer on handset sales through sharing marketing, advertising and other promotional costs with the service providers in lieu of promotion of CDMA technology was rebuffed by Ambani who demanded that Jacobs come up with a â€œtransparent and upfrontâ€ handset price reduction model.
Indiaâ€™s major CDMA operators such as Reliance Communications and Tata Teleservices claim that 7 percent royalty is being levied on CDMA handsets sold in the Indian market. At the same time, however, they claim that Qualcomm is charging China and Korea around 2 percent while not charging anything in the United States. Qualcomm has denied the claims, stating that rates in India were the lowest in the world.
According to Jacobs, CDMA handset prices have dropped more quickly than other technologies. He adds that they have dropped by 25 percent in India in the past year.
Qualcomm has previously offered to set up handset manufacturing unit in the country, claiming that by doing so itâ€™s trying to drive down costs.
Like Reliance, Brazilâ€™s CDMA operator Vivo, Chinaâ€™s China Unicom and Australiaâ€™s Telstra have also decided to migrate to GSM technology for future growth.
However, Indiaâ€™s second largest CDMA operator, Tata Teleservices, which also demanded a cut in royalty, has ruled out exiting CDMA technology.
According to analysts, Qualcomm, which makes its money from the sale and licensing of its CDMA chips and related technology and services, cannot afford to lose Reliance, one of its biggest customers. With 22.5 million subscribers, the company accounts for about 7 percent of all CDMA users worldwide.
Jacobs has scoffed at speculation that the standoff on the royalty issue is forcing Reliance to shift to GSM technology, saying that it is unfavorable spectrum regulatory policy in India that makes CDMA operators face tough competition from their GSM counterparts as they have obtained nearly half the spectrum compared to GSM operators.
While a report by Global Mobile Service Association (GSA) stated that as many as 25 CDMA operators worldwide, including Reliance, are contemplating to switch over to the GSM family, a study by global consultant, Credit Suisse, revealed that the share of CDMA subscribers in the Indian market will come down to 7 percent by 2010 while that of GSM will grow from 75 percent at present to 93 percent so long as the Indian telecom policy continued to favor GSM operators.
Aware of the dwindling subscriber base, Qualcomm may not be able to afford alienating the worldâ€™s fastest growing mobile markets in the developing countries, not when the CDMA operators in India, China and Brazil are estimated to contribute as much as 5 percent of Qualcommâ€™s sales for 2006.
According to analysts, Qualcommâ€™s strategy would be to appease the CDMA operators in the short term.
While it appears that GSM is winning the global standards war - at least for the time being - Jacobs feels that in the long term, all GSM players would be using 3G technology which, in turn uses Qualcommâ€™s patents and research in the implementation of the CDMA multiplexing technique, eventually delivering Qualcomm its due.