End-June, Paul Jacobs, Qualcomm CEO, along with a team of senior officials, rushed to India. The agenda was a meeting with Communications Minister Dayanidhi Maran, chief of Tata Teleservices Ratan Tata, and chairman of Reliance Communication Anil Ambani.
For the US-based Qualcomm, the largest provider of 3D chipset and software technology for CDMA handsets, it was something of a fire-fighting mission. The Indian government had expressed concern over the fact that Qualcomm, which earns a major part of its revenue from royalties on patented products, claims a much higher percentage (7 per cent) from India than from other Asian countries like China and South Korea, where the royalty on handsets is about 2 per cent.
On top of this, there was talk of Reliance Communication, the largest CDMA operator in the country, intending to embrace GSM in a big way. This would mean a serious setback for Qualcomm, which is already facing criticism from operators in emerging markets over high royalty charges on CDMA technology, for which it is the sole supplier. Globally too, several operators have opted to move from CDMA to GSM on this count.
Despite these pressures, the 43-year-old Jacobs stood firm on the company’s position, ruling out rationalisation of royalties on handsets sold in India. The company’s licensing terms, he said, are globally consistent and represent a low single-digit percentage of the wholesale price of a phone.
Jacobs also drove home the point that royalties were below 5 per cent of the handset cost in India, and not 7 per cent as claimed. He also maintained that it could not be reduced any further as the absolute royalty charged on CDMA handsets in India was in fact 15 per cent lower than that in China. According to him, since India has the lowest handset prices in the world, royalties paid to Qualcomm on CDMA handsets are the lowest in the world.
The cost of a handset, according to company officials, depends on market forces and not so much on the royalty fee charged by Qualcomm. In fact, royalties on handsets have been so low that they do not contribute in any significant way to the wholesale price of CDMA handsets, which, in some cases, have dropped to below $40. “CDMA phones are more expensive than GSM phones due to the extra data and service capabilities of CDMA handsets, not due to Qualcomm’s royalty structure,” stated a senior company official.
“If we cut the royalty rate even by half, it’s only a dollar difference as compared to what we did by creating competition and getting handset prices down by 25 per cent,” Jacobs pointed out.
To soften its uncompromising stand on the royalty issue, the company assured that it would work towards reducing the overall cost of CDMA mobile phones in India to about $30 from the current $40-level. The plan is to develop the Indian CDMA market along the lines of those in South Korea and China, Jacobs said. “A $40 handset fetches a payment of $2 for Qualcomm, but what is more important is to bring down handset costs rather than cut the company’s royalty.
Towards this end, Qualcomm has proposed funding of a government-owned telecom research institute by investing 7 per cent of all royalty earned from India.
This is similar to a model it has deployed in South Korea, where about 20 per cent of the royalty received goes back into funding the government-owned Electronics and Telecommunications Research Institute.
Meanwhile, the meeting with Ratan Tata included discussions on various issues such as the development of joint multiple platforms for improving CDMA services to provide more sophisticated, state-ofthe-art facilities for users. The talks also covered Reliance Communications’ plans to adopt GSM technology, which would leave Tata as the only major CDMA player in the country.
Expressing concern about the future of CDMA technology, given that, as many as 25 CDMA operators worldwide, including Reliance, are contemplating a switchover to the GSM family, according to a report from the Global Mobile Service Association, Jacobs stated that the effort would be to try and “convince” Reliance to continue operations using CDMA technology.
“CDMA is a third-generation technology. It provides data capability in proven economic conditions, even at the bottom of the pyramid. Therefore, it seems strange to move from a 3G technology to a second-generation technology,” noted Jacobs.
Early June, Reliance Communication applied for extra frequency in the GSM band. For Qualcomm this was reason enough for worry. In 2005, India contributed 2.2 per cent to the total royalty earned by Qualcomm globally, with Reliance as the largest contributor by virtue of being the top CDMA operator in the country. Meanwhile, Reliance had toughened its stand and asked Qualcomm to completely waive royalties either on handsets or networks for faster growth of CDMA-based telecom services in rural India. Ambani has reportedly made it clear that the high royalty on CDMA-based telephones was becoming unaffordable for both the company and its customers.
Reliance also wanted Qualcomm to use different criteria for the definition of urban, semi-urban and rural areas to finalise locations where the high royalties on network equipment and handsets should be waived. According to estimates, such a move would have resulted in 10 per cent lower capex for operators. For consumers, it would mean 12-15 per cent lower costs for CDMA handsets.
According to Qualcomm officials, “Reliance’s focus is to provide low-cost handsets and we are here to convince them that we can lower the price and also maintain functionality, which will allow it to generate increased revenues. Given that the price difference between GSM and CDMA handsets is only $4, this cannot be a reason for any CDMA operator shift to GSM.”
Qualcomm is reportedly proposing to talk to equipment manufacturers to reduce handset prices based on large volumes. The company will, in all likelihood, ask component makers to take a cut and bring handset costs in line with those in China. Moreover, Qualcomm is rumoured to have made it up to Reliance Communication by offering bulk discounts on royalty and suggesting certain benchmarks in terms of the subscriber base. This, according to analysts, is probably the best way to convince Reliance, which has close to 20 million subscribers.
The company is also planning to enhance its R&D centre in Bangalore, where it currently has 400 employees, and is looking to rapidly increase the number to take on full-scale design. It has also indicated that it would go all out to help domestic manufacturing. “The company has already identified a vendor for the project and is scouting for a few more partners,” claims a senior Qualcomm official. The idea is to replicate what is happening in other markets around the world ?? such as South Korea and China ?? in India where a local manufacturer will be able to partner with a global telecom player.
But to what extent these attempts will yield positive results for Qualcomm is not yet apparent. For Qualcomm, the past few months have been trying with international telecom equipment major Nokia cancelling its plans to form a new company with Sanyo Electric to make CDMA devices based on Qualcomm’s technology. Nokia also stated that it would “ramp down” its research and development of CDMA products by 2007. This was followed by growing discontent in emerging markets like Korea, China and India over the royalty issue.
At the moment, however, the company is directing its attention to retain its hold on one of the world’s fastest growing mobile markets.
