Qualcomm's double whammy

Olga Kharif
10 Dec 2007
00:00

Hits from Verizon Wireless and the European Commission are unlikely to break Qualcomm any time soon

A double dose of pretty bad news in one day can be hard to weather, but few companies have as many bases covered as Qualcomm.

The first slap on Nov. 29 was the European Commission's decision to recommend that its 27 member states adopt a mobile TV technology that competes with Qualcomm's (QCOM) MediaFLO platform. That same day, Verizon Wireless"”a cornerstone customer of Qualcomm's core wireless technology"”announced it would build its next-generation mobile network using a European-led technology called Long Term Evolution (LTE) rather than the standard being peddled by Qualcomm.

Anticipated complications

Neither decision came as a complete surprise, which helps explain why Qualcomm's stock barely suffered a scratch after the two announcements.

While Qualcomm had conducted two successful trials of MediaFLO in Britain, the European Commission was known to be leaning toward a mobile TV technology called DVB-H (or digital video broadcasting-handheld) for months. The commission was no doubt leery of bolstering the fortunes of a company that has long infuriated Nokia (NOK) and other European technology companies with the hefty royalties it collects on key cell-phone patents.

Verizon, meanwhile, had been dropping hints for months that it has been considering LTE. The rationale is fairly obvious, given that one of Verizon Wireless' two corporate parents is the British mobile carrier Vodafone (VOD), a devotee of the non-Qualcomm cellular technology that dominates the global market.

Uncertain future

But even if the decisions had been unexpected, Qualcomm has a knack for weathering bad news (BusinessWeek, 11/5/07). The secret to that resilience is Qualcomm's habit of hedging its bets with multiple irons in every wireless fire. It also doesn't hurt that neither of the technologies involved in these two defeats has a certain future.

Sure, if mobile TV takes off, Qualcomm will miss out on a healthy new revenue stream in Europe. But the market, and the underlying business model, are unproven. The company's U.S. mobile TV network has probably cost Qualcomm more than $800 million in investments. So far, only Verizon Wireless is selling the service commercially, though AT&T (T) plans to roll out MediaFLO in early 2008. As with any new service, uptake has been relatively slow, and Qualcomm's MediaFLO unit lost $61 million in the latest quarter alone. Few industry analysts will hazard a guess as to when it might break even.

EU member compliance not assured

It's also worth noting that MediaFLO may yet make it into Europe. True, the commission's directive says 'all EU Member States will have to support and encourage the use of DVB-H for the launch of mobile TV services, thus avoiding market fragmentation.' But several EU members, including Britain, oppose the imposition of a DVB-H standard and could go their own way.

And regardless of government edicts, Qualcomm's partner in its British trial of MediaFLO, British Sky Broadcasting, may decide to stick with that technology. 'The European Commission can say what it likes, but at the end of the day Sky TV will do whatever it wants,' says Richard Windsor, an analyst with Nomura Securities.

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