Bad news hit the cdmaOne community last week as the South Korean government put a stop to cdmaOne handset subsidies and uncertainty lingered about China Unicom’s plans to deploy the technology.
Though technology stocks across the board took a hit last week, Qualcomm Inc.’s stock took a beating. The cdmaOne patent holder’s stock ended last Thursday down $7.75 at $69 per share, though fluctuating in the $80 range that day. By close on Friday, the stock had fallen another 4.3 percent to $66.06.
South Korea’s cdmaOne wireless market has grown wildly in recent years, as the country’s five mobile-phone operators employed heavy subsidies to attract new customers. South Korea’s total wireless subscribers reached 23.4 million by the end of 1999, with 50 percent penetration. South Korea accounts for nearly 40 percent of the world’s cdmaOne market. CdmaOne technology today is the fastest-growing technology in the world.
The Ministry of Information and Communications has grown concerned in recent months that the hefty subsidies operators pay, which range between $132 to $220 per subscriber, have hurt trade figures. According to the Korea Herald, the MIC has blamed handset subsidies on frequent handset replacements, which contributed to foreign exchange outflow.
The MIC had tried to enforce such a ban previously, asking operators to voluntarily comply with the ban. But carriers like SK Telecom, the largest cellular operator in Korea, only slightly lowered subsidies earlier this year. This time, the MIC has ordered carriers to stop the subsidies June 1, or face a fine. According to published reports, the MIC believes handset demand will fall as a result, from 15 million units to about 8 million units.
Jeffrey Schlesinger, technology analyst with UBS Warburg L.L.C. believes subscriber growth in South Korea will slow significantly and could turn negative in the near-term after the new law becomes effective. Net additions in the first quarter were 2.66 million, he said, while April net additions reached 1.4 million. However, Schlesinger said he isn’t changing South Korea’s growth forecast of 25 million for the year given the tremendous growth in the first quarter.
“Impact on cdmaOne subscriber growth could be material,” said Schlesinger.
Qualcomm, which has seen its stock soar as high as $200 in early January, could see a financial impact since the company generates significant chip sales, as much as 50 percent, and licensing from South Korean handset sales.
South Korea’s move should have little impact on L.M. Ericsson and Nokia Corp., which haven’t made significant inroads in the South Korean handset market. Domestic vendors control 80 percent of the market, said Marc Cabi, infrastructure analyst with Credit Suisse First Boston. Motorola Inc., however, could feel an impact since it holds about 15 percent of the market.
Moreover, the future of cdmaOne technology in South Korea may not be as strong going forward. South Korean operators have not publicly announced which third-generation standard they are supporting, a migration to cdma2000 technology or a change to wideband Code Division Multiple Access technology, a 3G path chosen by GSM carriers. People familiar with the South Korean market, however, speculate cdma2000-based technology will be used in the cellular band, while many carriers may opt to deploy W-CDMA technology in new spectrum to avoid becoming an island among the Global System for Mobile communications community. SK Telecom is working on both technologies.
“The technology selection will be important for Qualcomm in securing continued annuity revenue streams in this market,” said Cabi.
Qualcomm says it will receive the same royalties on networks based on any CDMA technology, but Cabi believes more players will have a share of W-CDMA patents that could make that market tougher to sell into.
Finally, doubts that China Unicom will ever deploy cdmaOne technology continue to linger among investors, following a Wall Street Journal piece that indicated Unicom’s plans are in peril.
China Unicom and Qualcomm reached patent agreements over the technology in February. Since then, deployment plans have been delayed, with the latest explanation attributed to bureaucracy tie-ups within the Chinese government. Unicom is planning to issue an initial public offering and will begin its road show today, which could shed some light on its cdmaOne plans. Vendors say the Chinese government has assured them that cdmaOne technology will be rolled out in China.
