In the last part of this series, I pointed out that CDMA-based phones will dominate tomorrow’s market providing QualComm a huge play. A look at the revenue projections that I have put together, will provide further insights on why the company is trying to hold tightly on to its IP portfolio at the risk of never growing its market share in the WCDMA/HSDPA space (which I will henceforth call 3GPP).
While “QualComm: The margins” explored the impact on the company’s margins with all other factors remaining the same, this analysis considers a bigger picture including the future market trends. The graph below represents QualComm’s revenue potential if it is still able to extract close to 6% of handset ASP on the 3GPP handsets while not exceeding 25% of the corresponding chipset market share.
Some very interesting trends came out of this study –
While difficult to digest, this analysis does reveal why the industry is engulfed in lawsuits. Companies are simply not willing to pay QualComm around 40 billion dollars over the next five years! Every percent of the ASP saved is around 5 billion dollars. QualComm thus stands to lose around 15 billion dollars if its royalty rates were halved bringing its revenue CAGRs down by 2.5%.
QualComm also understands its 3GPP position and is playing a hard gamble here with its IP. If it is anyways going to be shunned by the handset vendors, it might as well go after them for royalty, at least in the short-term. The margins hence obtained will sustain the company’s relentless R&D effort which is now focused on 4G and other longer-term goals. On the other hand, any drop will decrease the company’s growth, lower the margins, and eventually hurt its outlook as it plans for 4G which is a different ball-game.
In the sequel, we will explore QualComm’s strategic options to optimize its 3G profits.
This segment is a part in the series : QualComm