September 24, 2008
Qualcomm Pact Hits Broadcom
By Tolkoff, Sarah
TECHNOLOGY: Deal with Nokia seen prompting cell phone chip shakeout For all of Broadcom Corp.'s court wins, some are seeing Qualcomm Inc.'s recent licensing deal with Nokia Corp. as a blow to the Irvine company's ambitions in cell phone chips.The licensing deal, struck last month, ended a three-year standoff over Nokia's use of Qualcomm's baseband processors-the brain of a cell phone that manages communications processing and other functions.
Investors and analysts see fallout for Broadcom. Shares of the company fell more than 10% on word of the deal. The stock is off some 25% in the past year on a recent market value of $12 billion.
"The stock was beat up primarily because the potential for cell phone revenue is a little bit more tempered," said Adam Benjamin, an analyst with Jeffiies & Co. in New York. "Broadcom has a burgeoning cellular baseband business. They have been spending a lot of money but have very little to show for it yet."
Broadcom makes a number of cell phone chips, including ones that extend battery life, download and play video and do handsfree networking. The company is a small player with less than 5% of the market.
Dominant players include Texas Instruments Inc., Marvell Technology Group Ltd. and STMicroelectronics NV
Others include Qualcomm, Freescale Semiconductor Inc., Infineon Technologies AG, Icera Inc. and NXP BV, Royal Philips Electronics NVs former chip arm that Broadcom Chief Executive Scott McGregor once headed.
Broadcom has big ambitions with a longterm goal of having 10% to 15% of the market. It's waged a multiyear legal battle against Qualcomm, which has drawn the ire of some for its business of licensing cell phone chip technology and collecting royalties.
Until last month, Nokia was one of Qualcomm's critics.
Now the two have made peace with a 15-year pact allowing Nokia use of Qualcomm's patents on chips for its phones and wireless network equipment. In return, Nokia agreed to allow Qualcomm to use its technology in its chips.
Financial terms weren't disclosed, but the deal was said to be "favorable" for both companies, with Qualcomm getting a sizable payment upfront and Nokia getting a discount.
As part of the deal, Nokia said it would withdraw an anti- competitiveness complaint against Qualcomm that it made to the European Commission.
The settlement is seen as a blow to Broadcom in its battle with Qualcomm, which was found to have violated several Broadcom cell phone chip patents. In the past two years, Broadcom made an effort to rally allies among the top cell phone makers.
With Nokia bowing out, Broadcom's cause might be weakened.
Moreover, some think the QualcommNokia deal has bigger implications. It could bring consolidation among cell phone chip suppliers, according to some analysts.
"The agreement between Qualcomm and Nokia has industrywide implications," said Brian Modoff, analyst at Deutsche Bank securities Inc. in San Francisco. "We think that this could serve as a catalyst, sparking the industry consolidation that we have expected for some time."
By Modoff's count, there are 17 baseband chipmakers.
"We think there is only room for three or four because it will take immense resources to stay technologically competitive and support customers," he said.
Broadcom isn't likely to be bought, since its founders own 60% of the company's voting shares. But it could face a decision on what to do with its cell phone chip business if the segment consolidates.
The settlement deal may dash Broadcom's chances of being a big supplier of baseband chips to Nokia, Modoff said.
"Many of these competitors had counted on gaining some share of Nokia to give their business the scale they need," he said. "These hopes now appear more distant."
Last year, Broadcom landed a design win with Nokia that some saw as an entry to selling more chips to the top cell phone maker.
Nokia said it would use Broadcom's Edge chips for sending data in phones due out next year.
"We don't see anything in the settlement between Nokia and Qualcomm that would prevent Broadcom from continuing to sell silicon to Nokia," said David Rosmann, vice president of intellectual property litigation for Broadcom. "We've been working for a long time with Nokia and we expect that to continue."
Broadcom's Own Pact?
Some industry watchers took the deal with Nokia as a sign that Broadcom and Qualcomm could make peace themselves.
Broadcom has spent a lot of money fighting Qualcomm in a series of patent infringement trials over the course of two years.
"I would think that it would make Qualcomm more willing to settle the current litigation with Broadcom,'* said Daniel Berenbaum, analyst with Cowen & Co. in New York. "Qualcomm's biggest beef was against Nokia. The Broadcom litigation is smaller stuff and it might make them more wiling to settle."
"To the extent that this signals a change of direction in Qualcomm's path, we are encouraged by that," Broadcom's Rosmann said.
Broadcom had been pressing for a licensing deal but has gotten more aggressive with its tactics with a lawsuit challenging the way Qualcomm does business and a bid to have it found in contempt of court for violating an injunction.
"The goal is to settle this thing so that Broadcom gets royalties for the chips," analyst Berenbaum said. "But I think Broadcom is less emotional than it was just a year ago."
Copyright CBJ, L. P. Aug 4-Aug 10, 2008
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