iPhone 3G: The Q Factor

Friday, September 21, 2007

The iPhone 3G or V2 will come out and it is a matter of time now. I have, in previous articles, talked about the various options that Apple has for its baseband solution and for the other features. And my personal favorite, at least in terms of providing a truly well-engineered product, down to the nuts-and-bolts, is QualComm (QCOM).

The iPhone currents, on the other hand, seem to be moving away from QualComm if rumors are to be believed. Apple may opt for the Infineon (IFX) 3G chip (incidentally, my first mention in the iPhone V2 suitors). What may have prompted the Apple (AAPL) decision needs a separate analysis by itself. In this article, however, I wish to discuss where it leaves QualComm.

Is this bad for QualComm? Yes, and no. Yes, because it is not partnering with a handset vendor with an increasing market share. The No-part is a little less obvious but here are my reasons -
  • QualComm's legal battles with Nokia (NOK) and BroadCom (BRCM) and the impending ITC ban: Based on the final rulings in much of these cases, QualComm chips may not be allowed to enter the US in the future and this will include an iPhone if it features such disputed chips. Besides, the royalty that it may have to pay the other parties may cut down the margins substantially on a per-chip basis. This is true in general, but a bad publicity with a highly visible product is the last thing the company wants.
  • WCDMA royalties: If a 3G iPhone is available in 2008, about 2.5 million units will be sold that year. This number is expected to climb to about 17.5 million units in 2010. With a conservative average selling price of $350 and a royalty percentage of 6% (especially if Infineon does not have any underlying license deal), QualComm stands to make close to $50 million next year and as high as $340 million in 2010 just on iPhone sales. Compare this against $@ million a quarter, 7-year deal between Interdigital and Apple. This number appears exagerrated, but unless Infineon is able to work around the IP issue, the numbers stand.
While I am quite positive that Infineon and Apple are aware of the IP issue and are looking to circumvent it or at least decrease the impact, I am equally sure that QualComm will litigate if it is not paid its dues. From QualComm's perspective, if the IP is all it has to grab a portion of this sumptuous pie, why would it budge?

I will also write about Infineon and its partner Interdigital (IDCC) in my next article. For now, I will let you chew on this one. For the mathematically minded, if I get a request, we can discuss my numerical methodologies.

Posted by Vijay Nagarajan at 11:57 PM  

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