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Telcos in a spectrum jam here
[June 26, 2006]

Telcos in a spectrum jam here

(The Economic Times (India) Via Thomson Dialog NewsEdge) : Telecom service operator Reliance Communication's recent decision to get a licence for GSM technology operations has taken a turn. US-based tech company Qualcomm owns most of the rights and patents for the CDMA technology.

A senior team from Qualcomm is expected to be in India from June 27 onwards to meet Trai, the Indian government, as well as CDMA and GSM operators. Qualcomm will also bring certain experts from the Federal Communication Commission to speak on the issue of spectrum allocation in India.

Qualcomm officials feel that the spectrum policy in the country favours GSM. Going forward, WCDMA is the technology that will work in the third generation. Therefore, it is strange that this anomaly on spectrum allocation continues in India, said Qualcomm officials.

CDMA technology owner Qualcomm believes that a flawed spectrum policy is causing more problems in India than prices of CDMA handsets, royalties or licensing issues. Speaking to ET for the first time after CDMA operator Reliance Communication announced its plans to move to the GSM front, Qualcomm's India president Kanwalinder Singh says the issue is not about technology or cost, but about policy, competition and future consumer choices. RCL's decision to expand in the GSM domain has shaken the telecom world and, as Qualcomm owns most of the patents in the CDMA industry, it is most affected by the decision.

Qualcomm says it does not negotiate with operators on licensing and royalty issues. This has become a contentious issue as CDMA operators, particularly RCL, has been saying that it has not been able to bring down hanset prices because of the high royalty charged by Qualcomm. Qualcomm claims all royalty issues are addressed with manufacturers directly. We have a global worldwide royalty rate, which is the same globally, with just one exception. The discussion on royalty or license is not with operators, but manufacturers of handset, equipment, ASIC etc.

Qualcomm has made an exception in its global standard royalty rate in China. This was done before China became a part of WTO. The Chinese government wanted to give a boost to local telecom manufacturing. Therefore, the Chinese government negotiated an exception to the royalty rates, wherein Chinese manufacturers were given a lower royalty rate to make equipment for the Chinese market. Standard royalty rates were applied for exports by these same manufacturers outside China.

While Indian CDMA operators are trying to bring down handset costs, none of the global handset manufacturers like LG, Samsung, Motorola have evinced interest in doing so publicly. None of these companies plan to set up CDMA manufacturing in India, which could help India intervene on their behalf with Qualcomm. Nokia's local handset assembly is restricted to GSM cells.

Qualcomm does not have any local Indian CDMA manufacturer to discuss or negotiate a new or lower licensing rate for Indian market. While RCL is trying to force a discussion between the government and Qualcomm on the licensing and royalty issues, Qualcomm seems to be more keen on talking about the spectrum problem. Qualcomm charges royalty rates based on the handset's average selling price.

It does not disclose these rates, but analysts say it may be about 5-7% of the selling price. RCL is trying to bring down handset costs, which has bearing on its balance sheet. There are broadly two cost components that Qualcomm controls: one, the royalty for using the technology and, two, the cost of the chipset.

Chipset cost is also a crucial component of the handset cost. Qualcomm, though, is not reducing prices, but working on higher end, better integrated chips. The company is launching a single chip that can combine four different semiconductor chips into one. Mr Singh refused to discuss the pricing for these chips or whether they will bring down the price of the handset at all. While there has been a lot of uproar about the royalty and licensing fees charged by Qualcomm, the firm derives the bulk of its revenues from chipsets.

Qualcomm is the dominant chip manufacturer for CDMA handsets. Texas Instruments and Via Computers its two competitors. A semiconductor chip is the heart and brain of a cell phone and a drop in its price makes a quantum difference to the selling price.

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