Why Qualcomm Needs To Win The 5G Race At All Costs

  • Qualcomm would lose it's licensing and royalties fees if Intel wins the 5G battle.
  • Qualcomm might have to pay licensing fees to Intel.
  • Ramping up R&D spending for 6G standard might become incredibly difficult for Qualcomm.

Qualcomm (NSDQ:QCOM) has been the market leader in wireless technologies so far. It’s sizable R&D investments of about $16.2 billion over the past 2 years alone have pretty much kept it ahead of its peers when it comes to baseband tech. But the chipmaker’s formidable market position may not stay intact forever. Intel (NSDQ:INTC) recently announced that it’s ramping up it’s efforts to develop the next generation 5G technology. How important is 5G to Qualcomm’s business and what happens to it, if Intel wins the 5G race? Let’s take a closer look.

Locking horns

Let me start by saying that this isn’t the first time that Intel and Qualcomm have locked horns with each other. For starters, Intel had released its WiMAX technology back in 2005, hoping that it would become the default 4G standard for all mobile operators. It was a great wireless standard and offered top notch transfer speeds. But it was a new technology altogether and telecom operators who had spent massive chunks of cash to setup their 3G networks weren’t financially ready for another entirely new platform.

Qualcomm’s 4G LTE standard, on the other hand, came after the release of WiMAX. But inspite of being late to the market, LTE appealed to many telecom operators. The primary reason for the success of LTE can be attributed to the fact that, unlike WiMAX, it wasn’t an entirely new platform and was instead a tech upgrade. This meant that cost of upgrading networks from 3G to 4G was drastically reduced with LTE.

Intel’s WiMAX was ahead in several fields such as MIMO, Space-Time frequency encoding, downlink channel reporting and beam forming, but it lost to Qualcomm’s LTE anyway due to poor financial feasibility for telco’s. The chipzilla is now seemingly taking another shot at the wireless technology standards, this time it happens to be 5G. The chipmaker announced back in February that it’s collaborating with several networking giants such as LG, Verizon, Ericsson, Nokia, SK Telecom and Verizon to further its ambitions.

So as a part of an investor’s due diligence, let’s take a look at what would happen to Qualcomm’s business prospects if Intel won the 5G race this time around.

What’s at stake

I’d like to point out to readers that Qualcomm garners a sizable amount of royalties and licensing fees from licensing out its 3G (WCDMA) and 4G (LTE) technology to handset and tablet vendors. To put things in perspective, the Qualcomm Technology Licensing group single-handedly generated about $7.1 billion revenue for the company that altogether represented 31% of the company’s entire topline. If Intel’s next-gen wireless tech becomes the default standard for 5G, this business segment will die a slow death as Qualcomm would no longer receive royalties and licensing revenue from 5G handset and tablet OEMs.

Consecutively, Qualcomm might as well have to pay Intel a licensing fee for using the latter’s wireless technology in its Snapdragon line of SoCs. This would be a double whammy for Qualcomm. In addition to gradually losing the QTL revenue over time, the profitability of its Qualcomm CDMA Technologies group (QCT group manufactures SoCs) would also suffer due to licensing-related payables.

More to the point, Qualcomm would be reduced to a mere chipmaker, competing with the likes of MediaTek and Texas Instruments. The mobile giant won’t have any license-worthy wireless IP if Intel dawns in the 5G era, which means that its Snapdragons will be sold and judged merely based on its application processor. To put things in perspective, the modems used by Qualcomm’s SoCs are currently a big selling point due to competitors selling chips with relatively inferior transfer speeds. This advantage will disappear.

And lastly, Qualcomm might have to significantly ramp up its R&D spending for the 6G wireless network in order to regain its current market position and dominance. But due to the aforementioned reasons, its QTL and QCT business divisions might not generate enough cash flow to support the ramp in 6G-related R&D spending if Intel gets it’s 5G wireless technology standardized across all telecom verticals.

Putting it all together

Intel has been known to subsidize it’s mobile SoCs and the chipmaker might as well bring the same trick to ramp up it’s market presence in the wireless segment. This could make it hard for Qualcomm to defend its dominance, but not entirely impossible. Overall, due to the aforementioned reasons, I believe that it’s of the highest importance and priority for Qualcomm to get its 5G tech standardized before Intel.

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Comments on this article and QCOM stock

user profile picture
internationalpirate
bearish
Qualcomm/Intel have nothing to do with 5G, it is essentially Samsung vs Huawei format war. Unlike 4G, 5G will split into multiple incompatible camps, with little to no niche for Qualcomm and Intel.
reply
user profile picture
Business Quant
neutral
Hey internationalpirate,

Could you please elaborate?

It's quite an interesting thesis and I'm genuinely interested in knowing your point of view in detail.

Hoping to hear from you.

Best,

Piyush
Do share this awesome post