Whether it Wins or Loses Block E, Qualcomm Suffers

As the 700MHz auction winds its way slowly to completion, the most aggressive remaining block-wide bidding is taking place in block E, the spectrum most usable for mobile TV in the 700mHz auction. We have long speculated that Qualcomm (QCOM) is likely to be an active participant in the bidding for the 6MHz of spectrum available there as it is very complementary (and contiguous) to their existing 6MHz which is being utilized in their MediaFLO offering. We continue to believe that is the case but are increasingly concerned that no matter who emerges as the winner of block E, Qualcomm will be perceived as the loser. MediaFLO may not be a critical component of Qualcomm’s near term financial success but it is increasingly not likely to provide any gravy either.

We see four likely outcomes for Block E. In nearly every scenario we see Qualcomm suffering.

• Qualcomm Wins, But Pays too Much

• AT&T (T) Wins and Competes With MediaFLO by shutting it out

• Verizon (VZ) Wins and Dilutes Qualcomm

• Someone else wins and a new competitor surfaces

Qualcomm Wins Block E – 30% Likelihood

After 88 rounds, the current price for the entire block E is at $1.203B or $0.70/Pop/MHz. While bidding for about 30 of the 177 sections of block E continues, the bidding for the majority of block E is complete. Due to the blind bidding process, we cannot identify who the winning bidder(s) is/are, but we continue to believe that Qualcomm has participated in bidding for the top 50 markets. These 50 represent 75% of the pops and approximately 85% of the dollars ($1B). If Qualcomm emerges as the “winner” of these markets, the company may well have acquired the spectrum at around $0.70/Pop/MHz. This is well below the $1.06 that AT&T spent to acquire 12MHz from Aloha Partners last fall. However, the company will have spent somewhere in the range of $1B as compared to the estimated $50 million that they spent for their original 6MHz. This would also be in contrast to the $800M that the company has indicated they spent to secure the spectrum and build out their nationwide mobile TV network. With our concerns about Verizon’s limited success with Qualcomm’s MediaFLO mobile TV offering, we believe investors will perceive significant incremental expenditure negatively.

AT&T Wins Block E 40% Likelihood

Should AT&T emerge as the winner of the majority of block E, concerns will grow that they will develop their own mobile TV initiative. AT&T could either leave Qualcomm at the altar without launching their own previously announced joint effort or divorce them in early 2009 when they gain control of the incremental 6MHz. Aside from losing AT&T as a potential customer for the MediaFLO offering they would gain a potential competitor with 18MHz of spectrum as compared to Qualcomm’s 6MHz. Without AT&T as a customer, with AT&T as a competitor and alternative standards to MediaFLO emerging outside the US, MediaFLO would be likely doomed to failure.

Verizon Wins Block E: 20% Likelihood

As Qualcomm’s current MediaFLO partner with their VCAST Mobile TV offering, Verizon could potentially purchase the 6MHz of spectrum to keep it out of the hands of AT&T and combine it with the Qualcomm 6MHz. This might enable the two companies to create a broad enough network to offer more channels than the current eight. While this appears to be the best possible scenario for Qualcomm, Verizon is unlikely to fork out $1B and not recapture something from the current financial relationship with Qualcomm. Thus, such a scenario would significantly reduce the profitability that Qualcomm can expect from MediaFLO. At the same time, such a development would most likely ensure that AT&T will migrate away from their relationship with Qualcomm. We tend to discount this scenario as occurring due to the apparent limited success of the MediaFLO/Verizon VCAST Mobile TV offering to date.

Somebody Other Than Qualcomm, AT&T and Verizon Wins Block E: 10% Likelihood

We believe that this scenario is the least likely but perhaps an EchoStar (SATS) or a smaller regional carrier(s) could acquire parts or all of the 6MHz in block E. This would still leave Qualcomm with only 6MHz which may not be sufficient to make their network viable. Here they may not have spent another $1B but they also would have failed to expand their capabilities further raising the specter of a faltering MediaFLO.

Disclosure: none

Comments

[Q98:]

4 scenarios, every one of which is negative for Qualcomm....

On the other hand, Qualcomm's stated long-term objective has been to get the industry out of the blocks and moving with a leg up for the company in insight and chipsets, then sold or spun off along with the big profit on the spectrum bought with pioneer credits.

Although it's a change from thinking based in events of ten years ago, there's evidence that ATT is partnering smartly with Qualcomm. T has begun to come down rather hard right on antagonist Broadcom, apparently for playing its smart lawyers' cards in ploys that potentially obstruct T's mobile roadmap utilizing handsets with Qualcomm inside. Would that occur if Broadcom's or anyone else's chipsets were competitive? [also, contrary to its PR's, Broadcom is unlicensed and not a player in 3G, while Nokia is in a gray area under litigation]

Why would Verizon need or want to squeeze Qualcomm in MediaFlo or anything else? (Please spare us the hack royalty nonsense, unless you're going to do a valid set of comparisons with historical numbers for GSM and analysis of the body of Qualcomm's ongoing pioneering work vs. counting little add-on loafer tassle variant patents.)

Oh. And your suggestion for the alternative mobile TV tech? DVB-H?

Pffff.

2008 Feb 22 08:16 AM

[squawk:]

Sorry, your analysis does not appear to be objective, but with a bent that whatever happens, QCOM loses. How can you make such a claim and be taken seriously?

1st scenario: How do you know that $1B sunk cost is "a loser?" Where's your analysis? You appear to have no idea of the economics behind the business model. If you did, you'd provide some analysis.

2nd scenario: Big assumption that T will move develop their own mobile TV platform. Big assumption. Where's the rationale? Where's the analysis? Your thinking is merely precatory, as if you're short the stock.

3rd scenario. VZW? Get real. You're grasping for straws.

4th scenario. Now I know you're really have no clue.

2008 Feb 22 06:19 PM

[Jamie at JRPG:]

As disclosed I have no position in QCOM.

I am not trying to make a stock call on QCOM but rather point out that they are not likely to emerge from the auction as beneficiaries of the process.

There is plenty of analysis behind the summary comments but only available to our clients.

2008 Feb 25 04:17 PM