1. Global Handset Outlook: More Than Meets the i Richard Kramer
2. Handset Costs Already Falling OEM Bottom Up Cost Base, ’06E <ul><li>Chipset roadmaps the dominant source of GSM handset cost reduction over past 10 yrs. </li></ul><ul><li>WCDMA costs are falling faster than GSM. Single-chip 3G in 2-3yrs? </li></ul><ul><li>EDGE smartphone vs. low-cost 3G? </li></ul><ul><li>IP costs (royalties) and multimedia mean 3G always more expensive. </li></ul>“ Other” costs are not vastly different: Mechanicals, moulding, displays, batteries Distribution, warranty, design, overheads
3. Radio Ga Ga? <ul><li>$100 WCDMA Device </li></ul><ul><li>3G Modem chipsets = $20-25. </li></ul><ul><li>IPR Royalty (15% ASP) = $15. </li></ul><ul><li>More testing, approvals </li></ul><ul><li>Higher fixed cost/unit </li></ul><ul><li>More components mean more things go wrong </li></ul><ul><li>Add display, Multimedia? </li></ul>What is the incremental cost of 3G? <ul><li>$ 100 EDGE Device </li></ul><ul><li>EDGE chipsets = c. $10-15 </li></ul><ul><li>IPR Royalty (7% ASP) = $7 </li></ul><ul><li>Simpler approvals </li></ul><ul><li>Lower fixed cost/unit </li></ul><ul><li>Less component count means lower return rates </li></ul><ul><li>Higher volumes </li></ul>3G LCH economics simply don’t add up yet! Anyone selling $100 WCDMA devices in ’07 will lose money. EDGE still costs OEMs $20-$40 less, a big difference.
4. Assessing The Value Chain Top 5 =84% share. After LG, only RIM & HTC make money. Jury out on Sagem, Japanese OEMs and Taiwanese ODMs surviving. See BenQ! EBITDA (cash) margins are far higher (25%-50%+). Operators are cash machines Non-SMS data revs rarely over 7% of sales, but rising. Need at least $2.5bn of sales to cover min. R&D requirements. Only 3 chipmakers shipped over 100m units in ’06. M&A has begun. Semis EBIT % 30% c. 20% LOSS LOSS OEMs 16% LOSS 11% 10% 6% EBIT % Operators EBIT % 18% 12% 26% 9% 12%
5. 3G Semis: Sink or Swim Site Map Contact Us QUALCOMM Worldwide Site Map Contact Us QUALCOMM Worldwide After 15 GSM chipmakers, only 4-5 with proven 3G platforms. The door is closing on 2G platforms Software Stack Apps. Processor Multi-Mode CMOS RF Interop/ Approvals Power Management OEMs looking for complete offerings. This Places huge R&D burden on chipmakers to provide platforms and solutions Problem in 3G is device complexity vs. cost. $500m R&D is not enough! Only Nokia, SE and Motorola outspends Qualcomm and TI in handset R&D. Software Apps Suites Radio Peripherals Chip Integration 65nm and 45nm IPR
6. Supply Chain: Devils in the Detail Handset OEMs have the most complex supply chains and the highest volumes of any end-market 100bn components per year 100 different platforms 2-3 week firm order backlog Negative net working capital 6,000 product variants 6m handsets shipped per week Operator customisations Product cycles 6-12 months Inventory channel checks High delivery accuracy High in-house yields, low FFR OEMs that could not manage this complexity shifted the problem via outsourcing. Has it worked? Motorola just put supply-chain head in charge of devices. They have new platform strategy, but will struggle until 2H08 at earliest Outside of Nokia no one makes money in the low-end
7. IPR: License to Kill GSM IPR is falling but remains high for new entrants. Cumulative rates of 8-10% are common. Established players can largely net off exposure via cross licensing agreements. 3G royalties are being set at erroneous levels. Some IPR players are out to solely press patent claims. New entrants (Chinese) are being asked to pay 15-20% royalties. LEGAL CLAIMS ARE ON THE RISE <ul><li>For new entrants, royalties will cost more than a modem chipset </li></ul><ul><li>Top tier OEMs are all in disputes with each other, tied in knots over definitions of FRAND. Needs reference pt. </li></ul>As handsets embrace cameras, colour screens etc, why should royalties be based on the full selling price of the handset. The modem value is shrinking, so should royalties. Lowering Royalty Rates is a must for OEMs to offer ULC WCDMA devices. Who can police this? Watch what Intel does in Wimax. Qualcomm hope to collect $7bn in cumulative PROFITS from this over the next 5 yrs. A raft of other IPR companies also hope to gain.
8. 3G For All? What is trying to be achieved with 3G4All? Will it really kick-start data adoption? What new services requires 3G and not simply EDGE? ULCH 2G initiatives boosted mobile phone penetration in low-income markets by driving down prices. Other than Qcom, who else makes money from this? Is there evidence 3G is bringing in incremental sales? Let’s see initiatives to drive data usage that work; making e-mail ubiquitous on all phones would be a good start. MUCH MORE NEEDS TO BE DONE! Huawei & ZTE look to be replacing Sharp, Option, at Vodafone. Do they make money? WCDMA Share 4Q06 Japan!
9. Mobile Data: Now or Never Device with highest dataplan attach rate not even 3G, but EDGE! <ul><li>Mega-markets not yet mobile: </li></ul><ul><li>8bn searches in the US alone last month, up 30% yoy. </li></ul><ul><li>1bn consumer email boxes globally <1% are mobilised. </li></ul><ul><li>YouTube claims 2bn viewings/day. </li></ul><ul><li>Over 1bn IM user, despite no IOT. </li></ul><ul><li>Google collecting millions of mobile numbers. What for? Push g-mail? </li></ul>There are plenty of services around to drive 3G/data usage Operators starting to bite the bullet on flat rate dataplans. But it only has 8m subs! World’s largest operator China Mobile going EDGE ; avoids near-term issues around 3G licensing,. India 3G 100% spectrum-led! Non-SMS data revenues rarely over 5% of sales, but rising. <ul><li>2007/08 should finally bring “convergence” business models </li></ul><ul><li>iPhone + iTunes cuts out operator </li></ul><ul><li>WiFi/VOIP Google-fone by ODMs? </li></ul><ul><li>Nokia acquires YHOO? </li></ul><ul><li>Microsoft-Motorola JV/partnership? </li></ul>
10. Key Issues <ul><li>Consumer smartphones – open OS for all? </li></ul><ul><li>3G IPR – snake in the grass. Still big issue. </li></ul><ul><li>Internet Service Delivery platforms – iTunes? </li></ul><ul><li>Chipset Battles – many casualties to come </li></ul><ul><li>Attach rates for new features – GPS, WiFi? </li></ul><ul><li>OEM strategies vs tactics, pipeline problems </li></ul><ul><li>What stops operators moving to flat-rate data? </li></ul><ul><li>USB modems – inflection point? </li></ul>