September 15, 1999 8:05 PM PDT

Qualcomm looks to shed handset business as profits fall

Increasing competition and falling profit margins have forced Qualcomm to consider selling its handset business, suggesting the wireless industry is facing the same pricing pressures as the personal computer market.

One of the nation's largest cellular phone equipment companies announced yesterday it is seeking "strategic options" for its mobile phone business, including selling that portion of its consumer products division. Qualcomm said increased competition, a shortage of phone parts, and industry consolidation have contributed to shrinking profit margins for mobile phone sales.

The rapidly falling per-phone profits and heightened consumer expectations of lower costs closely resemble conditions in the PC industry, in which such low-cost manufacturers as EMachines have rapidly made market share gains by undercutting traditional leaders. In another similarity, the cellular phone market is increasingly dividing into two camps--low-cost manufacturers and higher quality, feature-laden phone makers, industry analysts say.

Qualcomm has long operated in the higher end of the market. But many consumers--conditioned by inexpensive PCs, free ISPs, and other low-cost technology products--want cheap phones.

"It's very much a high-volume business and that's partially why we're facing these problems," said Qualcomm spokesman Christine Trimble. "We're facing increasing competition."

"They needed to sell the handset business because they're too small," said Ed Snyder, an equity analyst with Hambrecht & Quist. "They don't have the scale to develop enough new models on a regular basis to keep their line fresh."

Snyder said other smaller players in the industry, such as Sony, Audiovox, Lucent Technologies, and Philips Electronics, got out of the business or have scaled back production significantly for similar reasons. "Qualcomm was the next up on that list," he said.

Qualcomm makes only about 10 million mobile phones per year, compared with roughly 50 million for some larger vendors, according to analysts. Accordingly, the company cannot keep its costs in line with larger handset makers such as Nokia, Ericsson, and Korean vendors including Samsung, Hyundai, and Hitachi.

"There's a lot of competition coming in from South Korea and East Asian nations which is driving costs down," said Kelly Quinn, a wireless industry analyst at Strategy Analytics.

The lower labor costs of Qualcomm's competitors also have put the company in a squeeze.

"They don't have the same economies of scale," said Bryan Prohm, a wireless industry analyst at Dataquest. "Qualcomm tends to be one of the highest-priced handsets. Qualcomm has not been able to address that that well."

Qualcomm's decision to explore its options is intended to focus the company on more profitable businesses such as selling chipsets for its code division multiple access (CDMA) mobile phone technology, which reaps rewards through licensing arrangements. The company makes money by selling mobile phone chips to other phone makers and by licensing its CDMA technology to other chipmakers.

Qualcomm's strategy of selling chips and software for mobile phones "could go the route of Intel inside the PC," Prohm said, referring to the semiconductor giant's well-known marketing campaign. "I think they're saying, 'We make what makes your technology work.'"

Qualcomm already has sold its wireless infrastructure business to Ericsson, and if the company sells its handset business, the move could pay large dividends, analysts said.

"Margins are definitely shrinking. They can command the best price for [the handset unit] right now," Prohm said.

Qualcomm is likely to jettison its handset business by December, Snyder said.

 

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