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Qualcomm hopes for profit lift after 5G wifi – Financial Times

Qualcomm hopes for profit lift after 5G wifi – Financial Times

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The next generation of high-speed mobile networks, known as 5G, should give a lift to Qualcomm’s modem business as it tries to fend off the $130bn hostile bid from rival chipmaker Broadcom, according to Wall Street analysts.

However, some questioned how big the 5G bounce would be, or whether it would arrive soon enough to save Qualcomm from succumbing to the largest-ever technology takeover.

The first technical foundations for 5G were laid last week, when an industry-wide group known as 3GPP approved standards that govern the way devices will connect to the new networks. 5G is designed to bring more capacity to mobile networks and support new applications such as the “internet of things”, which rely on machine-to-machine communications and an explosion in the number of sensors collecting data.

Qualcomm has been scrambling to convince Wall Street that the longer-term potential of this next generation of networks is not reflected in its share price.

The first phase of 5G was put on an accelerated timetable earlier this year, reflecting the pressure on mobile carriers to make up for a shortage of capacity. The technology exploits higher frequency parts of the radio spectrum that are not currently used for wireless communications. The shorter wavelengths in these higher bands do not travel far or easily penetrate physical barriers, adding to the technical complexity and playing to Qualcomm’s strengths.

The standard should see it win back a strong market lead for the modems that connect smartphones to mobile networks, according to analysts. Qualcomm had a dominant position in the first phase of the current 4G wireless technology, though it has recently lost ground to rivals including Samsung and MediaTek.

“It’s looking with the move to 5G that they will remain the dominant modem supplier, particularly in the mid and high-end market,” said Romit Shah, an analyst at Nomura.

The 5G bounce should bring a revival of Wall Street confidence in Qualcomm, echoing the rebound in the company’s share price as 4G took hold, said Mike Walkley, an analyst at Canaccord Genuity. At the start of this decade investors had worried about the company’s “huge R&D spending”, but those fears dissipated as mobile operators started investing in 4G, he said.

The new technology standards should also boost Qualcomm’s licensing business, which relies on charging royalties on all devices that connect to 5G networks. The company will “own one of the strongest patent portfolios for 5G”, said Dimitris Mavrakis, research director at ABI Research. That should help particularly in the early stages of 5G, when the technology depends heavily on earlier generations of wireless communications where Qualcomm was a key inventor, he said. However, some analyst have warned that it was too early to judge the overall impact.

Much of the investment in 5G will be in areas where Qualcomm has a weaker technology position than it has in the air interface. These include the infrastructure needed to handle the huge volumes of data on the new networks, and technologies to manage the more difficult parts of the radio spectrum where 5G operates. “The real winners will be Broadcom and Intel,” said Mr Shah, limiting the benefit to Qualcomm.

Qualcomm also faces pressure over its licensing arrangements. It has said that it plans to maintain its existing pricing when it comes to royalties for 5G devices, charging up to 3.25 per cent of a handset’s price. However, Broadcom’s bid has put pressure on it to settle a protracted legal battle with Apple, something that analysts expect would lead to deep cuts in its revenues from the iPhone maker and could affect deals with other large manufacturers.

Timing may also be against Qualcomm. The first commercial 5G networks are expected to go into operation in the second half of 2019, with demand picking up towards the middle of the next decade

“It’s still a bit early,” said Mr Walkley. If Broadcom’s bid succeeds, it will have completed a takeover by the time Qualcomm’s business starts to register the lift from 5G, he said. “Broadcom’s timing couldn’t be better.”

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