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November 17, 2000

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Subject:  Re: TMF Rule Maker View on 3G
Author:  psuasskicker

[The following is a response to our Rule Maker Report on 11/16/00]

It's certainly an interesting take on things...Stunt a Gorilla's emergence by cutting it's power off at the knees. Qualcomm can't be a Gorilla in 3G if the infrastructure for 3G doesn't roll out to make 3G available.

Where are Verizon and Sprint on that list of SP's running out of money? I didn't notice. I'm betting not very bad off. PCS did what, $10 billion in fund raising? Rumor I've heard is Verizon's planning the same kind of offering which could net them $10 - $15 billion as well.

I have heard estimates that it will cost billions of dollars to build out these new networks.
$20 - $25 billion isn't enough?

And where's Globalstar's stake in all this? Not that it'd be cheap to build out a satellite system, but I do believe it'll happen.

Generally, I have a hard time believing no one will cough up whatever money's needed for this to roll out. Looks to me like we've got a few billion ready to roll already, with a few more billion on the way. But can we really expect no one to roll this out due to "lack of money"?

I have also heard that these same SPs will go to companies like Nokia and Ericsson (Nasdaq: ERICY) and ask to borrow the money to build the new networks. Nokia for its part has said that it would not do that.
Later that reading...
Nokia will be hurt when 2003 rolls around but since some 75% of its business is in handsets, it will not be hurt as badly as, say, Ericsson which has 80% of its business in networks.
This was really the only part of the article I didn't like. So, Ericsson's major business interest is in seeing that these systems are rolled out, but they're not gonna assist anyone in rolling them out? Peter, please go into that a bit further as I don't understand it well.

It is understandable that Nokia has a vested interest in these systems not rolling out. They will be hurt by 3G's rollout. They'll be financially better off than they were before, but I don't think they'll be as powerful in 3G as they are in 2G. Wouldn't that make it in their best interests to squeeze every dime out of 2G that it can get? Plus, if it solidifies its position in 2G, builds a great brand with its customers for years, then 3G rolls, will it not be better off that 3G rolled out later?

The answers to both questions are "yes", if you couldn't tell.

Qualcomm ... because Wall Street is factoring in the royalty stream from expected 3G sales into the stock price.
He's right, here, you know... Fact of life. While I think Qualcomm is undervalued based on what will be its future revenue stream when 3G rolls out, a large reason Qualcomm's price is as high as it is isn't because of the benefits it will reap from 2G. It's looking forward at 3G's arrival that gives it their inflated price. Qualcomm's PE is back over 100, and it's not cause of the massive growth projections of CDMA in 2G.

What it can do to dampen any delayed rollout in 3G is continue putting massive pressure on the industry to begin the switch to CDMA right now. We're starting to hear that the competing technologies are fading out, but as I'm recalling, this is due more to their inability to be ready by the time 3G is supposed to roll out. Correct me if I'm wrong on that one. But the last thing we'd want is a 3G delay to breathe new life into these technologies.

Not that I'm particularly worried about that. There's no question in my mind that CDMA will be the dominant standard in 3G mostly due to its superiority in what kind of speeds and clarity it can offer...the high switching costs are just the bonus to make sure nothing else sneaks up out of the blue to hit it over the head.
I am in Nokia for the long haul -- not two years, not five years, but a minimum of ten years. I hope to put my kids through college just from a percentage of my shares of Nokia.
This I do question just a little bit. Now granted, I have no idea how much Peter has invested in Nokia right now, so it's certainly possible that this could be his kids' college money in ten years. Not that I like talking about money much, but I have a significant stake of my portfolio in Qualcomm. This is a company with approximately a $60 billion market cap, and in ten years I'd say a ten bagger would be awfully gracious. It's certainly possible. In ten years, $600 billion market caps ... while probably not exactly common ... should at least be expected. With companies having $400 billion market caps today, at 3% yearly inflation, we'd be looking at $540 billion market caps if none of those companies' prices went up (save 3% yearly for inflation coverage) and no one surpassed them. This is to say nothing of the fact that we've seen at least three companies tip off the $500 billion market cap mark at some point in the past 18 months, changing that number to $670 billion.

For the record, I don't believe those companies' prices will only appreciate 3% yearly for the next ten years.

And I also don't believe no one will pass them.

Ask me what I think the ten largest market caps will be in the next ten years. Well, don't ask really, but, while I can't tell you without a bit of research (...alright, a good bit of research...) what I'd guess, I would put JDS Uniphase way up that list, and Qualcomm would be around the middle somewhere. I'd say a ten bagger is entirely possible in ten years.

Especially when Spinco splits out. I likely reinvest that money into Qualcomm at that point. But that's a side note. What happens then is, Qualcomm's market cap falls and only gives it that much more room to grow. No, I'm not an idiot and know its revenue/earnings fall as well, but I still feel Qualcomm will be once of the largest market caps in the world in ten years, thus adding to its room to grow.

I don't know that I'd say that's the case with Nokia.

This is a company with what's already nearly a $200 billion market cap. I happen not to believe that Nokia will be on that list, and may not be anywhere near it. Does this mean I'm bashing Nokia's ability to be a great market performer? Not in the least! But here are the facts:

  • The top market cap companies in the world today are the Gorillas of markets that show overwhelming consumer interest and growth.
  • Qualcomm is becoming a Gorilla of one such market.
  • Nokia is not, and likely never will be, a Gorilla.

    I don't see Nokia as having as great a long term return as Qualcomm. I believe they could have an incredible short term run, and perhaps a nice run-up when 3G hits. But I don't believe they're anywhere near a ten bagger in ten years. I don't believe we'll be seeing many, if any (my guess is none) $2 trillion dollar companies in ten years...or perhaps before my kids go through college. Considering they're yet unborn and I hope to keep it that way for another five years at least, that's about 23 years.

    Interesting article to say the least. I think it brings an interesting perspective on the whole perspective we were looking at before. What it indicates to me is:

  • SPs aren't very profitable, never will be, and therefor don't make good investments.
  • Short term value chains could be drastically effected if the money isn't a) already there, or b) raised to see that these systems are rolled out on time.

    I think it will be. I think 3G will roll by 2003, cause while the SPs are hurting and can't afford to spend much more right now, there are too many companies who have great interests in seeing this roll on time.

    And let's not discount consumer interest in all this here. It's not like we're rolling a technology that no one cares about. We're rolling a technology people are excited over! Consumers will demand it. Someone will be there to provide it. If that someone breaks in, others will have no choice to cough up the money to break in as well. Once it starts, it can't stop. Well, let's not say "can't". But it never has least that I've seen.

    As an interesting little side-bar for my last point of interest:
    It's amazing to me the the phone companies could be so good at silent price collusion for long distance rates for so long, yet so inept at keeping the bidding war for 3G at reasonable price levels...

    Hope this helps...


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