Qualcomm gets a little China win

By Scott Moritz

Qualcomm (QCOM) got a piece of the action as China’s phone industry shake-up opens the gate for 3G wireless suppliers.

After four years of preparation, China’s government finalized plans this weekend to restructure the country’s telecommunications industry by combining six phone companies into three major carriers: China Mobile (CHL), China Telecom (CHA) and China Netcom (CN). The move was made to create stronger competition for China Mobile, which dominates the market with some 400 million users.

Suppliers, including Alcatel Lucent (ALU), Nortel (NT), Ericsson (ERIC), Nokia Siemens, Motorola (MOT) and Qualcomm, have been eager to see how the telco deck got reshuffled, especially as it related to wireless network upgrades. Not exactly a surprise, China Mobile was given the green light to go with China’s home-brewed technology TD-SCDMA. No.2 China Telecom will license CDMA2000 and China Netcom got the WCDMA license.

Qualcomm gets about 4% in licensing fees from patents it licenses in CDMA2000 and WCDMA, and approximately 0 from TD-SCDMA, say analysts. The company also collects royalties from all CDMA2000 and WCDMA phone sales.

Qualcomm is likely to benefit from a conversion of a third of China Telecom’s subscribers to basic CDMA, about 58 million users, says JPMorgan analyst Ehud Gelblum in a research note Tuesday. The San Diego wireless standard-bearer will also collect royalties from all 3G WCDMA phones sold by China Netcom.

With China’s 3G plans in place, Qualcomm now looks ahead to July and a Delaware court date where the company expects to hear whether its arbitration plan with Nokia (NOK) over license fees gets accepted. Nokia, the No.1 phone maker, has been contesting Qualcomm’s right to license some of its wireless technology patents and the amount of the fees it charges. Analysts say if the court sides with Qualcomm, the company would reap a major financial award in the form of a new license agreement as well as back pay from Nokia.

If the court sides with Nokia, Qualcomm’s licensing revenue would suffer as lower rates awarded by the court to Nokia would also have to be extended to all its other wireless customers.

The new Chinese telco trio certainly removes one element of uncertainty hanging over Qualcomm, but the tranquility will be brief as the Nokia battle heads to court.