Qualcomm Inc.'s agreement to sell its mobile phone technology to China United Telecommunications Corp. sent Qualcomm shares up 7% on Tuesday on hopes that its cellular technology will become a major player in the quickly expanding Chinese market.
The agreement announced late Monday will allow China Unicom, as the company is known, to buy Qualcomm's communications chips and begin deploying the San Diego-based company's code division multiple access (CDMA) technology in China's wireless network.
The deal boosts Qualcomm's chances of seizing a foothold in the Chinese market, which could hit $10 billion in cellular phone sales this year, according to some estimates. It also boosted Qualcomm's shares Tuesday, by $9.06, to $136.06. More than 35 million shares exchanged hands in Nasdaq trading.
The agreement was a step forward in Qualcomm's effort to challenge the dominance of another cellular standard, known as Global System for Mobiles, or GSM, now the most widely used in the world.
The Chinese cellular market is expected to grow 63% this year, to 70 million users by year's end, from 43 million in December. So far, China's wireless network, which now uses the GSM standard, penetrates only about 3% of the country.
"Because regular phone service is so bad in China, mobile phones are just booming there," said Edward Snyder, an analyst of wireless equipment companies for Chase H & Q. "The Chinese market is a huge market, and they've just started to build out the network."
Qualcomm will license its CDMA technology to China Unicom; the typical royalties fees on such deals are about 5%, Snyder said.
Qualcomm has maintained that with so little of the Chinese wireless network now built, there is plenty of time for CDMA, which is the dominant standard in the United States, Japan and Korea, to become a force in China. The company said China Unicom's plan is to have about 10 million CDMA subscribers by the end of the year.
China Unicom is the second-largest state-owned telecom company in China, behind China Telecom. China Unicom has about 4 million mobile-phone subscribers but seeks to boost its capacity to 60 million in the next five years.
The company hopes to complete the first phase of its CDMA network, which would handle 2.6 million customers, by the middle of this year.
The deal gave a much needed boost to Qualcomm's stock, which has tumbled about 20% since the beginning of the year. While the company reported sharply higher fiscal first-quarter earnings in January, it has warned that it may ship fewer chips and phones in its second quarter ending March 31.
Despite the announcements this week, Snyder cautioned that it could take years to realize the benefits of the China agreement because so much of the country's network must be built. He added that the value of Qualcomm stock has reached stratospheric levels and it could be difficult for the company to maintain its rate of growth.
"Qualcomm will be fine and make plenty of money," Snyder said. But he added, "The problem is that their stock price is so outrageous. It's based on the idea that CDMA will take over the world."
Snyder said that with GSM already being used by more than half of all cell phones in the world, Qualcomm faces an uphill battle to win acceptance for CDMA.
Qualcomm shares also got a boost by its announcement Tuesday that it is asking federal regulators to set aside a wireless license for the company in an upcoming radio frequency auction so it can provide Net services in the Southeast.
A U.S. appeals court last July found that the company is entitled to a radio spectrum to offer digital wireless phone service, ending a seven-year legal battle. Qualcomm has been in discussions with the Federal Communications Commission for several months and is now formally proposing it be granted a 20 megahertz license serving the southeastern U.S.
The license is one of 12 to be auctioned this spring and can be used for high-speed Internet, phone and other advanced communications services. Qualcomm said in its FCC filing that it would use the license to provide high-speed Internet service to wireless phones.