CDMA Upgrade Is a Matter of When, Not If

Compared to the GPRS standard, the upgrade is a simple matter that could double voice traffic.
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Qualcomm (QCOM) - Get Report can handle some pushing.

Dates have been swirling for the anticipated rollout of several 2.5G networks based on Qualcomm's 1X CDMA standard for the past two weeks. It looks as if many of the networks that optimists thought might upgrade to the standard in late 2001 won't do it for another quarter or two.

Delayed networks mean fewer CDMA chipsets sold for equipment and handsets until the networks get upgraded. But onlookers insist that timing is the only question mark surrounding the step up to 1X technology, compared to the business-model and service-uptake doubts plaguing the launch of general packet radio service, or GPRS. With 1X technology, carriers can handle twice the load of mobile-phone calls, providing an immediate boost once the equipment is in place and working.

On the road to third-generation wireless technology, two newer types of networks that dominate worldwide infrastructure offer an intermediate step of enhanced performance. One of them, CDMA technology, is predominantly popular in the U.S., Asia and Latin America. For CDMA network operators the 1X, or more specifically 1xRTT technology, offers the chance to double the amount of voice calls while also offering better data capability.

The other standard, global system for mobile communications, or GSM, networks deployed in Europe, Asia and more recently in the U.S., can be upgraded to the widely eyed GPRS technology. GPRS allows for efficient handling of data services such as short-messaging and email. But experts say 1X is a guaranteed hit, while GPRS will take months to prove its worth to a jittery market.

"The only benefit for GPRS is if customers use wireless data services, which remains to be seen," says Peter Friedland of W.R. Hambrecht. Friedland compares that to 1X technology, with which "in addition to voice capacity, you get higher data rates. To a degree the data the network picks up is gravy, and voice is the main driver."

Last week

Sprint PCS

(PCS)

management confirmed that it will take until June 2002 to turn up a nationwide 1X upgrade. Meanwhile a week earlier Japanese operator

KDDI

, blaming handset and network problems, admitted it would delay its Japanese rollout by six months until March of 2002. SG Cowen analyst Scott Searle said this put one to two pennies of earnings per share at risk for Qualcomm in the upcoming two quarters. But with the promise of doubling voice traffic -- the cash crop of wireless carriers right here, right now -- there's little chance CDMA network operators will forgo the technology.

According to Yankee Group analyst Roger Entner,

Verizon

(VZ) - Get Report

already upgraded New York to 1X, which he says is a fairly easy process, and left out the data capability for now. "This is a slight oversimplification, but for CDMA it's very easy, like changing a video card in your computer. They're putting in an extra interface card."

GPRS is not considered a massive upgrade to GSM, but in the U.S. at least, many of the companies such as

AT&T Wireless

(AWE)

have to revamp their older TDMA networks just to get to GSM. Not so with CDMA. Entner adds that Sprint PCS should roll out its technology in three geographies -- the East, West and Midwest -- using its selected vendors. A delay from one vendor in one part of the network wouldn't necessarily preclude a June launch of the other two areas.

Keep in mind Qualcomm thrives in the more stable wireless markets of the moment, avoiding sluggish Western Europe. Searle admits in a note to clients that despite any slip in a Japanese rollout, "other markets such as Latin America with 1X launches scheduled by year-end in combination with the recent increase in U.S. handset sales could likely offset this shortfall." Which makes any 1X delays a minor setback, rather than a calamity. Carriers may spend extra time bring the network up to 2.5G, but they're not changing plans. With twice the voice-calling potential, Qualcomm doesn't have to resort to the hard sell.