Nokia Looking for CDMA-Phone Deal With Verizon - TheStreet

Third time's a charm -- or so

Nokia

(NOK) - Get Report

hopes.

The world's largest mobile-phone company is close to finalizing a large-scale contract to sell mobile phones to

Verizon

(VZ) - Get Report

, despite two previous failed attempts at a deal. The companies are still in negotiations, according to a person familiar with the situation, but may announce the deal as soon as next week.

Watching closely to see if the deal goes through will be mobile-phone chipset maker

Qualcomm

(QCOM) - Get Report

. As the leading producer of chips for mobile phones using CDMA (code division multiple access) technology, it's going to hope that Nokia again fails to get a toehold in its primary market.

So far, Nokia hasn't been able to manufacture a mobile phone that is compatible with the CDMA technology, which is used by Verizon, the country's largest wireless carrier in terms of subscribers. The bulk of Nokia's phones operate with the GSM (global system for mobile communications) standard, which is used by 74% of cellular users. But Nokia CEO Jorma Ollila said on a conference call earlier this week about CDMA, "We want to be a dominant and key player in this space."

Currently, only about 15% of mobile-phone users -- or 67 million worldwide -- rely on CDMA technology. But it's a growing standard, and Qualcomm is trying to gain a presence in China, a fast-growing market, for the technology.

If Nokia can complete the deal with Verizon, it would give the company a chance to show that it can produce CDMA gear. And once in that sector, Nokia would offer Verizon and other CDMA-based operators, such as

Sprint PCS

(PCS)

, a choice of manufacturers.

Until perhaps now, Qualcomm has had a corner on the market in developing the chipsets necessary for mobile phones operating on CDMA networks. Nokia has refused to purchase CDMA chipsets from Qualcomm, preferring instead to develop them in-house. Thus far, Nokia hasn't been successful in doing so, which was why its two previous attempts at deals with Verizon fell through.

If, however, Nokia has finally nailed the technology, Qualcomm is certain to feel the pressure. "If Nokia wins in CDMA, Qualcomm loses," says

Chase H&Q

analyst Ed Snyder. "It's a teeter-totter."

Qualcomm still will receive royalties on its CDMA licenses, but the sale of CDMA chipsets is expected to account for about 45% of the company's total revenue in 2001. If Nokia, which owns about 30% of the mobile-phone market, is successful in manufacturing CDMA technology, it threatens 10% to 20% of Qualcomm's revenue -- totaling hundreds of millions of dollars, Snyder says. This is because Nokia will be able to take market share away from Korean mobile-phone manufacturers, such as

Samsung

, which dominate CDMA handset sales and rely entirely on Qualcomm's chipsets.

It's unlikely that Nokia will sell its chipsets directly to Samsung and other competitors, but it will be able to take business away from them and, in doing so, from Qualcomm. Qualcomm officials didn't return calls for comment. (Chase rates Nokia and Qualcomm strong buy and buy, respectively, and hasn't performed underwriting for either company.)

Ollila called Nokia's CDMA market share "more than meaningful" but said it hasn't reached its target yet. "It's a good story

how operators feel about the product, as well as how end consumers are receiving it and demanding it," he added.

It will take some time, and of course a deal in hand, to see if a Verizon contract would give Nokia a serious foothold in the CDMA arena, according to

Bear Stearns

analyst Wojtek Uzdelewicz. Verizon has started to sell Nokia's CDMA products, which are called tri-mode phones because they can be used on analog, digital and PCS frequencies, even though details of the contract are still being discussed.

"It's hard to say what people will think or how they'll sell at this level of reception," he says, noting that the contract is for about 1 million units. A fuller assessment of its success will take weeks to determine. Nokia is selling its phones to Verizon at a discount of at least 18% to what tri-mode CDMA handsets usually cost, he says, adding that Nokia probably isn't making money off the deal. (Bear Stearns rates Nokia accumulate and hasn't been an underwriter for the company.)