The average royalty rate that Qualcomm (
) charges mobile handset vendors has declined gradually over the
past years, as the average selling price of CDMA mobile phones
continues to fall. We expect a larger base of mobile phones
will contribute to the declining trend in royalty rates, though at
a slower pace. Moreover, handset manufacturers like Nokia (
) and Reliance, which are dominant players in emerging markets, are
becoming weary of Qualcomm's high royalty rates. This could cause
them to shift to newer technologies offered by competitors Texas
), Broadcom (
) and Infineon (N/A:IFNNY).
While we expect Qualcomm's royalty rate will decline slowly to
2.5% by the end of Trefis forecast period, Trefis members predict a
slightly higher level of 3%. This corresponds to an upside of 6% to
our price estimate for QCOM stock.
We currently have a
Trefis price estimate of $51.71 for Qualcomm's
, about 1% below the current market price of $52.34.
High Royalty Rates Could Persuade Mobile Makers to Shift
From 2005 to 2008, Nokia and Qualcomm were in a fight over
higher royalty rates charged by Qualcomm. Though the negotiated
figure is unknown, many industry watchers speculated that the
royalty rate was close to 2%. This is much lower than the average
royalty rates enjoyed by Qualcomm.This precedent could lead to
other mobile phone vendors renegotiating royalty rates with
Another example is that of India's Reliance which has lodged
complaints in the past against Qualcomm's high royalty rates. If
players like Reliance decide to shift to competing technologies
like GSM, this could have a severe impact on Qualcomm's royalty
Emerging Markets Key to Qualcomm
Developed markets like U.S. and Europe are close to saturation
in terms of mobile subscriber penetration. With huge population and
growing GDP, emerging markets like China, India and Latin America
are expected to see maximum growth in CDMA subscribers. The average
selling price of mobile phones is lower in the emerging countries,
which means Qualcomm earns lower royalty revenue per phone.
However, volume gains from these markets should more than offset
any declines in developed markets like the U.S. Hence we expect
Qualcomm will continue to keep its royalty rates lower in order to
retain its key customers, particularly in emerging markets.
Trefis Community Forecast
The Trefis community expects Qualcomm's royalty rate for CDMA
mobile phones will decrease from 3.4% in 2011 to 3% by the end of
the Trefis forecast period, compared to the baseline Trefis
estimate of a decrease from 3.1% to 2.5% during the same period.
The member estimates imply an upside of 6% to the Trefis price
estimate for Qualcomm's stock.
complete analysis for Qualcomm's stock is here
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