Import ban on 3G handsets could hurt industry

A ban on all importation of future 3G handset models using Qualcomm technology could have a big impact on cell phone operators and handset manufacturers.

An import ban on all new models of 3G wireless handsets that use chipsets from Qualcomm could cause a huge headache for several cell phone makers and mobile operators if the matter is not resolved soon.

The U.S. International Trade Commission ordered a ban Thursday on the import of all future models of phones using 3G technology from Qualcomm that have been found to infringe on a patent held by Broadcom.

In what appears to be an effort to minimize damage to the cell phone industry, the ITC applied the ban only to new models of phones that have not yet been sold in the United States. The import ban does not apply to cell phone models imported for sale to the general public on or before Thursday--the date of the order.

Qualcomm CEO Paul Jacobs said on a conference call with analysts after the decision had been released that he was "extremely disappointed" with the commission's decision.

"We believe the commission has overstepped its bounds," he said. "They grandfathered in existing models, but the ban excludes future models. And this does nothing to protect the public interest and public safety."

Qualcomm executives said there would be little impact on the company financially in the near term. But analysts agree that in the long term, a ban on the import of future cell phone models that use this technology could have a substantial impact not just on Qualcomm, but on cell phone manufacturers such as Motorola and Samasung as well as mobile operators AT&T, Sprint Nextel and Verizon Wireless.

"It's a huge issue for both handset makers and carriers," said Charles Golvin, an analyst with Forrester Research. "Carriers are counting on selling these new 3G handsets to drive greater data usage. Not being able to sell new phones will be hugely problematic to their growth, especially at a time when everyone is trying to come out with something new to compete against the iPhone."

Qualcomm is the dominant semiconductor manufacturer for two next-generation technologies--EV-DO and WCDMA--that are being used today by three of the four major U.S. operators to build their next generation of high-speed wireless networks. Verizon Wireless and Sprint Nextel use EV-DO technology. And AT&T is building its 3G network using WCDMA technology.

Last year, an ITC judge ruled that Qualcomm's chips infringed on a Broadcom patent that would help cell phones conserve power when they are looking for a signal from one of these next-generation networks.

Under the ban, cell phone manufacturers and mobile operators will not be allowed to import any future models of phones that use this technology. The ban could be particularly tough for all the major cell phone operators, which during the past several years have spent billions of dollars deploying their 3G networks. Now that they have extended wireless broadband to a large portion of their footprint, these carriers need subscribers to upgrade their handsets to new 3G versions. It's only through these new 3G-enabled devices that subscribers will be able to spend money on new data services, such as over-the-air music downloads or video services.

"It's really going to freeze innovation, or it could."
--Nancy Stark,
Verizon Wireless spokeswoman

Verizon Wireless and Sprint could be hit particularly hard because these companies are eager to find new handsets to compete against the upcoming Apple iPhone, which is scheduled to be released on AT&T's network at the end of the month. The iPhone itself won't be impacted by the import ban because it uses AT&T's slower 2.5G network. But competitors looking for devices that could compete with the iPhone will likely tout 3G speeds as an important differentiator to the iPhone. But if Verizon and Sprint can't get their hands on new phone models it could be difficult to compete.

Verizon Wireless spokeswoman Nancy Stark blasted the ITC's decision. "It's a bad order for the industry and for the millions and millions of wireless consumers who depend on wireless communications," she said. "It's really going to freeze innovation, or it could."

The ban could also be devastating to handset makers, especially Motorola, which recently announced a slew of new phones that it has designed specifically for 3G networks. While it's still unclear what the ITC will define as a "new model," it could be argued that Motorola's new versions of the Razr and Moto Q, which are all 3G-capable in their latest incarnations, could be impacted. These phones are all expected to go on sale in the United States later this year.

But Motorola maintains that it has already been working on ways to ensure that the ITC decision would not impact its business.

"The ITC decision does not impact our currently shipping handsets," Jennifer Erickson, a spokeswoman for Motorola, said in an e-mail. "Further, we want to emphasize that we do not anticipate any supply problems for our CDMA EV-DO-enabled handsets during the second quarter. As we have said previously, this is a dispute between Broadcom and Qualcomm. We expect both companies to act in the best interests of their customers and the industry to resolve this matter as quickly as possible."

The import ban could also affect other phone manufacturers, such as Samsung and LG, which also rely on Qualcomm chips in many of their 3G handsets.

Still, Samsung spokesman Kim Titus said his company isn't concerned about its ability to sell future models of phones.

"All of our current phones will not be affected, and we've been working actively with our suppliers and customers to ensure we will have a continued, uninterrupted supply of future mobile phone models," he said.

Qualcomm believes it's unlikely that the ban will actually go into effect. Lou Lupin, Qualcomm's general counsel, said the company plans to petition President Bush to veto the order. At the same time, Qualcomm is seeking to get a stay to the enforcement of the ban from the Federal Court of Appeals, which hears cases regarding patent cases.

Under federal law, the president has 60 days to review the deal based on a recommendation from the U.S. Trade Representative. Before reaching their decisions, both the ITC and the White House are supposed to consider whether their actions are in the public interest. But if history is any indicator, the likelihood of the White House overturning the order may not be very high.

"It is correct that it has rarely been the case that the White House grants a veto," Lupin said. "Having said that, there has rarely been a case like this one where the rights of third parties were denied due process and the decision has had such a detrimental impact on public safety and consumers."

Of the more than 600 investigations instituted by the ITC since 1974, only five have resulted in exclusion orders that were rejected by the White House, said Bryan Schwartz, a partner in the intellectual property section of the law firm Benesch, Friedlander, Coplan & Aronoff in Cleveland. The last time that happened was in 1986, added Schwartz, who has represented clients in a number of ITC proceedings.

Verizon's Stark said her company is also planning to file for an immediate stay of the ITC's decision with a federal appeals court and to lobby for a presidential veto of the order. She said she wasn't sure whether Verizon would be filing the documents solo or with other wireless carriers.

She added that the order is unfair because wireless companies and manufacturers weren't able to be a party to the liability portion of the proceedings, and they were never accused of patent infringement themselves or found to have infringed.

"It violates our principles of due process and fairness by punishing us when we haven't been accused of anything or found to infringe," she said.

She declined to discuss the ruling's potential impact on Verizon's future product roll-outs or sales, saying only, "this isn't final for 60 days...we're confident that we have a very strong case for appeal."

Sanjay Jha, chief operating officer for Qualcomm and president of Qualcomm CDMA Technologies, said it was crucial that the ban not go into effect at all, especially with the holiday shopping season coming up in a few months.

"All the carriers set out plans to launch large number of phone models later this year," he said. "And they're keen to make sure their plans for growth for second half is not impacted or impeded. The best way to ensure that is for all of us to implore the president to veto this order."

But even if the legal efforts fail, Forrester's Golvin said it's very likely that mobile operators and handset makers will be able to exert enough pressure on Qualcomm and Broadcom to reach some kind of agreement.

"I find it very hard to imagine that Qualcomm and Broadcom wouldn't reach some kind of settlement very soon," he said. "I'm sure all the cell phone operators and handset manufacturers that have come to rely on Qualcomm technology will put a significant amount of pressure on them to resolve this. There's just too much at stake for them not to."

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