A 4G Standards War Is Brewing

Verizon Wireless is considering switching its technology allegiance. That would be bad news for Qualcomm, LG, and Alcatel-Lucent

In global wireless communications, decisions over which technology runs a cellular network can change history and make or break multibillion-dollar companies. That's what happened in the 1990s, when mobile operators upgraded their networks from analog to digital. The precursors of today's Verizon Wireless and Sprint Nextel (S) chose a cutting-edge technology called CDMA (short for code division multiple access) from then-startup Qualcomm (QCOM), assuring the San Diego company a central role in the mobile sphere for years to come.

Now, the industry faces a similar fork in the road as operators prepare to migrate their networks to so-called fourth-generation mobile technology that boasts faster download speeds and lower costs. Again, Qualcomm is at the center of the action, with an approach it calls Ultra Mobile Broadband, or UMB, that will make it easy to access multimedia applications from a variety of portable devices.

But Qualcomm's longtime European rivals—which developed the competing Global System for Mobile (GSM) communications standard now used by about 80% of the world's subscribers—have a 4G technology of their own: Long Term Evolution, or LTE, proffers similar specs to Qualcomm's UMB but, not surprisingly, is more compatible with GSM-type networks. Also in the mix: A cabal of tech companies that includes Intel (INTC), Cisco Systems (CSCO), and Samsung (SSNGY) is throwing its weight behind yet another technology, known as mobile WiMAX, akin to Wi-Fi on steroids.

Verizon Wireless Weighs a Change

The stakes are high for the industry's transition to 4G technology. And as with all such shifts, there's hardly a more opportune moment for companies to defect from previous suppliers and make big bets on alternatives that could deliver an advantage. That's what Sprint Nextel did when it stepped off the CDMA train and committed to spending $5 billion on a WiMAX network (BusinessWeek.com, 9/3/07) it hopes will reach 100 million Americans by the end of 2008.

Now longtime Qualcomm loyalist Verizon Wireless, the No. 2 U.S. mobile operator, is mulling a switch. It's considering LTE, backed by the likes of Ericsson (ERIC) and Nokia (NOK), and has joined a group looking at the evolution of the GSM standards path. To be sure, Verizon Wireless is also looking at mobile WiMAX, UMB, and other alternatives. "We are testing a lot of technologies," says Verizon Wireless spokeswoman Nancy Stark. "We have not yet made a decision." Still, reports of the company's consideration of LTE sent shock waves across the industry.

Analysts say a move by Verizon Wireless to LTE or WiMAX could prove a major setback for the CDMA family of products, a $43 billion market for handsets and infrastructure dominated by players including Qualcomm, Alcatel-Lucent (ALU), LG Electronics (LGEJY), Samsung, and Nortel Networks (NT). Qualcomm and LG are among the most exposed to the CDMA market in terms of revenue and profit, but Alcatel-Lucent could suffer the most. Some $2.4 billion in Alcatel-Lucent revenue from CDMA gear would be wiped away, says Richard Windsor, a wireless analyst in London at Nomura Securities, a division of Nomura Holdings.

UMB: Already a Distant Third?

Verizon Wireless' potential switch illustrates just how much the telecom industry could change as a result of choices being made now about 4G wireless technology. With so many questions swirling around CDMA's future, analysts are focusing less on UMB and more on LTE vs. WiMAX. Sprint Nextel's decision to use WiMAX and Verizon Wireless' interest in LTE "greatly weaken support for the CDMA road map and shift the focus of technological competition onto LTE and WiMAX," says Dave Tanner, a senior analyst at tech consultancy Analysys.

ABI Research notes that AT&T (T) has said it will go with LTE and Deutsche Telekom's (DT) T-Mobile is expected to adopt LTE as well, while newer service providers are rolling out WiMAX. So where does UMB fit? "It doesn't," ABI Research analyst Phil Solis wrote in a recent blog. Even if the CDMA family comes to an end, analysts predict Qualcomm will be able to keep raking in royalties because it purchased a company called Flarion Technologies, which gives it patents in every 4G camp. Still, its grip on mobile-phone chips is likely to be loosened.

Which path Verizon Wireless will take is anyone's guess, but it's undoubtedly influenced by Vodafone Group (VOD), its co-parent with Verizon Communications (VZ) and one of the world's biggest GSM providers. Solis of ABI Research says Verizon Wireless has another big incentive for making the switch: CDMA only has about 20% of the global market, and UMB isn't expected to fare much better. A move to LTE would make Verizon Wireless compatible with the majority of mobile operators around the world, including Vodafone, in a market where scale is crucial. Solis says LTE is the likely choice for Verizon Wireless.

WiMAX Has Significant Advantages

As alluring as it may be, LTE faces important commercial challenges. It's still not clear whether the technology can meet its targets for network performance on time and at the right price, experts say. And by the time LTE becomes available in 2009-10 it is likely to be surpassed by the latest terrestrial technologies.

What's more, early versions of mobile WiMAX are already a commercial reality. Some industry players, such as Korea's Samsung, argue that WiMAX is so good LTE may never be necessary. Mobile WiMAX potentially can move data at a speed of 70 megabits per second across 40 miles, though the average speed is probably closer to 30 megabits. WiMAX also promises to be cheaper to implement than conventional 3G mobile technology because it uses newer, more efficient technology. More important, because it's based on Internet protocols, WiMAX lets carriers offer a single data service, similar to wireless DSL, that can carry any kind of traffic, from voice calls to Web surfing to video. That's a significant advantage over the separate voice and data services now provided by mobile operators.

And it fits right into the strategies of IP gearmakers such as Cisco, which sealed its entry into the WiMAX arena earlier this month when it announced a proposed $330 million acquisition of Navini Networks, a WiMAX equipment maker and holder of key WiMAX patents. Cisco had said in 2004 it wouldn't be a WiMAX player. The about-face is seen as a testament to the technology's growing importance.

Gaining Traction Around the Globe

WiMAX earned another significant victory earlier this month when the International Telecommunication Union's radio assembly, an arm of the U.N., agreed to include it as part of what is called the third-generation family of mobile standards. The endorsement opens the way for many of the ITU's member countries to devote a part of the public radio spectrum to WiMAX, helping to connect the receivers that are starting to be embedded in laptop computers, phones, music players, and other portable devices.

Intel, the world's largest computer chipmaker, is planning to integrate the technology into laptops by 2008. Samsung already has unveiled several new WiMAX devices, and Nokia and Motorola (MOT) have said they expect to start selling mobile devices using WiMAX technology in 2008.

WiMAX is also taking hold in parts of the developing world. The technology is being adopted rapidly by operators in high-growth markets such as Brazil, China, India, and Russia. Indeed, some 410 operators around the world have deployed WiMAX services, according to TeleGeography, a Washington (D.C.) consultancy. About 75 of those offer mobile WiMAX; the balance offer fixed WiMAX.

Clearwire (CLWR), a high-profile venture started in 2003 by wireless pioneer Craig McCaw, has teamed with Sprint to share the risk of providing WiMAX in the U.S. It also has launched services in Europe and hinted at plans to expand into Asia and Latin America.

A Race That's Far From Over

As popular as it's becoming, WiMAX isn't a slam dunk. Sweden's Ericsson, the world's No. 1 telecom-equipment maker, has said that unlike most other manufacturers, it will not make WiMAX gear. Ericsson argues that WiMAX is not optimized for voice calls on the move. That's not the technology's only challenge. WiMAX will have to compete with ever-improving fixed broadband technologies. And those who back it will have to figure out how to achieve profitability in developing markets.

What's more, the flavor of mobile WiMAX being introduced now is not a true 4G service, but rather something halfway between 3G and 4G, says Tanner of Analysys. The 4G version of WiMAX won't hit the market for another few years, about the same time as LTE. And within the industry a debate is raging over which of the three competing 4G standards is the fastest, most efficient, and most cost-effective.

Still, with Intel seeding WiMAX startups around the world and embedding WiMAX chips in its laptops, phone operators that have sunk billions of dollars into 3G licenses clearly are concerned that WiMAX could have a major impact. At a trade fair earlier this year Vodafone CEO Arun Sarin called on the industry as a whole to step up the pace of development for LTE, to combat a faster-than-anticipated take-up of WiMAX. "LTE is still at the standards stage, while WiMAX is commercial reality," Sarin said in February.

If Verizon Wireless throws its considerable weight behind LTE, Sarin might get his wish.