Unrealistic Hopes for ParkerVision’s Cordless Phone

ParkerVision entered the cordless phone market on July 20, 2004 when it acquired the Aero2000 cordless phone from Consumerware Inc. for a little more than $1 million. CEO Jeff Parker proclaimed:

“ParkerVision is extraordinarily pleased to have acquired assets related to the cordless phone. With the integration of our D2D technology, the new cordless telephone will have an unprecedented two-mile open field range that we believe will make it the best in distance, coverage, and voice quality in typical consumer usage when compared to other cordless phones on the market today. We believe this phone, with its quality form factor and feature set, combined with the high performance of our D2D transceiver technology will provide a unique and exciting offering to consumers. We expect to be in production with the D2D-based cordless phone in the fourth quarter of this year.”

Though its D2D-based cordless phone is not yet available, ParkerVision claims it will still enter the US market, which is already dominated by high-volume producers with well-known brands, like Panasonic and GE, who have production scale that enables superior price competitiveness.

US Cordless Phone Market The size of US cordless phone market is estimated at $2.5 billion in 2005, where roughly 80% of the market is dominated by four key players: Panasonic, Uniden, GE, and VTech (marketed under VTech and AT&T). Over the past few years, the market has undergone significant consolidation: the number of companies who make cordless phones has been dramatically reduced. In terms of sales, Panasonic has a market share of 32%, followed by Uniden at 16%, GE at 13%, VTech at 10%, AT&T at 10%, Bell at 4%, and Motorola at 3%, while several other suppliers comprise the remaining 12%.

US Market is Difficult to Penetrate The US cordless phone market is and will remain difficult to penetrate. The four major players will continue to maintain their dominance over the long run. They have in fact increased the proportion of their production to cheaper locations like Asia to remain competitive, making a US made phone like ParkerVision’s too expensive sell.

European Market is Also Difficult to Penetrate The European cordless phone market is also established, with two key local players, Siemens and Philips, controlling the market, while telcos and ultra high-end players, such as Bang & Olufsen, occupy just a small portion of the market. German-based Siemens and Dutch-based Philips have already created such a high degree of brand loyalty among consumers that it would be costly and risky for anyone to enter the market. At the same time, strong protectionism of labor unions within Europe’s manufacturing sector has kept the bulk of the production within the continent.

Declining ASPs for Cordless Phones Cordless phone prices fall gradually after their launch, where the drop simply reflects the normal price trend of consumer electronics. Since their respective launches, we have seen consistent price erosion for the 2.4GHz and 5.8GHz cordless phones. According to the Consumer Electronics Association, the average selling price for cordless phones in the US was $30 in 2003, almost three times higher than corded phones. The average retail price was $80 for 2.4GHz systems and $175 for 5.8 GHz systems in 2003, down 20% and 9% Y/Y, respectively, based on Beyen International Research.

Other New Cordless Phone Competitors “The fiercely competitive cordless phone market will get even more crowded in 2005 as a new company, Comtrek Technology, announced its entry last month.” The new cordless competitor will initially target the sub $50 price point “gift market” with a series of 2.4GHz analog cordless phones with color LCD screens. CEO Giordano, a former GE executive who ran the company's entry into the telecom business, noted that Comtrek will distinguish itself from the field with the inexpensive color screen and a “high value” industrial design. The company will also bring to market a line of 5.8GHz digital phones with a 1.5-inch color LCD display. (Twice, Feb 7, 2005)

Strong Demand for VoIP Phones Gartner Dataquest predicts sales of VoIP phones to North America alone will more than double from $2 billion in 2003 to $4.2 billion by 2007. The use of IP-based telephony solutions in enterprises is climbing as well. In-Stat/MDR reported that as of 2003, IP-based solutions accounted for 50 percent of total enterprise telephone stations sold in the US. VoIP phone suppliers are also expanding their product applications to include fax machine, answering machine, and videoconferencing capabilities, while some offer web browsing, e-mail, MMS, built-in cameras, MP3 playback, and digital imaging. Low-end VoIP phones are available at $20 to $35 each, while higher-end models list at $35 to $150 each. Competitors are rushing in to offer VoIP phones. D-Link, for example, has announced plans to promote its own brand of VoIP products in the United States through a deal with AT&T, and multiple suppliers will offer cordless VoIP phones in the US and Europe in early 2005.

ParkerVision’s Unknown Performance at High Prices Consumers value performance: the performance, or quality of a call, depends on the implementation of the voice coding algorithm, the noise filtering and echo cancellation circuits, and the signal between the mobile phone and the base station. While ParkerVision claims superior performance, this remains to be seen until they actually release their product. Consumers also value price: the cordless phones is a home appliance that targets high volume consumer markets. Design and production costs are, therefore, very important. With low production volume, ParkerVision simply cannot compete with Panasonic, Uniden, and GE on design and production efficiency.

ParkerVision’s Time-to-Market is Extremely Slow With shortening product life cycles, time to market is a key driver to profitability. A six-month delay to market can wipe out a product’s profitability. ParkerVision has not yet released its version of a phone that it purchased for $1 million in July of 2004. This delay will impact sales because its competitors are already launching new, better, more advanced products, as evidenced by the Consumer Electronics Show in January 2005.

With its eventual introduction of a new cordless phone, ParkerVision will attempt to compete on price and quality against established brands from big competitors like Panasonic, Uniden, and GE. Similar to its attempts in the US WLAN market, ParkerVision will achieve the same results in the US cordless phone market: ParkerVision is a low-volume, high-cost supplier with insignificant sales competing against dominant, high-volume, low-cost competitors with well-known brands. As a result, PakerVision’s chances for success in the cordless phone market are very low.

To sum up, the main industry specific drivers aside from the positive impact of improved macro backdrop on consumer spending, are (a) shift to cordless, (b) switch from analog to digital, (c) move to higher bandwidths and (d) increased features.

We estimate that the silicon content on digital cordless phones is in the mid 40's, and that system on chip as offered by DSPG account for 20-30% of a digital cordless phone's ASP.

The Company is currently expanding its target markets with solutions for the Digital European Cordless Telephony 1.9 MHz band. As evidenced by Exhibit 1, the DECT market accounts for 21%-26% of the worldwide cordless telephony units sold, and we estimate its dollar value is in the mid to high 20's. While the overall residential telephone units sold in Europe was fairly flat in the last couple of years hovering just above the 40 million mark, DECT-based units grew by 16% and 24% in 2002 and 2003 respectively. The shift to DECT-based systems is driven by the same factors as in the industry as a whole-convenience, features and vendor promotions. The growth drivers for DECT systems are DECT systems now account for 56% of the market in 2003, according to data by the DECT Forum and DSPG's estimates.

Industry watchers expect total unit sales to remain fairly unchanged in the next few years. However, DECT units will likely increase their share of the pie and maintain a healthy growth in the mid to high teens in 2004 and grow by additional 10% per annum in the next couple of years, reaching 75-80% market share by 2006. The recent addition of 10 new members to the European Union will likely further support the increase in unit sales. DSP supplies Panasonic, GE, Uniden, Bell, and Motorola

Big Market in 2004 the mix in the worldwide telephone market is about 24.1% corded and 75.9% cordless. Approximately 47.4% of telephones are digital. The shaded boxes represent DSP Group's business opportunity. We also believe that the DECT market is bigger in Europe than in the US. In Europe, about 35 million new cordless phones are sold each year and 95% of them are digital phones, which comes out to over 33 million phones. In the US, about 60 million new cordless phones are sold each year, and only 33%, or nearly 20 million cordless phones, are digital. In addition, current players like National Semiconductor, Philips and Infineon, are becoming more focused on the handset market rather than the smaller market of cordless phones and therefore are leaving the market open for DSP Group to capture market share.

We believe that DSPG has an edge over competition thanks to its clear focus in this business segment, strong technology, fabless model / foundry independence, along with its open, modular offering that allows for closer customization to customer needs. In addition, DSPG's competitors don't seem to have as strong of a foothold with the Japanese consumer telephone and electronics manufacturers that provide most of these devices worldwide.

DSP Group provides the hearts and brains of cordless phones to leading brands like Panasonic, Sony, GE, Uniden, Motorola, and others. With a marquee customer base, DSPG commands 70% of its current US target market and 25% of the overall cordless niche.

Essentially, DSPG's family of processors provides a good deal of value to telephony product manufacturers by eliminating the need for a number of other electronic components, including a Central Processing Unit, Radio Frequency device, flash memory and other related sub-systems that might otherwise be integrated into the product. Distribution and Geographic Mix: Tomen Electronics (a division of the Tomen conglomerate of Japan) is the Company's main distribution channel, as it accounted for 78% of 2003 revenue (slightly down from 80% in 2002), serving key market players like Panasonic, Uniden, Sony, Toshiba and JVC. Accordingly, Japan accounted for 78% of revenue in 2003, with other parts of Asia accounting for 19% of the mix (up from 16% in 2002) and served by other resellers and distributors, along with direct sales teams, while the share of US and Europe in the mix shrank.

Entrenched Competitors In the digital cordless telephone market, the company's main competitors include National Semiconductor, Philips, Oki Electronic, Micro Linear and Infineon. Philips and Infineon have greater market share in Europe because of their relationship with their parent companies: Philips and Siemens, respectively. Oki focuses on lower-end solutions, while Micro Linear is a fairly small company. In other markets like in VoP, DSP Group's principal competitors include Conexant, AudioCodes (AUDC: Buy), Texas Instruments, Broadcom, Infineon and Oki Electronic; and in digital speech, competitors include Motorola and AT&T.

DSPG faces competition from a number of well-established semiconductor players. Direct competitors offer IC's that are designed specifically for integrated digital telephony. The main competition comes from Philips, Infineon, and National Semiconductors (NSM). The first two have stronger traction in Europe and they benefit from their relationship with parent companies - Philips and Siemens, respectively. However, it seems that other than DSPG, Philips is the only one with real commitment to this niche, as part of their vision for home networking. Infineon, on the other hand have stated in the past that they intend to lower their focus on this segment due to the price wars, and industry watchers also expect NSM to exit the market sometime in the future. Other players in the space include the semi division of OKI Electronics, that appears to have lower-end solutions with no clear roadmap and Micro Linear, a fairly small company that focuses on the space but did not gain traction to date as they don't have a strong feature offering.

DSP has long-term strategic co-development partnerships with its customers, which significantly reduce the risk of its investment in R&D. The company tailors its R&D efforts to the product roadmaps of its customers, virtually ensuring that it continues to be designed into future products. Key customers include Panasonic, Uniden, GE, Motorola and Bellsouth. GE has the largest market share in unit terms in the US market, with a 22% share, although it has traditionally focused on 900MHz analogue systems. It is currently planning to penetrate the digital segment, which should serve to further enhance consumer acceptance of digital phones. Panasonic is DSP’s largest OEM customer, and we believe that the company’s success with this customer positions it well to benefit from GE’s move up the value chain.

DSP markets and distributes its products through direct sales and marketing offices, as well as a network of distributors. The largest distributor is Tomen Electronics, which focuses on the Japanese market and comprised 81% of total revenues in 2002. Since DSP has co-development relationships with its key OEM customers, the role of the distributor is relatively passive. Indeed, Tomen’s largest customer is Panasonic, whose relationship with DSP Group can almost be described as strategic. The company does not grant a right of return to its customers, hence it recognises revenue on the sale of components to Tomen. DSP has a relatively high degree of visibility, since the design-cycle of a new cordless handset is roughly nine months.

New Products While the bulk of DSP revenues is still generated by 5.8Ghz and 2.4Ghz phone chips, the company’s future prospects hinge on the success of new, leading edge communications products. As demonstrated by the 5 awards won at CES this year by phones using DSP chips, we believe DSP will be able to meet this challenge in FY05 and beyond. Following is an update on DSP’s product pipeline:

Video-Bluetooth for U.S. Market: The product, which will also provide cellular connectivity remains on track to launch in 2Q05. VoIP Cordless Phones: These products have already been demonstrated and will start shipping in the US and EU in 1H05. The phone base translated VoIP and then transmits using EDCT (US) or DECT (EU). VoIP Video: Scheduled for sales in 2HO5, these products are an upgrade to VoIP cordless, providing the addition of video communication and transmission over WiFi. We believe demand for this product could build relatively quickly as wireline carriers ramp up their fight to remain competitive with cable and wireless carriers. We note that the video IP product is largely based on technology that is emerging from DSP’s acquisition of Bermai, whose WiFi expertise appears to be playing a key role in DSP’s long-term strategic view. We are very encouraged by the rapidity with which the acquisition is leading to new product development, a we believe that at this stage DSP has all the technological puzzle pieces to continue rolling out new products for the foreseeable future.

Parker Uses High Cost Manufacturing DSP Group is a fabless semiconductor maker and sources its wafer manufacturing, testing and packaging needs from foundry partners to better leverage its design expertise and development capabilities. The company sources its wafers and RF devices from TSMC and IBM. Then, ASE and TSMC test these products according to DSP Group's own detailed testing procedures and specifications for each product. Finally, ASE and Siliconware Precision Industries (SPIL: Not Rated) provide die packaging services. The contracts with TSMC are negotiated once a year at the end of each year.

Customers DSP Group sells products to major consumer OEMs and telecom operators that incorporate its IC products through distributors and representatives. The company has direct sales offices in California, Israel, Tokyo and France, while sales representatives are based in China, Hong Kong, India, South Korea, Taiwan, Denmark, Germany, Sweden and the UK. DSP Group’s largest distributor is Tomen Electronics, accounting for 79%, 81%, and 72% in 2003, 2002 and 2001, respectively, of the company’s total sales. Tomen Electronics is a Japanese distributor of foreign-made semiconductors, which was founded in 1972. Tomen distributes DSP’s products to consumer electronic manufacturers such as Panasonic, Sony, and Uniden.

Shift to VOIP Phones VoIP is a process in which voice data can be transmitted over networks using the Internet Protocol (IP). This process includes dividing the signals into numerous small data packets, transmitting these packets over a network and reassembling in the correct order at the destination. It can also be used to implement the speech component of video conferencing applications. VoIP is presently restricted to a minimal niche market. As of the end of last year, only about 100,000 people were making their phone calls over the Internet. But, according to Yankee group, the number should balloon to about 10 million by the end of 2007, as more people are enticed by calling costs that can be 30% cheaper than normal local and longdistance rates.

DSP Group is the leading DSP chip supplier for the cordless phone industry with over 75% market share in the US; 2) with its entrance into the European DECT market, the company is poised for strong revenue growth in 2005 as it captures market share from Philips, Infineon and National Semiconductor in the $200M market; 3) future products in VoIP and Bluetooth could provide exciting growth opportunities in the H2:05 and 2006 time period;

DSP Group is the market share leader in the Integrated Digital Telephony (IDT) market. The company has been able to leverage its strong technology to become the market share leader in the cordless phone business. Its voice and data convergence capabilities are nicely matched with handset OEMs’ increasing needs for cordless telephony migration. As a result, it holds a favorable position in extending its cordless phone footprint into several leading OEMs like Panasonic, Uniden, Motorola, General Electric and CCT Telecom. In 2003, the company had approximately 75% market share.

DSP Group products include Integrated Digital Telephony (IDT) speech processors, Voiceover- Broadband networks and Internet Protocol (IP) technology products, and a variety of advanced voice and data transmission solutions. Customers are primarily system OEM, ASIC and ASSP providers, who incorporate these products into consumer products for the residential wireless telecommunication market worldwide. Customers include Panasonic, General Electric, Sony, Uniden and CCT Telecom. The company's focus on the design of highly integrated mixed-signal devices, its capability to predict market trend and fast adoption to market needs make it a leading supplier of chipsets to short range multimedia communication market.

Telephone equipment manufacturers use its chipsets in consumer products for the residential wireless telecommunication market. Its product families target five segments of the wireless residential communication market: 1) Digital cordless telephony, 2) Multimedia access, 3) Analog telephony, 4) Voice-over-Packet (VoP) market, and 5) the Digital voice recorder market. The company currently concentrates on digital cordless telephony. Growth drivers. We believe that there are three end market growth drivers that will drive DSP Group revenues in 2005. First, the created demand for higher-frequency handsets, moving from 900 MHz to 2.4 GHz, and now to 5.8 GHz in North America and ROW; second, the shift to DECT-based system in Europe; and third, the demand for video phone and Bluetooth driven by household wireless connection and networking.

Digital Signal Processors are basically microprocessors that are designed to perform intensive computations typically required in multimedia applications. Compared to regular processors, Digital Signal Processors can perform complex signal processing computations more effectively in terms of higher speed, higher quality and lower cost transmissions. They were developed in the 1980s specifically to meet the needs of digital signal processing (DSP), the processing of signals through digital instead of analog methods, which is integral to the development of communication technology over the past couple of decades. DSPs play two key roles in wireless handsets. One is called speech coding, which is a computationally intensive task and must be done in “real-time” to maintain an interactive, natural-feeling call. The other is called “channel coding”, performing noise filtering, modulation, encryption, and equalization.