The Transformation of Qualcomm
By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER
December 24, 2000
To hear some Qualcomm executives talk, there was no grand design in the
way the wireless technology company transformed itself at the end of the
millennium.
Yet the metamorphosis Qualcomm began last year is fundamentally altering
how the San Diego company does business. It has pruned some of its biggest
operations and spun off others into publicly traded companies.
Instead of making things like chips, phones, base stations and other
equipment, Qualcomm has refocused on the underlying technology that made
it all possible -- pushing its use in wireless gadgets, networks and markets.
Much of the effort has targeted China, with its vast, undeveloped market that
offers the biggest prize of all.
The changes in Qualcomm' s corporate organizational charts might make for
an interesting case study at the Harvard School of Business.
But to the investors and employees who rode a rocket as Qualcomm shares
gained 2,619 percent in 1999 -- and then fell almost 70 percent this July --
the changes might seem perplexing.
Such head-scratching may be understandable, since Qualcomm' s top
executives sound at times as if their decisions came about by happenstance.
"Qualcomm is not a company where we do strategic planning in a classic
sense," says Tony Thornley, a longtime telecom executive who joined
Qualcomm in 1994 as chief financial officer. "Instead we focus on the right
opportunities and on making them happen."
Yet even if Qualcomm' s transformation just sort of happened, the changes
were made for good reasons, says Paul Jacobs, an executive vice president of
the company and son of Qualcomm founder Irwin Jacobs. He is in line to take
over as president of Qualcomm in 2001.
Those reasons have a lot to do with the future of wireless communications --
or at least the future that Jacobs and other top executives intend to create for
Qualcomm. And like Thornley, Jacobs sees Qualcomm as a company that
can move fast to stay ahead of the competition.
For example, when Qualcomm was added to Standard and Poor' s list of the
nation' s 500 biggest companies on July 12, 1999, the company completed a
secondary stock offering on July 21 -- just nine days later. Proceeds from the
stock sale generated more than $1 billion for the company.
"The bankers basically said they had not seen a company be able to move
that quickly before," Jacobs says. "And a similar thing works on the technical
side."
Such agility has proved necessary to survive against the colossal players who
dominate the shifting and fragmented markets that make up the global wireless
telecommunications industry. Qualcomm says about 74 million people use its
technology -- out of a global wireless market estimated at 700 million.
Just how well the new Qualcomm will fare, however, has been obscured by
the industry' s pronounced downturn in 2000 and by the stop-and-go nature
of Qualcomm' s efforts in China.
Earlier this month, the Chinese Ministry of Information Industry said it would
support the deployment of a nationwide network based on the wireless
standard pioneered by Qualcomm. But some analysts remain skeptical, saying
they' ll believe it when they see it.
"I' m generally positive," says Mark McKechnie, a San Francisco-based
analyst who follows Qualcomm for Banc of America Securities. Yet,
McKechnie adds: "A lot is going to come out in the next year or so in terms of
how well they' ve positioned themselves."
To make a profit
How has the company re-positioned itself?
Qualcomm set out in the early 1990s to make communications chips, base
stations, handsets and other wireless equipment based on its proprietary
CDMA technology, known as Code Division Multiple Access.
"We got into each of those businesses with the mindset of promulgating
CDMA into the world -- and to make a profit," says Steven Altman, an
executive vice president who oversees Qualcomm' s technology licensing.
A relative newcomer, Qualcomm moved to penetrate a global market already
dominated by two rival wireless standards, Time Division Multiple Access, or
TDMA, and Europe' s global system for mobile communications, or GSM.
To get CDMA established at a time when rival standards already were in
widespread use, Qualcomm decided to make all the equipment a wireless
carrier might need in order to offer CDMA service to its customers.
"Our infrastructure business was losing money from day one," Thornley
recalls. "That was expected for a while, but several years into it we
recognized that the developing markets . . . weren' t happening quickly."
Qualcomm had more success in its wireless phone manufacturing business.
But within years, competition began to intensify, and the price of wireless
handsets began falling rapidly. Meanwhile, CDMA technology was slowly
making inroads in Korea, the United States and other markets.
"As our technology thrived and the market grew, it was no longer necessary
for Qualcomm to operate those businesses," Altman says.
So Qualcomm began unloading some of its businesses, beginning in 1998 with
its spin off of Leap Wireless International, which offers wireless service using
CDMA technology.
The next move, which was Qualcomm' s most decisive, came in early 1999
when the company struck an agreement with Swedish rival Ericsson. The deal
ended a dispute over wireless patent rights, which secured the future of
CDMA technology and enabled Qualcomm to sell its ailing infrastructure
manufacturing business to Ericsson.
A year ago, Qualcomm announced its exit from the digital phone
manufacturing business by selling its handset unit to Kyocera of Japan.
And this summer, Qualcomm announced plans to spin off its communications
chip-making business through an initial public stock offering. That decision
was perhaps the most surprising, because Qualcomm' s chip-making business
remains highly profitable. (The IPO planned for the new company, known for
the time being as "Spinco," was delayed until early next year due to stock
market volatility.)
A logical decision
As surprising as it seemed, the decision to spin off the chip-making business
was logical to Qualcomm executives. Jacobs says the chip business was
increasingly running afoul of the company' s burgeoning licensing business.
Qualcomm, which holds hundreds of CDMA patents, is positioned much like
a tollbooth at the entrance to the next-generation superhighway of wireless
services. A company moving to next-generation wireless technologies --
which rely largely on CDMA patents -- must pay Qualcomm a toll in the form
of technology licensing and royalty fees.
Qualcomm won' t say exactly how much it collects in royalties, but insists it
gets paid regardless of the type of CDMA technology used. Analysts estimate
that Qualcomm takes between 2.5 and 5 percent of every CDMA phone
sold.
In fiscal 2000, the company reported $705.5 million in licensing and royalty
revenue, accounting for more than 25 percent of Qualcomm' s $2.8 billion in
annual revenue. In the previous fiscal year, Qualcomm' s licensing and royalty
revenue was almost $454.2 million, or 18.5 percent of total revenues of $2.5
billion.
As the wireless industry expanded and evolved, analysts say CDMA became
the preferred technology for next-generation wireless services such as
downloading stock quotes, e-mail messages and other Internet-based data.
To promote the spread of next-generation CDMA devices, however, it
became necessary to make the gadgets compatible with TDMA and GSM
technologies so CDMA devices could be used, for example, on a GSM
network.
As a result, Qualcomm' s chip business began developing so-called
multi-mode chips that adjust to different network technologies.
But multi-mode chips require cross-licensing agreements with GSM and
TDMA patent holders. As Jacobs put it: "Our licensing group didn' t want to
compromise our royalty stream from CDMA in order to get licenses from
GSM. So there were natural stresses there."
By separating its chip-making business from its licensing business, Qualcomm
avoids those conflicts, Jacobs says.
Focused on CDMA
Executives say it would be a mistake to view Qualcomm solely as an
intellectual property manager, relying on revenues from its own patents.
As it has in the past, Qualcomm remains focused on promoting CDMA
technology, especially in the form of wireless applications for high-speed data,
video games and digital movies, among other things.
In a quest for applications, the company has been revisiting various methods
of communications, asking what kinds of needs businesses and consumers
have that could be served by high-data-rate wireless technologies.
Thornley notes, for example, that the company could use its Omnitracs unit to
enter markets, such as the medical instrument industry, where Qualcomm
could provide wireless techniques for patient monitors and other devices.
Thornley also acknowledges that Qualcomm has about $2.5 billion available
for investing in new companies and new technologies. And remember, this is a
company that can move fast to seize opportunities.
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