>>why bother to make the equipment at all? If their technology is so valued that >>other manufacturers are willing to pay royalties, why bother manufacturing at all? >>Why not just sit back and collect the royalties, thereby increasing margins all the >>more?
Perhaps the answer is that QCOM is going for the gold. That is, to be a great growth company. It takes more than a few million dollars in royalties to pull that off. Perhaps the same management crew that could face off against the entire communications establishment, consisting of all of Europe, AT&T, the Wall Street Journal and numerous academics, and come up smelling like roses, can put it all together.
While most investors probably are comfortable with QCOM manufacturing infrastructure equipment, which is intense, relatively small volume and non-consumer in nature. More controversial is the risk associated with building factories to make handsets. But clearly QCOM is attracted to the very big bucks in handset sales, wanting to participate directly in that coming bonanza, too. It seems brilliant to me that QCOM teamed with Sony, a first-rate Consumer Electronics manufacturer, to get off the ground quickly, efficiently and with the highest quality. On second thought, it may not be so much brilliance as simply an indicator of the negotiating power QCOM derives from its CDMA franchise, especially since QCOM has the 51% ownership.
I am intrigued by the extent of synergy that can be achieved by a company that can design and manufacturer all aspects of a dominant wireless system to which it is the gate-keeper. One of the most important aspects of their hegemony will turn out to be client and server software and custom engineered devices for specialized data systems. For example, if you think deeply about OmniTracs, it clearly becomes a model, with or without GPS, of a multitude of private/public data networks. Eudora Email is also a model. The recently announced Unwired Planet deal is illustrative of a major statement of direction consistent with this notion. As PCS goes national, literally thousands of such data systems will spring into existence. QCOM is perfectly situated to be a primary developer/manufacturer/licensee/endorser of these systems. As PCS goes international even without Globalstar, the number and value of such systems multiply. Finally, with Globalstar, the systems have total reach virtually anywhere on the globe, not just CDMA-covered cities with roaming agreements. (For anyone following Wind River Systems, WIND, it should be obvious how these systems benefit that company as well, especially since WIND already has a strategic relationship with QCOM, Hughes Network Systems, NorTel, etc.)
With the CDMA franchise, QCOM has the latitude to be merely adequate and yet succeed wonderfully for stockholders. But what if QCOM has more than adequate talent working its wonders on the world? If so, then you are watching one of the great growth companies of the next century develop right before your eyes.
Allen |
