Qualcomms Adventure Story>
Qualcomm's big adventure
Setting an 'invisible' wireless standard
By Simon Walsh, CBS Marketwatch
Last Update: 4:01 PM ET Jun 25, 1999
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WASHINGTON (CBS.MW) -- Talk about building shareholder value.
On June 14 -- the day Qualcomm Inc. (QCOM: news, msgs) President and
Chief Operating Officer Richard Sulpizio began a week of schmoozing with
European fund managers -- his company's shares were already up more
than 250 percent on the year. The former Unisys Corp. program manager
spent the next four days pounding the table for Qualcomm's cutting-edge
wireless technology, CDMA.
It appears to have worked: By Friday Qualcomm shares were up more than
350 percent.
"The whole world is recognizing that CDMA is the answer for
third-generation systems," Sulpizio told CBS.MarketWatch.com. "The
question is not if you go with CDMA, it's when you go with CDMA."
Storybook Year
For Qualcomm, it was just another chapter in a storybook year. In March
the maker of wireless chips and handsets settled a long-running dispute
when rival Ericsson (ERICY: news, msgs) -- in a stunning turnaround --
agreed to support the same CDMA standard as Qualcomm. That was a big
deal. CDMA -- or Code Division Multiple Access -- is expected to power
the next generation of wireless devices. It uses the radio spectrum more
efficiently by wedging fat streams of date in the empty spaces between
conversations. Those data streams can carry everything from email to huge
files from the server back at the office.
The settlement left Qualcomm in possession of the key CDMA patents.
Now, every company that uses CDMA in wireless chips or handsets has to
pay Qualcomm a royalty. The potential windfall is staggering, if you assume
CDMA will be the standard for "third generation" wireless. And many
analysts do.
"What you have, essentially, is a company that is
acting as the tollbooth to the wireless highway," says
Mark Roberts, an analyst with Everen Securities.
A Better Mousetrap?
CDMA's strength is its ability to pack more voice
and data into the radio spectrum. Traditional cellular
phones assign a unique frequency to each
conversation, even if you don't need the whole thing.
CDMA is different. It cuts each conversation or
chunk of data into digital packets and assigns an ID
number to each group of packets. The packets are
spread across a wide swath of the broadcast
spectrum, then reassembled on the receiver end,
using the ID number as a sort of decoder ring. It's
like being at a cocktail party. There are lots of
conversations going on at once, but you can still
focus in on what the person next to you is saying.
The codes let CDMA receivers grab groups of
packets with more precision. That reduces static and
improves the clarity of telephone conversations. And using the spectrum
more efficiently lets carriers transfer huge amounts of data at the same
time.
That could mean big changes in the way people do business. Instead of
hunting for phone jacks at the airport, business travelers could just plug their
mobile phones into the laptop to transfer files and send email – at rates of
up to 384 kilobits per second, more than ten times the speed of the typical
28.8 modem.
Standards & Backbones
Of course, this isn't going to happen overnight. By some estimates we
won't get to the 384 kbs level until 2001. And CDMA is used by only about
25 million people today. The most popular technology, called GSM, is used
by a whopping 162 million subscribers, mostly in Europe. Getting those
people to switch to CDMA will be no mean feat. As a result, some people
think the focus on CDMA is misguided – at least for now.
"These battles over technical standards are ridiculous," says Keith Shank,
director of strategic marketing at Ericsson Inc., a unit of Sweden's LM
Ericsson.
Shank says the Internet backbone is the most important thing. His group is
working on technology that operates at the network level – the space
between the handsets, if you will -- and "translates" calls from one standard
to the next. Shank says hardware advances like that make standards a lot
less important.
"Our job is to make the standards invisible to the end user." he says.
In a strange twist of fate, Shank is working with a lot of ex-Qualcommers.
Under the March agreement, Qualcomm agreed to sell its CDMA
infrastructure group to Ericsson. Now roughly 1,300 network engineers
formerly employed by Qualcomm work in Shank's group -- laboring,
ironically, to make CDMA invisible.
Target practice
For investors considering Qualcomm, though, the question is: How high can
it go? After all, the stock has already more than tripled so far this year.
Isn't all the good news already factored into the price?
Many analysts say no.
"I was negative on Qualcomm for nearly two and a half years, until the
settlement," says Raj Srikanth, an analyst with FAC\Equities. "Not any
more."
Srikanth believes the stock has a lot of room to grow. But he's reluctant to
set targets.
"Every time I set these targets, they blow right through them," he says.
Qualcomm's strength is based in part on its multiple revenues stream, all of
them robust. At Deutsche Banc Alex. Brown analyst Brian Modoff expects
CDMA royalties alone will earn Qualcomm about $1.50 a share in 1999.
That works out to about $112.50 in share value -- at a multiple of 75 time
earnings. And that's before you even look at Qualcomm's other businesses:
A CDMA chip-making operation that controls more than 90 percent of the
market; a maker of mobile handsets; and truck-monitoring service called
OmniTRACS.
"Clearly we see upside," Modoff says.
For Qualcomm, two big events loom on the horizon. The first comes in July,
when the company reports third-quarter earnings. Then, in October, the
International Telecommunications Union will consider endorsing CDMA as
the standard for 3G, or "third generation" wireless. Most analysts expect
that endorsement, possibly as early as November. If it happens,
Qualcomm's royalty income could swell even more.
Meanwhile, Sulpizio says Qualcomm will keep doing what it does best:
Dreaming up new technologies it can patent and license to others. His goal
is to build Qualcomm into a major telecom player by pushing CDMA into
every conceivable nook and cranny where it would make things better,
faster or smarter -- from communications chips embedded in laptops to
product-monitoring gauges on store shelves. "The market is getting big," he
says, "and the future is bright."
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