Forbes Digital on QCOM (via Q* thread)
07.01.99
By David Einstein
or years, Irwin Jacobs, cofounder and chief executive of
Qualcomm (nasdaq: QCOM), has been telling people that his
company's technology represents the future for wireless
communications. Well the future's almost here, and it looks like
Jacobs may be right.
Wall Street certainly thinks so. In the past three months, Qualcomm
shares have tripled in value, turning the San Diego maker of
communications chips and cellular phones into one of the hottest
companies in the technology sector. The stock has been on a roll
recently, closing up $6.50 yesterday to hit a 52-week high of
$143.50.
This recent surge in stock price is due to a deal the company made in
March with Swedish telecom equipment giant Ericsson (nasdaq:
ERICY). Under the deal's terms, Ericsson will support Qualcom's CDMA
technology as the standard for third-generation, high-speed wireless
networks. Ericsson had championed GSM--a rival technology that is
the current standard in Europe. But GSM has not been as successful
in the U.S., and in the end Ericsson decided it had to embrace CDMA
to expand its business in the fast-growing U.S. market.
"The agreement with Ericsson places the
lion's share of the international property in
Qualcomm's hands."
As part of the deal, the companies settled a patent infringement suit
Ericsson had lodged against Qualcomm in 1996. In addition, Ericsson
agreed to buy Qualcomm's money-losing wireless infrastructure
business (estimates of the sale range from $120 million to $500
million).
The March agreement spelled relief for the entire wireless industry,
whose main players had grown tired of waiting for a standard to
emerge. It was especially beneficial for Qualcomm, promising to
further strengthen the company's position as the leading seller of
chipsets for CDMA-based cellular phones. To date, Qualcomm has
shipped more than 40 million chipsets and owns about 90% of the
market.
A standards battle victory also means fatter fees from licenses and
royalties for Qualcomm, which currently account for 7% of the
company's revenues. "In terms of licensing, they're very well
positioned," says analyst Pete Peterson of Volpe, Brown Whelan in
San Francisco. "It looks as if the agreement with Ericsson places the
lion's share of the international property in Qualcomm's hands."
Devices equipped with third-generation CDMA technology will be able
to access information over wireless connections far faster than is
possible today. A laptop computer could be used for video
conferencing, for instance, while a smart phone could be used to surf
the Net.
Moreover, equipment built with CDMA is expected to work over
systems using GSM and TDMA, a third technology that is popular in
the U.S. That type of compatibility should hasten the time when a
person will be able to use the same cell phone anywhere in the world.
Next page...
continued from "Qualcomm's stock soars as industry embraces
its technology"
DMA has risen above the crowd because it offers several
advantages over other formats. Developed for military purposes
in World War II, it is resistant to eavesdropping, making calls
more secure. It also allows a large number of users to share the
same radio frequency, increasing the capacity of a system and
lowering the cost of operating it.
Jacobs, an MIT-trained engineer who cofounded Qualcomm in 1985,
said the company began testing CDMA in 1989. In 1990 Nynex, which
has since been acquired by Bell Atlantic (nyse: BEL), and Ameritech
announced plans to use it, and, in 1991, Motorola (nyse: MOT),
AT&T (nyse: T) and Nokia (nyse: NOK) said they would incorporate
Qualcomm's technology into some of their products. In 1996, nine of
the 12 largest U.S. cellular carriers moved to CDMA, and the
technology today is used in some 30 countries.
Meanwhile, GSM grew to dominate Europe in the 1990s, and
companies like Ericsson strove to push the technology on the U.S.,
creating a ready-made market for its GSM-based products. Of
course, GSM companies weren't too keen on the idea of a different
standard being imposed on Europe, which would force them to alter
their equipment. With Ericsson taking the lead, the GSM group
fiercely fought Qualcomm's attempts to evangelize CDMA
internationally.
Qualcomm has had a difficult time getting
Wall Street on its side, despite an enviable
growth record.
"I've always been convinced that our technology would be positive
for the industry, but getting the industry to accept it has been an
ongoing battle," says the 65-year-old Jacobs.
Qualcomm also has had a difficult time getting Wall Street on its side,
despite an enviable growth record. Revenues have increased from
$387 million in 1995 to $3.3 billion last year, while profits are up from
$30 million to $108 million. Nevertheless, investors always seemed to
treat Qualcomm like a company whose time had not yet come. In
eight years as a public company, it had never traded above $40 a
share until March.
Analysts say that Qualcomm's challenge now is to sustain its
newfound momentum. And to do that, it must find a way to improve
its position in the multibillion dollar U.S. market for cellular phones.
Finland's Nokia accounted for 40% of the nearly 30 million phones
sold in the U.S. last year, followed by Ericsson with 21%, Motorola
with 12% and Qualcomm with 8%.
Nokia and Ericsson both have grabbed market share with affordable
phones for the masses. Qualcomm, meanwhile, has garnered a
reputation for innovative handsets incorporating new-fangled
features. For instance, it recently introduced a smart phone that
incorporates technology from Palm Computing. Users can track
appointments and exchange E-mail in addition to making phone calls.
If Qualcomm can successfully attack the low end of the market, it
could turn its brand into a household word. If not, it may end up
being known mostly as the company whose name is on San Diego's
stadium.
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