Business Week: December 6, 1999
by: nbfm (45/M/san diego)
11/24/1999 11:00 pm EST
Msg: 63068 of 63074
Business Week: December 6, 1999
Information Technology: Telecommunications
Qualcomm: From Wireless to Phoneless
Can the company keep wowing Wall Street by selling research?
Irwin M. Jacobs is used to bucking conventional wisdom. A decade ago, the chairman and CEO of Qualcomm Inc. was
pushing a wireless telephone technology that he thought would be more efficient than anything else on the market. But some
of the most powerful companies in the wireless world, including Sweden's Ericsson, claimed that Qualcomm's technology
would never work. Jacobs ultimately proved the critics wrong. He won the support of manufacturers such as Motorola Inc.
and wireless phone companies like Sprint Corp. The San Diego company grew into a $4 billion powerhouse in the mobile
telecom industry.
Now, Jacobs is going his own way again. Qualcomm is getting out of the manufacturing businesses that it worked so hard to
build in order to focus on research and development. The company sold off its wireless network division earlier this year and
expects to announce a buyer for its cellular-telephone business by the end of the year. In short order, Qualcomm-branded
cellular phones will disappear from store shelves. About the only place the company's name will remain on public display is
Qualcomm Stadium in San Diego, home of the Padres and Chargers. ''Qualcomm has always been based on technical
innovation,'' says Jacobs. ''We'll let others deal with wrapping plastic around chips.''
Instead, Jacobs, a former engineering professor at Massachusetts Institute of Technology, wants Qualcomm to be the
wireless industry's best research lab. Already, the company has a slew of patents on things like how the sound of a voice is
carried on radio waves to a cellular phone. Now, he wants to develop the next generation of wireless technology for
everything from tapping the Internet to transmitting fat chunks of data. Qualcomm also will continue designing the computer
chips that run mobile phones. One big potential hit is a new wireless technology, dubbed ''high data rate,'' or HDR, that's
capable of zapping video from the Net over radio waves. ''We're way ahead'' of the competition, says Jacobs.
His strategy has Qualcomm's stock zooming ahead, too. Its shares have soared nearly fourteenfold this year, the best return
of any company in the Standard & Poor's 500 Index.
Here's why the bulls are stampeding. They believe that Qualcomm is set to become the Intel or Microsoft of the wireless
world, a company whose hold on key technologies will deliver an endless jackpot. Today, only about 15% of the 257 million
wireless phones worldwide use Qualcomm's key technology. But as the mobile market moves to Third Generation
technologies that can transmit data at extremely high speeds, Qualcomm will take on a more prominent role. Analysts
estimate that by 2005, more than half of the 1 billion cellular phones will use Qualcomm's technology. That could yield
hundreds of millions of dollars in royalties annually. ''They've got the core technology for the next millennium,'' says analyst
Tim Luke of Lehman Brothers.
CRITICAL MASS? Yet Qualcomm's proponents may be missing something. Although the wireless phones coming out early
next century will use Qualcomm's basic technology, it's not clear how rich its royalty stream will be. Wireless technology is
evolving so quickly that it will be difficult for any company to keep a tight grip on intellectual-property rights. European rivals
such as Ericsson and Nokia are designing mobile phones and wireless networks that bypass many of Qualcomm's patents.
''More than 100 companies in addition to Qualcomm have Third Generation wireless patents,'' says Arja Suomenin,
vice-president of Nokia Networks in Helsinki. ''[Qualcomm does not] have more or less [patent rights] than others.''
And there may be an even bigger problem. Just as Jacobs is whittling down Qualcomm, size is becoming increasingly
important in the wireless world. The Big Three--Motorola, Nokia, and Ericsson--are gaining market share across their
businesses. That's because they have tremendous resources to pour into everything from research and development to
marketing. Qualcomm may be in a vulnerable spot if it has to rely on other companies to go out and sell its goods. ''It's not a
done-do success story,'' says Bob Egan, a research director at market researcher Gartner Group.
Consider the business of making chips for wireless phones. Qualcomm, which designs chips and outsources the
manufacturing, now has some 90% of the market for chips using its technology, code-division multiple access (CDMA). As
Motorola, Ericsson, Intel, and others pile into the CDMA arena, Qualcomm's share could slide to 50% by 2003, Merrill
Lynch & Co. reckons. ''Qualcomm has fundamental knowledge of CDMA, but it's going to have to run real hard to keep
up,'' says Dwight M. Decker, chief executive of Conexant Systems Inc., a rival telecom chipmaker in Newport Beach, Calif.
Jacobs doesn't plan on just keeping up. By getting out of the manufacturing businesses, he figures Qualcomm will have
enough resources to lead the pack in the development of wireless technologies. Consider this: With both the manufacturing
divisions gone, operating margins will rise markedly. Merrill Lynch estimates they will jump from 7.6% in 1998 to 32.4% in
2000. Even revenues won't be hit that hard by the move, thanks to strong growth in chip design and licensing. Merrill
reckons revenues will fall only 7% in 2000, to $3.67 billion
Qualcomm already is pouring money into what it figures are the wireless technologies of the future. Early this month, the
company demonstrated HDR. While engineers tooled around northern San Diego in a white Ford Econoline van, they used
HDR to pull up a TV-quality clip of Kevin Costner's For Love of the Game on a PC sitting in the back of the van. The
streaming video is possible because Qualcomm is transmitting data over radio waves at astonishing speeds: more than 30
times faster than today's traditional modems. ''Nobody else has achieved such speeds in a mobile environment,'' says Craig
Ellingsworth, an analyst at Boston's Yankee Group Research Inc. who attended the demo.
TAKING ON BROADBAND. Wall Street was impressed. Qualcomm's HDR demo helped push its stock up nearly 60%
this month alone. It sends data so fast that Qualcomm promotes it as a way for cellular operators to open a new avenue of
competition against cable and phone companies' broadband offerings. Analysts agree that HDR's speed will leave the
wireless-data solutions being developed by European competitors in the dust.
In the end, Qualcomm's new structure may result in even more dramatic change. Several analysts think that Jacobs has made
the company more appealing as an acquisition candidate by selling the low-margin manufacturing operations. ''It's beginning
to look more like an engineering lab with lots of intellectual property that somebody is going to want to own,'' says Gartner
Group's Egan. That somebody could be Motorola, Nokia, or even Intel, which is now getting into the business of making
telecom chips. Jacobs is showing once again that blazing his own trail can be very lucrative for him and his shareholders.
By Steven V. Brull in San Diego, with William Echikson in Brussels
Copyright 1999 The McGraw-Hill Companies, Inc. All rights reserved. Any use is subject to (1) terms and conditions of this
service and (2) rules stated under ''Read This First'' in the ''About Business Week'' area.
11/24/99 5:14 PM |
