The ex-professor's high wireless act
Despite a sell-off, Qualcomm keeps its grip
By William J. Holstein
Irwin Jacobs, founder and chief executive of Qualcomm, used to be amused by all the things people said about his
company's gravity-defying stock price. He would even hand visitors a newspaper cartoon in which a man in his 60s
shows off a brand-new baby son. "Frankly, I think the Qualcomm had as much to do with it as the Viagra," the
presumptive shareholder says in the caption.
But like a lot of other high-tech CEOs, Jacobs is a bit on the defensive these days. Wall Street's recent tech sell-off
knocked Qualcomm's stock price down by about a third?from $150 at the end of March to around $100 last
week. A former professor at the Massachusetts Institute of Technology, the 66-year-old Jacobs now finds himself
having to explain the difference between his company and a dot bomb. As if he were lecturing a group of
wrong-headed college freshmen, he patiently points out that Qualcomm is a technology blue chip that is winning a
global war for supremacy in wireless communications. He dismisses the company's stock plunge?"it's the nature of
Wall Street"?and is confident that investors will soon come to their senses.
Even after the sell-off, San Diego-based Qualcomm boasts an eye-popping price-to-expected-earnings ratio of
100 to 1. Its market value remains greater than that of General Motors. But leaving aside the question of just what
its shares should be worth, the company clearly has a lot going for it. For starters, unlike many other technology
plays, Qualcomm actually makes money?an estimated $700 million this year on sales of nearly $4 billion.
It's also sitting on about $2 billion in cash and is using that loot to buy smaller companies or purchase big stakes in
them. Last week, for example, it shelled out $144 million for a 10 percent stake in free Internet access provider
NetZero, which will allow Qualcomm to distribute software like its Eudora E-mail system wirelessly. Thanks to a
positive cash flow (a distinctly quaint concept in an era of "burn rates"?that is, spending cash without making any),
the company says it should be able to keep building its kitty.
The 15-year-old Qualcomm has retreated from making its own cell phones and network equipment. Instead, it
concentrates on the brains of wireless communications systems?semiconductors and software?and licenses its
know-how to others. In Jacobs's view, the company has a shot at competing with telephone and cable companies
in delivering high-speed broadband communications to homes. "Long term, ours is a wonderful business, and it's
going to keep growing for a decade or more," says Jacobs, who, ever the professor, often illustrates his points by
drawing elaborate diagrams on a whiteboard.
Up to speed. One reason he smells opportunity is the length of time it's taking AT&T, America Online (with its
Time Warner acquisition), and others to transform their cable lines into two-way pipes that can handle voice, video,
and data at lightning speeds. Telephone companies also seem to be taking their sweet time hooking up customers
with high-speed connections. Right now, the fastest speed a wireless user can get (from Sprint PCS) is a painfully
slow 14.4 kilobits per second. But if Qualcomm and the wireless industry can push to the next generation of
technology, consumers will be able to tap the full power of the Internet through hand-held devices?phones,
personal organizers, and pagers.
In the world that Jacobs and others envision, laptop computers will communicate wirelessly and at dazzling speeds.
Samsung, the largest maker of handsets using Qualcomm's technology, is testing devices that will deliver music,
pictures, and video in color. Phone.com, a leader in providing wireless content, is preparing "location services" that
help cell phone users get directions. "For many people, the telephone is going to end up being the computer," says
Jacobs.
To help make that happen, service providers are spending tens of billions of dollars. MCI bought Sprint in part to
get hold of its all-digital PCS network, which is based on Qualcomm's technology. AT&T last week raised $10.6
billion in an initial public offering for its wireless unit, the largest in history. Vodafone has combined its wireless
operations with those of Bell Atlantic, and San Antonio-based SBC is doing the same with BellSouth.
To be sure, there are still technological squabbles over just how to make the wireless future happen. Qualcomm is
tiny compared with equipment and handset makers like Ericsson, Lucent Technologies, Motorola, and Nokia. Yet
it is trying to force the entire industry down its road map toward code division multiple access (CDMA)
technology, a wireless communications system that most experts agree offers greater capacity than rival systems.
(Simply put, CDMA uses mathematical code to break words down into bits of data, send them through the air, and
reassemble them on the other end of the call into a recognizable voice pattern.)
Victory in Europe. The toughest resistance to CDMA has come from the twin mobile powerhouses of northern
Europe, Finland's Nokia and Sweden's Ericsson, both of which have pushed a system called Global System for
Mobile Communications. By selling its CDMA network gear subsidiary to Ericsson last year, Qualcomm poked
holes in the solid wall of European opposition. As a result, it won agreement in international-standards bodies that
the next generation of wireless communications will be based on CDMA.
That was progress. But now two rival "modes" of CDMA are emerging. Some equipment and handset makers are
pushing a variation that will require them to make lower royalty payments to Qualcomm. While it's impossible for
outsiders to forecast just which way these fights will be resolved, there's little doubt they will be. "The next
generation is marching on," says Ben Linder, vice president of marketing at Phone.com in Redwood City, Calif.
"It'll happen one way or another."
The beauty of it all from Qualcomm's point of view is that no matter which precise technology takes hold, the
company will get a piece of the action in the form of royalties. The more it can steer the industry toward its own
patents, the greater its profits. The company already licenses its technology to at least 75 companies and has more
than 1,200 patents.
Bob Egan, vice president of wireless at the GartnerGroup, buys Qualcomm's argument that it can keep growing.
"I'm fairly bullish," says Egan. "They shed things and then invest in what comes next. That's where they are right
now." As for Jacobs, the way he figures it is that if he can make the world safe for CDMA, Qualcomm will win in
the end?and that will mean a victory for shareholders who dared to look past those lofty P/E ratios
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