Patents, Patents, Everywhere(from Forbes)
By Eric Nee
Just inside the locked doors that separate the lobby from the work areas at Qualcomm headquarters is a vivid testimonial to one of the great engines of Qualcomm's growth: an entire wall lined top to bottom with plaques, one for each of the 327 CDMA patents the company holds. Jacobs and his executives pass this innovation shrine every day on the way to their desks. On each plaque appears the name of the inventor, the patent number, a description of the technology, and a diagram. Jacobs' name is on ten plaques. Viterbi has his name on ten. Paul Jacobs, Irwin's son, is on 27 (Paul has a Ph.D. in electrical engineering and computer science, and is executive vice president in charge of wireless data).
Some of the patents are minor, like one covering the physical design of a now-discontinued Qualcomm phone. Some are fundamental, like one detailing how calls are handed off from one cell to another when a person talking on a CDMA phone drives down the highway. The 327 patents make up a portfolio so broad and deep that "you can't deploy a CDMA product without infringing," boasts general counsel Steven Altman. Nor have Qualcomm's inventors slowed down; it has 846 patents pending.
Altman's job is one of the most important at the company. He negotiates licensing deals with companies like Lucent, Ericsson, and Motorola. Qualcomm amassed so many patents because for many years it was the only company developing CDMA. Today any company that makes CDMA products, be they chips, phones, or infrastructure gear, has to get a license from Qualcomm. Licensees pay a one-time fee for access to the patent portfolio and then royalties based on the value of the CDMA products that they sell. For cell phones, analysts estimate the royalty averages 4.5% of the sales price. In 1999 the average sales price of a CDMA phone was $245. So each time one sold--ka-ching!--Qualcomm was $11 richer. In the fourth quarter of 1999 alone, Qualcomm took in $177 million in patent royalties, up 140% over 1998's figures.
Some Wall Street analysts, like Paine Webber's Walter Piecyk, are extremely bullish on Qualcomm's royalty stream. You may remember Piecyk: He's the analyst who put a $1,000 price target on Qualcomm stock in late December 1999--two days before the stock, which had rocketed 80% in the previous weeks to nearly $500 a share, split four to one. Piecyk believes Qualcomm could pull in $20 billion a year from its CDMA patents by 2010. That is a big number, and 2010 is a long way off, but the prediction isn't as crazy as it may seem. Piecyk predicts that three billion wireless phones will sell in 2010, that 85% of them will incorporate CDMA, that the average price will be $180, and that Qualcomm will continue to get a 4.5% royalty on each phone sold. Do the math, and you arrive at $20 billion. And Piecyk isn't backing off: "I should probably have said 100%" of the wireless phones will use CDMA, he says.
Not everyone agrees. "Qualcomm is the most overvalued stock known to man," says Andrew Cole, an analyst at Renaissance Strategy. "The share price is built on the belief that all new phones will have some kind of CDMA. That is a big question mark." Here's why the royalty stream may never reach $20 billion: First, Qualcomm may not be able to enforce its patents on successive generations of wireless technology. With so much money at stake, companies like Nokia, Ericsson, and Motorola will likely seek ways to design around Qualcomm's patents. "If intellectual property is too blocking in one area, people will go another way," says Tom Engibous, CEO of Texas Instruments, the No. 1 maker of cell-phone chips. And new technologies may be invented that supersede CDMA. Second, the average sales price of CDMA phones has been dropping steadily; competition may force it down unexpectedly far and fast. Finally, Qualcomm may not be able to extract a 4.5% royalty from all vendors over the next ten years. Most large companies, Engibous explains, have patent portfolios of their own; big players within an industry often sign cross-licensing agreements that let them use one another's technology without paying fees.
For now, however, nearly all wireless manufacturers have signed patent licenses with Qualcomm. These cover not only CDMA products but also products that incorporate so-called WCDMA (wideband code division multiple access), the technology slated to become part of the European standard. The licensees are practically a who's who of telecom: They include Ericsson, Lucent, Nortel, Motorola, Hitachi, and Samsung.
The big holdout is Nokia, the largest cell-phone maker of all. It pays royalties to Qualcomm on CDMA, but has yet to sign a WCDMA agreement. The two companies have held talks, "but at the moment, we're not 100% sure how [Qualcomm's] patents will apply to WCDMA," says K.P. Wilska, president of the Finnish company's U.S. arm. Qualcomm's Altman says bluntly that Nokia has little choice if it wants to sell WCDMA phones: "Absolutely. Nokia has to get a WCDMA license." Piecyk, the Qualcomm bull, predicts that Nokia will sign rather than try to face down Qualcomm in court: "You'll see an agreement before year-end. Nokia is not known for being litigious." If Nokia and Qualcomm reach a rapprochement, Qualcomm's stock could take off again. |
