Good News for qcom holders. From Monday's NY Times:
nytimes.com
October 23, 2000
Qualcomm's Shrinking Act Could Pay Off Big
By SIMON ROMERO
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The Associated Press
Irwin Jacobs, the chairman of Qualcomm, in front of a wall at the company's San Diego headquarters that displays many of the company's 1,000 or so patents.
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rwin Jacobs, the chairman of Qualcomm, had already left China after meeting with Premier Zhu Rongji when word caught up with him at a hotel room in Budapest last week: China's second-largest telecommunications company, China Unicom, had finally confirmed plans to construct a wireless communications network using technology patented by Qualcomm.
The announcement eased the techno-political tensions raised earlier this year after Chinese officials had seemed to assure the United States government that Qualcomm's technology would be adopted by China Unicom — only to have the Chinese company back out a short time later.
More to the business point, though, the news helped drive Qualcomm's stock up 11 percent in one day last week, contributing to a 25 percent rise in the company's stock price since the beginning of last month — a period when the Nasdaq composite index was declining by 17 percent.
Yet even as the new China deal seemed to vindicate his vision of a world in which nearly every wireless phone might one day use technology patented by Qualcomm, Mr. Jacobs, a former engineering professor, gave a characteristically matter-of-fact reply when asked to comment.
"From a revenue point of view," he wrote in an e- mail message from Budapest, where he was on a business trip, "we would anticipate an interesting impact in 2002 and beyond."
Mr. Jacobs, who turned 67 last week, is seldom showy, despite his bold ambitions for the global wireless market. The rest of the telecommunications industry may be enthralled with bigger-is-better consolidation, but Qualcomm is actually getting smaller, spinning off division after division. If the future belongs to Qualcomm, it will be on the strength of the company's intellectual creativity and a fierce defense of its portfolio of patents — some 1,000 and growing.
Many of those patents involve a wireless transmission format called Code Division Multiple Access, or CDMA, a "spread spectrum" technology long used by the United States military for secure radio communications.
CDMA competes mainly with two other wireless standards, Time Division Multiple Access, or TDMA, and the global system for mobile communications, or GSM. But last year, in industry standards-setting bodies, it began to look as if many elements of CDMA would be incorporated into the coming generation of wireless networks intended to connect to the Internet and carry massive amounts of voice and data traffic.
Suddenly Qualcomm, with its CDMA patents, was a favorite with investors. The company's share price soared 2,600 percent last year, surpassing all other major issues on the Nasdaq. And although much of those astronomic gains were negated earlier this year as technology stocks went out of fashion and Qualcomm suffered its initial setback in China, the company's shares have resumed their climb in the last three months.
"The pointy-headed professor who took battlefield technology and made it the core of an almost pure intellectual-property company is one of the great telecommunications tales of our time," said Jerry Hausman, an economist at the Massachusetts Institute of Technology who specializes in telecommunications issues. "If Jacobs succeeds — and his chances look pretty good — then his moves will be studied in detail in the years ahead."
Qualcomm owes its existence to an idea Mr. Jacobs had while driving down Interstate 5 in Southern California one day in the mid-1980's, shortly after becoming wealthy by selling his first start-up, Linkabit, a developer of wireless communications technology.
A Massachusetts native, he had left a teaching post at M.I.T. two decades earlier for one at the University of California at San Diego, where he found the region's military industry a fertile field for his interests in business and engineering. So while another person might have been thinking of how to spend his Linkabit wealth that day on the Interstate, Mr. Jacobs was musing about spread spectrum — a military radio technology with roots reaching back to World War II.
Spread-spectrum radio signals being sent out are scattered over a wide range of frequencies and then collected back onto their original frequency at the receiver. This makes communications hard for an enemy to jam or intercept. For civilian use, the main benefits are signal clarity and the efficient use of increasingly crowded bandwidth, because scattered signals are less likely to interfere with other transmissions — even ones on the same frequencies.
Seeing the commercial possibilities for spread spectrum, Mr. Jacobs founded Qualcomm in San Diego in 1985. Today, from a corporate campus chiseled into sun-drenched hills on the northern edge of the city, some 6,500 employees are either directly involved in or supporting the research-grounded patent-building process on which the founder has staked the company's future.
In preparing for the patents push, Mr. Jacobs began to streamline Qualcomm in 1998 by bundling its interests in various telecommunications carriers — including Cricket Communications and a Mexican company, Pegaso — into a holding company named Leap Wireless International.
The following May, Qualcomm sold its telecommunications equipment business to the big Swedish wireless equipment maker Ericsson. That deal resolved a lengthy patent- infringement dispute, while also effectively taming Ericsson's resistance to the flavor of CDMA technology that Qualcomm is advocating for next-generation wireless networks.
Late last year, Qualcomm announced plans to sell its handset manufacturing business to the Japanese company Kyocera, while securing a five-year commitment from Kyocera to buy most of its CDMA chips and software from Qualcomm.
Next up is Qualcomm's chip manufacturing business. The chip operation, temporarily named Spinco, is being prepared for an initial public offering and the distribution of shares to Qualcomm shareholders.
The selling off of Qualcomm's businesses has been so extensive that one analyst, John Sullivan of Phillips Business Information, questioned whether Mr. Jacobs had taken up the Japanese poetic form of haiku to express his ambitions. In a widely circulated report, Mr. Sullivan imagined the chief executive's musings might look like this:
Many business groups
Mundane thoughts weigh down my soul
Spin off everything
Whatever its literary potential — or limitations — Qualcomm's strategy presumes the widespread commercial use of wireless communications. Qualcomm already receives about 4 percent of the wholesale price of each wireless phone that uses CDMA technology, in addition to royalty revenue from the sale of network equipment using its technology.
In its third-quarter results, released in July, the company reported a 40 percent rise in net income, to $218 million, on revenue of $714 million. About half of that amount came from Spinco; the other contributors included OmniTracs, a global positioning system used by the trucking industry, and Eudora, an e-mail software developer.
But royalties contributed $174 million of the revenue total, up 38 percent from a year earlier. For this year as a whole, Qualcomm's royalties should total about $630 million, according to Pete Peterson, a Prudential Securities analyst. And some analysts are projecting annual royalty revenue of $3 billion by 2005.
"The combination of having the best intellectual-property portfolio with the ability to do astute deals is their forte," said Graham Tanaka, who invested in Qualcomm stock about a year and a half ago as president of the Tanaka Growth Fund.
One of the central merits of CDMA technology, according to Mr. Jacobs and some other experts, is that it handles huge amounts of voice and data with great ease. "Whether you're in the heart of Tokyo or an undeveloped corner of Africa, it's clear that CDMA-based systems make the most sense," Mr. Jacobs said in a recent interview at his modest office.
Mr. Jacobs's tendency to go off on intellectual tangents or argue at length about the merits of seemingly obscure statistical minutiae can make him seem better suited for lecturing on engineering topics than running a company that has surpassed Motorola, America's other wireless titan, in market value — $55.6 billion as of Friday, compared with Motorola's $50.9 billion.
In fact, Mr. Jacobs, whose 3.5 percent stake in Qualcomm is worth almost $2 billion, has demonstrated a fiercely competitive side in negotiations over wireless technology standards.
CDMA systems still lag TDMA and GSM, with only about 15 percent of the global market. But CDMA is growing at a faster rate than its rivals. And the company could yet see its biggest rewards when current networks are replaced with next-generation systems using Qualcomm's technology.
Qualcomm predicts that its patented technology will be used for either CDMA2000 or W-CDMA, the two standards that have emerged as the likeliest to be adopted by carriers building networks over the next five years. But competitors, particularly Texas Instruments, are already preparing either to develop around Qualcomm's patent positions or to favor different technologies.
"We believe there are a lot of patents out there that will apply to the new generations of wireless networks, including many of ours," said Mike McMahan, director of wireless research and development at Texas Instruments, which has supplied many of the chips for mobile handsets using the GSM standard, which is widely used in Europe.
Texas Instruments insists that it is agnostic about standards and willing to work with competing technologies. But it took a step toward confronting Qualcomm's dominance in the CDMA arena in June by acquiring Dot Wireless, a San Diego company with several former high-ranking Qualcomm executives, to try to put itself on equal technological footing with Qualcomm.
The bigger threat to Qualcomm's patents strategy may come from Nokia, the Finnish wireless giant, which is seeking to promote the idea that multiple patent holders, including Nokia, will benefit from coming wireless technologies.
In an all-out effort to show that it is not willing to become a mere assembler of handsets dependent on other companies' technology, Nokia is supporting what it calls an open, global approach to wireless networks, instead of a proprietary one based on Qualcomm's patent portfolio.
"It's unclear what the final applicability of Qualcomm's patents will be," said K. P. Wilska, president of Nokia's United States operations. "Getting patents granted in multiple countries is a long and complicated process."
But Mr. Jacobs contends that specializing in research and patents will give his company the power of concentration.
"By focusing on development, and not manufacturing, we'll keep our technological edge," Mr. Jacobs said. "And we'll be the ones receiving royalties instead of paying them out to our competitors." |
