Text of Qualcomm article in New York Times.
October 23, 2000
Qualcomm's Shrinking Act Could Pay Off Big
By SIMON ROMERO
Irwin 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."
Copyright 2000 The New York Times Company |
