DangerDudette,
Not sure if this will give you that 1999 QCOM ride, but me thinks it will ride into 2010 in good shape..........
Great stuff on RB from zipper_the_man
Qualcomm: Why Wall Street Doesn’t Get It
Investors are nervous about Qualcomm’s future. The stock has been languishing in the
mid-60s—after plummeting from its earlier highs. They shouldn’t be worried: Qualcomm, an
undisputed leader in wireless technology, is in the final stage of converting itself from a maker of
stuff—wireless handsets, chips and software—into a seller—or rather a lesser—of ideas. If it
succeeds, Qualcomm becomes the very epitome of the New Economy: a company with almost
limitless horizons, yet modest need for capital and huge payrolls.
When George Gilder first wrote about Qualcomm in the Gilder Technology Report, the company
was still developing a new way to transport voice and data. It was to be based on Code Division
Multiple Access technology (CDMA), the technology that is used by the military for secure
communications. The wireless industry, analysts and the business press were skeptical that
Qualcomm’s technology would work. And even if it did would wireless service operators use it? Not
likely, scoffed the skeptics.
Qualcomm plowed ahead and proved the skeptics wrong. The believers who harkened to George
Gilder made out like bandits. They will again. What bothers the doubters is a seemingly sharp
change in Qualcomm’s strategy. Here’s the story:
In order to prove CDMA was viable, the company designed and built semiconductors for use in cell
site radios and handsets. Then it built the cell site radios and handsets. Qualcomm quickly
became a one-stop shop for wireless service providers, supplying a full line of CDMA products.
That kind of primed the pump. Not to be left behind, many others, including Nokia, Motorola, Sony
and Samsung also began building handsets for CDMA.
With appropriate hardware now widely available, CDMA became the most widely used wireless
technology in the U.S. But a small, thinly financed company can’t easily make money in the
hardware business competing against huge, smart competitors such as Sony and Motorola. Its
goal accomplished, Qualcomm decided to stop making things and resume making technology.
First to go was the cell site radio group, which was sold to Ericsson. Then, last December,
Qualcomm sold its handset business to Japan’s Kyocera for $216 million in cash. Kyocera also
agreed to purchase the majority of its chipsets from Qualcomm over the next five years. Now,
Qualcomm is unleashing its chip business. It has already spun off the chip business, and the new
company, which is currently known as Spinco, will probably go public within the next year.
Qualcomm is thus out of the business of competing with manufacturing giants. It is recasting itself
as an intellectual property giant, which collects royalties based on its patents. That new business
model has given some followers of Qualcomm’s stock the willies. Can a business exist on ideas
alone? What a gamble! Betting the farm on sheer technology. At a time when, it seems, that
technology is being challenged.
Among the challenges: a new technology from a young company called Flarion. The
Lucent-backed company is developing a new third-generation wireless technology it calls
Flash-ODFM (Orthogonal Frequency Division Multiplexing). This one is supposed to be better,
faster and cheaper than any flavor of CDMA. Wireless vendors that use it won’t have to pay
Qualcomm a royalty.
Another threat: There is a competing flavor of CDMA being used for 3G wireless systems in Japan
and other parts of the world. Earlier this summer, a Korean carrier announced that it would be
switching from Qualcomm’s CDMA to Wideband CDMA, a technology not patented by Qualcomm.
That sent Qualcomm’s stock plunging about 10 points.
Wideband CDMA is also making inroads in Japan. NTT DoCoMo, by far the largest wireless service
operator in Japan, will deploy Wideband CDMA (W-CDMA) in March of next year. J-Phone, Japan’s
number three wireless service operator, has also opted to use W-CDMA. Only DDI/IDO, which
ranks second in number of subscribers, will continue to use Qualcomm’s flavor of CDMA—it is
estimated that DDI/IDO will have only a 24% market share in Japan.
We think both these threats are way overblown. Flarion’s system won’t be ready even for prototype
work until late this year. A lot of water will have flowed under the bridge by then.
Nor is Qualcomm a loser yet in Japan. It was recently granted a patent there that is equivalent to
one of the first patents it received in the U.S. more than ten years ago. What it says is that
Qualcomm is entitled to receive royalty income from any CDMA-based network architecture
including Wideband CDMA and UMTS-2000, the European version of W-CDMA. Qualcomm has
already signed agreements with a number of companies, including Samsung, Lucent, Ericsson and
Sony, that have agreed to pay it royalties regardless of what version of CDMA they use in their
products.
Consider this. All 3G systems are ultimately based on CDMA technology. This means that even
those systems that now use two competing standards—GSM and TDMA—will eventually turn to
CDMA when they move to 3G systems.
The scoffers overlook something else, too. Qualcomm practically owns the market for CDMA
chips. Today, some 77% of CDMA chips are Qualcomm chips and other chipmakers pay royalties
for use of Qualcomm’s intellectual property. By spinning off the chip unit as a separate company,
the chip group will be able to build chips for other wireless technologies as well. It will also be able
to build combined chipsets to develop phones that can be used anywhere in the world. All this will
generate a lot more money for Qualcomm.
Qualcomm is involved in some potentially huge joint ventures with some very interesting partners.
The first of these, announced more than a year ago, is Wireless Knowledge, a joint venture with
Microsoft. Originally intended to provide corporations with wireless access to their corporate
databases and information management assets, Wireless Knowledge stalled for more than a year
while it changed course and reinvented itself. Instead of providing wireless access to corporations,
the company is now a systems integrator, placing the necessary software and servers behind the
corporate firewall. It now appears to be in a position to rack up customers and begin generating
revenue.
Nor should we neglect to talk about telematics. In July, Qualcomm entered into a joint venture with
Ford Motor Company. The new venture, currently called Wingcast, will bring computer power and
wireless communications to automobiles (see Telematics, page 1). In the venture, telematics will
help increase traffic over CDMA networks, which will cause wireless service operators to buy more
equipment made under license from Qualcomm.
Wingcast will run up against General Motors, which has already implemented the OnStar system,
where drivers can talk to OnStar employees in a command center via a wireless phone. Wingcast
also faces competition from the makers of onboard GPS systems, which are mounted on
dashboards of many cars. But we’ll bet on Wingcast, which we expect to be superior to any similar
systems available today. The service will enable Ford and other carmakers to build cars that can
“talk” to the Internet over CDMA networks operated by Verizon and Sprint PCS in the U.S. While it
will provide many of the services other systems currently provide—such as realtime directions—it
will also provide drivers with realtime traffic reporting, and automobile diagnostics so that if a
problem develops with the car the system will inform you, alert the nearest repair center and tell
you how to get there.
If anyone “gets” the new economy, Qualcomm’s chief executive, Dr. Irwin Jacobs does. It’s about
ideas and about change. It’s not about making physical things. Jacobs, like Bill Gates and John
Chambers and Larry Ellison before him, understands the new game. He is out to build a pure
technology company that won’t compete with the hardware giants. It will not need to build factories
all over the world. It will not require much in the way of inventories or receivables. It will not have to
dilute its equity or run up debt to finance growth because it will not consume huge amounts of
capital.
Now that CDMA is the most widely used wireless technology in the U.S., Qualcomm is ready to
conquer the rest of the world—including telematics—as the universe goes wireless. Wall Street
talks a lot about New Economy mindset but doesn’t always understand it when it sees it. Our
readers can be thankful for that: Qualcomm is a great buy, hovering around $60 as it has been for
several weeks. If you don’t own it, buy some shares now. If you do own it, don’t think of selling.
—AMS
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