Fortune. Qualcomm vs. Ericsson. The Battle to Control Your Cell Phone
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Julie Creswell
For much of the past decade, Dr. Irwin Jacobs has
been at war. It began in the early 1990s when the
professor-turned-CEO of Qualcomm discovered that
a certain military technology could be developed
into an effective standard to operate cell phones for
civilians. Instead of being praised for his
breakthrough, Jacobs battled skeptical naysayers,
most notably a Swedish-based nemesis named
Ericsson, which was promoting its own competing
standard to control the guts and interoperability of
cell phones.
Their battle continues today, but the stakes are
much bigger. Qualcomm of San Diego, a
$3.3-billion-a-year company, and Ericsson, with
$22.7 billion in 1998 revenues, are now in the middle
of an international spectacle that's been dubbed a
"holy war." The victor will usher in the next
generation of international wireless
communications. And Qualcomm desperately needs
a win. Revenue grew 59% last year, and profits rose
18%, but its volatile stock ended the year virtually
unchanged, down $15 from a high of $67. (It's now
trading around $72.) After a round of layoffs, the
company may now be looking to unload its troubled
equipment-making business.
So Qualcomm is hoping for transcendence in a new
era of high-speed data transmissions, where you'll
access e-mail and Internet sites and even conduct a
videoconference call on the Santa Monica freeway
with the same phone that tucks inside the palm of
your hand. For any of this James Bond-like
technology to work, governments and global
manufacturers like Ericsson and Qualcomm need to
cooperate. Easier said than done.
Part of the reason your cell phone doesn't work in,
say, Iowa and Paris and Buenos Aires is the fact
that there was no attempt to ensure compatibility of
networks in the nascent days of analog cell phones
or even more recently when companies shifted to
digital cellular technology. The International
Telecommunications Union, an agency of the
United Nations, would like to avoid that situation in
this coming third generation of cellular
communications. So it is considering assigning a
family of global standards for new wireless phones.
While the ITU has said it would like to come to a
decision by the end of March, the process may be
delayed by a legal showdown between Ericsson and
Qualcomm.
There's a lot of money and market share at risk.
Demand is booming in the U.S., and wireless
communications are expanding rapidly throughout
Latin America and Asia. By one estimate, the global
market for handsets will grow from $40 billion in
1999 to more than $58 billion in 2004. No firm has as
much at risk as Qualcomm. Most of its peers,
including Motorola, Nokia, and Ericsson,
manufacture phones for more than one of the
existing versions of the three standards that now
carry voice over wireless networks: CDMA, TDMA,
and GSM. Not Qualcomm. The bulk of its 1998
revenue came from licensing fees, semiconductor
chips, equipment, and handsets (with partner Sony)
that are linked to Jacobs' CDMA.
Jacobs had to battle to gain any acceptance of
CDMA. Originally used for top-secret government
communications because it was impervious to
jamming, CDMA, standing for "code-division
multiple access," tags packets of conversation with
a unique numeric code. Many different CDMA
conversations get carried over the same frequency;
then their packets get sorted and delivered to the
appropriate party. Its wireless technology is
growing fast in the U.S. and has a large presence in
Korea and Latin America.
Still, TDMA, which stands for "time-division
multiple access," is the most successful standard in
the U.S., with backing from operators like AT&T
Wireless and SBC Communications. Then there's
the other, similar technology called GSM (global
system for mobile communications), which has
dominated Europe since its introduction in 1991.
Ericsson and Nokia work with both technologies.
As they worked to develop cellular technology that
would carry voice and video, and allow cell users to
access the Web, the GSM and TDMA camps joined
together and created a plan for a new standard
called wideband CDMA. (Yes, CDMA.) Meanwhile,
Qualcomm juiced up its existing technology and
created its own third-generation CDMA. The
technologies sound similar and in many ways are
similar, but arcane technical differences make them
incompatible. For consumers this means one thing:
cell phones still won't work across countries or
continents.
While Ericsson has a strong presence in the
European cellular market, Qualcomm isn't on the
radar there. If the ITU endorses two different
CDMA standards, Qualcomm stands little chance of
breaking into the market, as subscribers to its
network won't be able to use their phones there. Not
surprisingly, Qualcomm is urging the international
body to approve a single standard that's compatible
with its existing CDMA technology. "When you're
introducing a brand-new technology that has a
common base, CDMA, then don't have two slightly
different ones," pleads Jacobs, 65. Qualcomm's
backers have a lot at stake too--Sprint PCS has
spent more than $5.5 billion for a U.S. network that
supports CDMA technology, and retrofitting to
adapt to a slightly different ITU standard would be
expensive.
Another group of carriers, including Airtouch
Communications in San Francisco, which is being
acquired by Britain's Vodafone, has urged a
compromise. "There are billions of handsets to be
sold, and plenty of market share to go around," says
Craig Farrill, vice president of strategic technology
for Airtouch. But Ericsson executives insist the
company has made improvements to CDMA that
would be lost if its standard were made compatible
with Qualcomm's existing technology. Qualcomm, in
turn, says that it owns the intellectual property
rights to CDMA and won't license them unless the
competing standards are converged.
Qualcomm hasn't completely stalled because of this
standards battle. It has two new product offerings
this year--a thin cell phone and something called the
pdQ smartphone (a cell phone with a built-in Palm
Pilot organizer). But these products have a lot of
competition, including the introduction of new
Nokia CDMA phones and a CDMA version of
Motorola's popular StarTAC phone. And even if
Qualcomm's new offerings are hits, it'll still lag
behind leading handset manufacturer Nokia (see
chart). As a result, warns Michael Ching, a wireless
equipment analyst at Merrill Lynch, pricing pressure
could slow Qualcomm's revenue growth to 16% this
year.
But Qualcomm's long-term success depends on its
version of CDMA being embraced outside the U.S.
The best battle plan may be the one least palatable
to Jacobs: a pact with the enemy. In April,
Qualcomm is scheduled to meet Ericsson in a Texas
court to argue the patent lawsuit. But reports
surfaced in mid-February that the two were close to
agreement on a pact that would give Ericsson
access to Qualcomm's CDMA technology, and
Qualcomm the right to use Ericsson's GSM
technology. Analysts say that such a deal makes
sense, but that both sides may need to compromise
about who owns which parts of the technology.
Compromise, though, has never been Jacobs' strong
suit. After battling for acceptance for years, striking
a deal with the enemy can't be easy. In late February
a Qualcomm spokeswoman insisted to FORTUNE
that the company's position hasn't budged. That
stubbornness could be Qualcomm's Achilles' heel.
Key players like Japan's NTT are siding with
Ericsson. If it doesn't change its tune, Qualcomm
may end up with only its lawyers to keep it
company.
Magazine Issue: Vol. 139, No. 6, March 29, 1999
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