Torpedo That Hit Qualcomm Carried a Message
If you think competition in advanced technology and international markets is a high-toned game played by Marquis of Queensbury rules, think again.
Qualcomm Inc., the inventive San Diego-based telecommunications company, was sailing along toward a great destiny this year when it was almost kneecapped by international competitors and government regulators who outmaneuvered it.
L.M. Ericsson of Sweden devised a new standard for the next generation of cellular phones that is based on Qualcomm’s technology, but not compatible with it. Then Ericsson got European communications regulators as well as Nokia of Finland, Siemens of Germany and Nippon Telegraph & Telephone of Japan to agree to its standard. Next it is going to place the new standard before a United Nations rule-setting body on telecommunications.
The upshot may be that Qualcomm, the 13-year-old company that has grown to more than $3 billion in revenue and 9,000 employees, will continue to be frozen out of European markets and severely damaged in its present and future business everywhere.
Qualcomm has fought back. Chairman Irwin M. Jacobs, company co-founder and co-inventor of CDMA, or code division multiple access, technology for cellular phones, is threatening intellectual property lawsuits on a grand scale and trade action by the U.S. government.
He may succeed in securing an opportunity for Qualcomm to compete with Ericsson and others in every market, including Europe, as mobile phones advance to data transmission and even Internet access.
“His chances of success are better than 1 in 3 and improving, but they’re not yet even money,” says a telecommunications expert.
What’s at stake is a huge market. Mobile phone use worldwide, now approaching 200 million customers, is projected to reach 1 billion before 2005. Most predictions underestimate the tremendous prospects as wireless telephones provide basic communications services to developing countries.
The prize is great. No wonder the competition is rough and tough. Here’s what happened and what the story says to everybody in business.
Europe has always been ahead of the United States in cellular phone usage. The need to make calls across its many national borders forced agreement more than a decade ago on a single mobile phone standard, called GSM, for global system for mobile.
European phone equipment suppliers soon came to
lead the global market. Ericsson, a longtime supplier to global telephone markets, with $21 billion in annual sales, gained one-third of the U.S. market--where it is linked with General Electric--and comparable shares in Asia and Latin America. Nokia also has been successful worldwide.
In the U.S., AT&T; had a technology similar to that of Ericsson. But in San Diego, Jacobs and Qualcomm co-founder Andrew Viterbi, entrepreneurs and former computer science professors, devised the CDMA system, which breaks phone calls into digital bits and codes each bit. The effect is to allow many calls simultaneously over the same line, thus greatly increasing the capacity of cellular phone systems.
CDMA was a timely development, but Qualcomm’s system was not welcomed. Competitors complained that the United States was confusing the market by allowing multiple standards. “The existence of different technical systems makes the U.S. market complicated,” Bo Hedfors, head of Ericsson’s U.S. operations, writes in the company’s annual report.
Some experts predicted as recently as 1996 that CDMA would not work.
But it did work. CDMA phones, whether supplied by Qualcomm, Motorola or others, gained acceptance in the U.S. and Asia. Qualcomm did not try to go it alone, but formed joint ventures with Sony of Japan for telephone manufacturing and Northern Telecom of Canada for ground station equipment.
Even European telecommunications companies began to concede they needed CDMA’s capacity for their systems. And Ericsson began work on an advanced system for mobile phones called wideband- CDMA, based on the technology Qualcomm developed.
Qualcomm’s future seemed limitless, and its stock hit $72 a share at the end of last year.
But in the early months of 1998, a different picture emerged. Ericsson’s new system would be compatible with Europe’s GSM but not with Qualcomm’s CDMA. Furthermore, the European Telecommunications Standards Institute approved it as the single standard for all of Europe.
And the International Telecommunications Union, a United Nations body that is examining advanced systems this year, was asked this month to certify the Ericsson standard for the world. An ITU decision is due this fall.
Qualcomm was caught by surprise. With its business already hurt by the Asian financial crisis, the company’s future was now threatened. The stock fell back to its present $56 a share.
Jacobs flew to Europe last month to confer with telecommunications providers. “We want to be part of a single converged standard, or at least the new standard must be friendly to our technology,” he says.
Qualcomm is submitting its advanced CDMA standards, called CDMA-2000, to the United Nations. It plans to press its intellectual property rights to CDMA. And the U.S. government is being alerted to the anti-free-trade actions of European companies and regulators.
Some telecom experts think Jacobs will prevail. “Ericsson tried a politically driven strategy, but I don’t think it will work,” says Bradford Peery, head of Brad Peery Inc., a Mill Valley, Calif., investment research firm specializing in telecommunications.
But the final verdict is far from certain. Qualcomm will only succeed “if the U.S. government is unambiguous in its preference for open markets, if it declares that it doesn’t like such tactics,” says Peter Cowhey, a telecommunications expert at UC San Diego and a consultant to Qualcomm.
The upshot most likely is that “there will be several standards in this new stage of mobile telephony, just as there are several standards today,” says Linda Barrabee, an analyst at Pyramid Research, a Cambridge, Mass., telecommunications consulting firm.
That will be OK with Qualcomm as long as markets everywhere are open to competition.
What lessons does the story hold? One is don’t underestimate competition. Qualcomm became too impressed with its own technology and was caught flat-footed by Ericsson. No company should be surprised on the fundamentals of its business.
Two is that messy, competitive markets are better for entrepreneurial opportunity, for consumers and for general economies than the orderly standards that governments in Europe and elsewhere prefer. The battle between standards continues to push advances in mobile phones.
Finally, competition for the huge prizes in advanced technology is not a game of patty-cake. But it’s exciting.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Racing for the Phone
Qualcomm Inc. started shipping its CDMA (code division multiple access) cellular telephone technology in 1996, years after Europe’s GSM (global system for mobile) technology had allowed Europeans to make phone calls across that Continent’s many borders. Both systems have won customers worlwide, but the Qualcomm system has been growing faster than the European one because it offers greater capacity to cope with the public’s surging use of cellular phones. The chart compares projected growth for the European and Qualcomm digital systems.
Growth in digital cellular subscribers, 1996-2001
European system: 315.8%
Qualcomm system: 1,408%
Source: Dataquest
