Qualcomm Poised to Gain From New Cellular System
The idea struck Irwin Jacobs in a flash: Take an obscure process used in military communications networks and turn it into a bedrock technology for a new generation of cellular telephones.
It was an idea that ultimately could make cellular networks cheaper to operate, more dependable and capable of delivering the Internet at high speeds.
Since that moment of inspiration in 1985, Qualcomm Inc. has become the world’s leading developer and an unflagging cheerleader for a technology known as Code Division Multiple Access, or CDMA.
Exuberance about Qualcomm’s role in the wireless world to come sent shares up more than 20-fold last year, making it the fastest-rising stock on the New York Stock Exchange. But that was before setbacks in Asia and slower-than-expected acceptance of Qualcomm’s current-generation technologies knocked shares down from $200 in January to its current $60 range.
Yet if Qualcomm makes the right moves, it still stands to profit handsomely from the roll-out of so-called third-generation cellular systems that will offer users high-speed Internet access, streaming video and other features, analysts say.
Ultimately, the extent to which Qualcomm cashes in on the wireless market’s explosion depends on a successful defense of more than 1,000 technology patents it owns or has filed and its ability to continue exacting royalties at favorable rates.
As wireless carriers move to so-called third-generation technology, chips based on some form of CDMA could become a ubiquitous feature of cell phones and other hand-held devices.
Sprint and Verizon already have deployed CDMA networks in the United States. Other companies in the United States and abroad are developing telephones and other equipment.
At current market rates, patent royalties from CDMA licenses will bring Qualcomm $3.1 billion a year by 2005, up from an estimated $632 million in 2000, according to a forecast by Prudential Securities Inc.
That compares with revenue of $3.9 billion generated by all of Qualcomm’s businesses, including royalties, license fees, chip sales and its OmniTracs fleet-tracking service, during fiscal 1999.
“In the long run, Qualcomm is considered really the company to watch,” said Sean Batting, an analyst with Carmel Group. “They’re positioned in the industry in a very strong way.”
The current market rate gives Qualcomm about 4% of the wholesale price of each cellular phone that uses its technology, said Pete Peterson, an analyst with Prudential Securities Inc.
Qualcomm in July announced it is spinning off its chip-manufacturing operation, which accounted for about a quarter of all revenue in fiscal 1999. The spinoff, once completed, will allow Qualcomm to focus on patent development and licensing.
The new company, temporarily called Spinco, will be in a better position to cross-license its product to meet both European and American standards for next-generation CDMA chips.
Qualcomm also is pushing a new, high-speed wireless Internet technology, High Data Rate, which can deliver Web access at speeds up to 2.4 megabits per second--twice as fast as a typical DSL, or digital subscriber line, connection--to users in a moving vehicle.
So far, the biggest battle Qualcomm has won was its fight to make CDMA the standard technology for new generations of wireless networks.
CDMA is one of several versions of a technology known as spread spectrum because signals are broken down into packets that are coded and scattered across the radio spectrum.
Since World War II, the U.S. military has used spread spectrum systems, including CDMA for secure radio communications because the signals are difficult to jam.
Early pioneers of spread spectrum technology included the late actress Hedy Lamar, the star of such films as “Tortilla Flat” and “Samson and Delilah” and onetime spouse of Austrian munitions magnate Fritz Mandl.
In 1942 Lamar and composer George Antheil were granted a U.S. patent for a spread spectrum device that would allow torpedoes to be controlled by jam-resistant radio signals. The patent was never used, but the use of spread spectrum by the military and in commercial satellite networks grew.
In 1985, Qualcomm was working with Hughes Electronics to develop a CDMA-based satellite communications system when it suddenly occurred to Jacobs that CDMA would work well in a land-based commercial, cellular network.
“I indeed recall it as a flash,” said Jacobs, 66, who taught electrical engineering at MIT and UC San Diego, before moving to private industry 28 years ago. “I realized CDMA was really a better way to go.”
Jacobs is surprised by the success of Qualcomm, created as a sort of retirement project in 1985. Three months earlier, Jacobs and his partners sold Linkabit, a San Diego-based military contractor that they had founded in 1980. Jacobs made $25 million on the sale and was looking for a way to keep busy.
Jacobs considered a return to teaching when he decided to instead join some old Linkabit colleagues and form a new company.
They started out in offices above a pizza restaurant in a San Diego strip mall. Qualcomm now employs nearly 10,000 and has offices in 14 countries.
“I’ve always found that the most fun comes by working with people and creating products,” said Jacobs, who owns a little less than 4% of Qualcomm. “We never really anticipated we would come up with a number of very good ideas that would turn out so well.”
Worldwide, about 60 million cell phone users rely on CDMA networks, popular because they use the radio spectrum more efficiently and decrease the incidents of calls in a moving vehicle being dropped.
GSM, the current European standard, claims more than 200 million users. Europe, however, has adopted a version of CDMA, dubbed WCDMA, for its next-generation cellular networks that were developed by companies that built on Qualcomm technology.
Some analysts wonder if Qualcomm will be able to continue to collect royalties from WCDMA operators in particular at current market rates.
Some cellular carriers in Japan, Korea and the United States, meanwhile, are adopting CDMA2000, a separate standard for next-generation phones that is preferred by Qualcomm.
Prudential’s royalty projections call for Qualcomm to collect $1.8 billion from CDMA2000 royalties in 2005 and $1.3 billion from WCDMA.
Courts in Europe and Japan have upheld Qualcomm patents for the underlying technology of both. Qualcomm expects patents to be challenged in other regions, but executives believe it will prevail in most cases.
“Whichever way it goes, it’s not particularly critical to us as long as it’s CDMA--and it will be CDMA--so it’s moving ahead,” Jacobs said in an interview.
Qualcomm suffered a serious setback in February when China Unicom, China’s second-largest telecommunications company, reneged on a deal to deploy Qualcomm technology in a new mobile telephone network. The company’s fortunes appeared to revive recently when Wu Jichuan, China’s minister of information technology, said his country must rely on Qualcomm to meet the needs of the market. Qualcomm shares rose 6% on the day of Wu’s comments.
On the Net:
www.qualcomm.com
The CDMA Development Group: www.cdg.org
