Casino Royale: The Story Of Qualcomm
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Image: Christian Hartmann / Reuters
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Paul Jacob, CEO, Qualcomm
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here is something about technology companies that makes them want to dominate the world. Oracle, SAP, Microsoft, IBM, Google and even Apple all want the world to veer around to their point of view and therefore their products. Maybe it is something to with the transient nature of technology advantage. Those who manage to be dominant, even for a short-while, are seen as visionaries. And then there are those who are almost in that camp but not quite. For much of its life Qualcomm has been in the latter camp — the almost-Microsoft.
It was founded in 1985 by MIT professor-turned-entrepreneur, Irwin Jacobs, together with six of his friends. They had invented a proprietary technology that became the seed for the wireless standard CDMA, a technique that allows large amounts of information to be transmitted over limited wireless spectrum by using complex matching algorithms.
CDMA began to be adopted by the world’s mobile operators from the mid-90s after years of relentless hard-selling by Jacobs, backed up by equally relentless patenting by his engineers in the
R&D department.
Globally, this strategy has been very successful. Today, the company founded by Jacobs is led by his son Paul, and sits on a pile of over $18 billion in cash while generating another $2-3 billion in free cash flows every year!
While this is brilliant in itself, India had eluded Qualcomm’s grasp. It has not made too much money here because its business model has just not worked here. However, things might be on the cusp of a change for Qualcomm because of a change in market dynamics and some canny risk-taking by the company to adapt its business model to fit this changed scenario. A win here will not only get it success in India, but also sink the ambition armada of its longtime foe, Intel, and with it, spell the endgame for the rival wireless standard backed by it — WiMAX.
Qualcomm’s model as it exists is simple. Be inventive, file as many patents as possible in wireless communication, and then build products around those or wait for people to queue up to use those patents and pay a nice royalty to the company.
Qualcomm’s patents are critical to almost all major wireless standards on the GSM, CDMA and even LTE (Long Term Evolution) sides, helping it squeeze a royalty out of quite literally anyone and everyone. An army of its lawyers and patent experts go after any company that dares touch its wireless IP without paying for it.
The Way It Works
People tried to design around Qualcomm’s 3G patents but it was very tough because all patents are usually inter-related,” says Shiv Putcha, an analyst with telecom consulting firm Ovum. “Most patents can be traced back to original innovations and patents that were at the root. You simply can’t get around it,” he says. Nokia and Samsung both found this out the hard way. In 2008, after a three-year legal battle over the use of its technologies in Nokia’s phones, Qualcomm won $2.3 billion from the world’s largest phone maker and an assured stream of annual royalties over the next 15 years. In 2009 it won $1.3 billion from Samsung plus additional royalties over 15 years.
The biggest chunk of Qualcomm’s revenue, over 60 percent of roughly $10 billion annually, comes from selling its own proprietary chipsets to mobile phone, notebook or data card makers. It is the world’s largest “fabless” chip maker, meaning it designs its chips but outsources their manufacturing to others.
Another 30 percent — and this is the interesting part, one which gives it a profit margin of nearly 85-90 percent — comes from licensing its formidable IP (intellectual property) around wireless communication (over 12,000 US and over 50,000 international patents) to chip makers like Texas Instruments or Infineon, mobile phone makers like Nokia or Samsung and equipment makers like Huawei or Alcatel-Lucent. For instance, it takes between 4-5 percent of the wholesale price of any CDMA or 3G phone made or sold anywhere in the world.
Don’t Say Hip, Say Cheap
In India, however, CDMA phones — the essence of Qualcomm’s business — never took off, though CDMA’s entry into the Indian market in 2000 was one of the most disruptive events in Indian telecom history. That’s because Tata Teleservices and Reliance Communications (RCOM) used CDMA technology as a Trojan horse into Indian mobile telephony, passing it off (wrongly) as a cross between a fixed and mobile service.
Though this flash-bang entry established Qualcomm firmly in India, it left the company with two serious issues.
First, its CDMA platform, though more advanced than GSM on most counts, quickly got relegated to the lowest end of the price and consumer segments because CDMA operators like Reliance presented it as a poor man’s technology. They did this to quickly mop up the millions of lower-income potential subscribers still not signed up for GSM.
Qualcomm also alienated itself from GSM incumbents like Bharti Airtel and Vodafone (then Hutch) who felt, rightly, that it was the ammunition provider for their upstart, backdoor competitors.
The net result was that Qualcomm was left picking up low value crumbs from the bottom one-fourth of India’s mobile market — CDMA subscribers. For close to 10 years Qualcomm has remained in that position. And now that the two members of the CDMA camp — RCOM and Tata Teleservices — had both switched allegiance to GSM, people expected Qualcomm to stay down, and out.
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