Qualcomm's Biggest Problem: Meeting Demand
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ven in the middle of the fray, Qualcomm CEO Paul Jacobs somehow seems to float above it all.
Back in April Qualcomm warned that it is struggling to meet demand for its cutting-edge mobile phone radio chips. The news has troubled both shareholders—the stock has since sold off 15 percent—and customers, who aren’t able to make as many high-end smartphones as they might otherwise like. Meanwhile, the company is seeing intensifying competition from, among others, Samsung, which also happens to be a key customer. And neither Jacobs nor any of his minions will talk about the company’s marquee customer, Apple.
And yet, amid a roomful of re-porters at Qualcomm’s developer con- ference at Hilton San Diego Bayfront in June, the 49-year-old engineer seemed immune to the drama.
Will the company take on Intel in server chips? “It’s certainly an area we are looking at,” Jacobs said. Will Qualcomm build its own factories to keep up with demand rather than continuing to farm out production to contract manufacturers like Taiwan Semiconductor? “Our inclination is to retain the model we have,” Jacobs said. Will Qual- comm build its own gadgets? “No.”
Then Jacobs paused to glance out the Hilton’s enormous fourth-floor window at the glittering blue waters of the harbour below. “Wow,” Jacobs said. “That’s an enormous boat.”
There are reasons Jacobs can main- tain his Zenlike calm: Despite all the concerns, business is good. Qualcomm will generate $15 billion in sales for the fiscal year ending in September, up 36 percent from $10.9 billion during fiscal 2011, analysts estimate. Qualcomm’s chips can be found in leading smart-phones from Samsung, HTC and Nokia. Every Apple iPhone 4S sold contains $23.54 worth of Qualcomm parts. Better yet, Qualcomm collects royalties on nearly every smartphone sold. And the company does all this while steering clear of the messy business of building its own handsets or running its own chip fabs.
That’s a profitable bit of triangulation: Qualcomm’s gross margin of more than 60 percent is richer than any of its major customers’, including Apple’s.
That hands-off model, however, hit a bump earlier this year. Tight capacity at its manufacturing partner, TSMC, forced it to offer disappointing earnings expectations. More ominously, one of its most successful customers, Apple, uses Qualcomm’s modem chips but skips the company’s ARM-based microprocessor designs in favour of its own, keeping more profits for itself. How long can Qualcomm continue to produce growth rates so far ahead of the rest of the chip industry? Should it build its own fabs? And can the company resist the temptation to re-enter the handset-hardware business?
For Jacobs, those aren’t abstract questions. Under his father, Qualcomm co-founder Irwin Jacobs, Paul ran Qualcomm’s handset business. It was one of Qualcomm’s biggest flops, racking up $200 million in operating losses before it was sold to Japan’s Kyocera in 1999. “One of the reasons was that our customers felt like we were competing with them,” Jacobs says in an interview with Forbes. And without those customers Qualcomm would never have become big enough to invest in better wireless chips. “I think it’s just a scale issue. Yeah, if you have a lot of scale, then you can invest, but ‘Can you invest enough?’ is the question.”
Thanks to Paul’s father, Irwin—his predecessor—the answer to that ques- tion is yes. Under Irwin Jacobs Qual- comm was best known for pushing a protocol known as CDMA, for “code division multiple access”, that allowed carriers to cram more calls into the same amount of radio spectrum. A version of that technology—dubbed WCDMA—would become the basis for the third-generation wireless technologies now built into most of the world’s smartphones, unleashing a geyser of licensing revenues.
That gush of cash—about a third of Qualcomm’s revenues now come from licensing—funds a research and development juggernaut. In the fiscal year ended September 2011 Qualcomm spent $3 billion, or 20 percent of its revenues, on R&D. Some of those efforts can get pretty wild, such as “augmented reality” software that meshes mobile camera images with virtual reality. Other researchers are working on sensors that will sit in a patient’s bloodstream and lodge in his wrist.
“Imagine your phone rings and says, ‘Go to the doctor now, because you need to manage your heart,’ ” Jacobs says. “You’ll be a mobile phone, too.”
The wild ideas don’t always work. Among the flops: Zeebo, a gaming console for the developing world Qualcomm helped develop, and the SmartBook, cheap notebook computers powered by smartphone processors. “They throw a lot of things against the wall and see if they stick,” says Will Strauss, president of wireless market research firm Forward Concepts.