Over the past five years, Qualcomm has invested or acquired more than 20 different companies. At first glance, the investments seem to have been made almost at random. They range from buying a stake in computer services firm Sima Techniek in 2004 to the recent acquisition of San Diego-based wireless communication company Nigel Power.
In between are sprinkled more deals, including the acquisitions of mobile banking firm Firethorn, Bluetooth company Open Interface North America and mobile broadband IP service maker Flarion Technologies.
This seemingly scattershot approach is less arbitrary than it seems.
Today, Qualcomm has a stranglehold on CDMA patents. Essentially, phones are unable to connect to a CDMA network without paying a royalty to the company, according to Morningstar equities analyst Brian Colello. The company’s patent position has helped it build a hefty cash stash approaching $14 billion, which it uses to fund its myriad investments and ventures.
Colello estimates Qualcomm’s licensing arrangements with handset makers allow the firm to collect around 5 percent of the total price of each CDMA handset sold. For LTE, he expects that to drop to around 3.5 percent.
Qualcomm takes issue with this. In an interview with Wireless Week, Qualcomm COO Len Lauer said the company was “optimistic” going into 4G. He argued that even if one were to buy into an argument that Qualcomm doesn’t have a strong patent position in 4G, it would only apply to a small number of stand-alone 4G devices.
“For a good number of years, the large majority of devices will be multi-mode. They’ll have 3G capability and 4G capability,” he said. “As a result, [manufacturers] will be using all our know-how and discovery for both 3G and 4G.”
No matter Qualcomm’s patent position in 4G, the chip maker does appear to be taking some steps to diversify its long-term portfolio of services and chips.
|Marshall: Qualcomm works as an enabler, pushing forward new markets for its chips.
“I think the challenge they face is that the industry at large is well aware of their approach. They can’t achieve what they did in the past,” says analyst Phil Marshall with the Yankee Group. “Their position will be diluted over the long term… I think their strategy is to gain a foothold in media and other vertical applications.”
Indeed, that is exactly what Qualcomm is doing. The company has moved aggressively to build its presence in wireless-enabled nontraditional consumer electronics and machine-to-machine (M2M) technology. While the company is not admitting that this effort is an attempt to bulwark its future revenue against a seemingly inevitable drop in CDMA patent profits, its efforts could end up having that effect anyway.
“The traditional Qualcomm mantra is to create an ecosystem to vertically integrate key applications that will create demand for their chipsets,” Marshall says. “The approach has not always worked, but when it has worked, it’s worked very well.”
Qualcomm’s partnership with Amazon on the Kindle eReader is perhaps the most notable example of its efforts to enable a new market for its chips. The device’s wireless connectivity has been integral to its success, allowing readers to seamlessly purchase and download books on impulse. The Kindle remains the market leader in the electronics book market despite the emergence of competing eReaders.
Morningstar’s Colello views efforts like the Kindle as one segment of Qualcomm’s three-pronged business strategy. As Colello pictures it, Qualcomm’s chip sales form one leg of the stool, its intellectual property rights licensing forms another and its move into new platforms creates the third leg.
“They need to put their money to work in a way that will keep them in more markets than just 3G,” Colello says.
Some of those efforts have such a long horizon that it is unclear when, if ever, Qualcomm will see a return on its investment. For instance, Qualcomm has sunk well over $800 million into its FLO TV effort since its foray into mobile television began in late 2004.
|Colello: Qualcomm’s patent position isn’t as strong in 4G as it is in 3G.
So far, the service has landed just three commercial customers. Verizon Wireless began offering it as part of its V CAST service in March 2007 and AT&T launched it about a year later. Though no official figures have been released, it is widely believed that uptake of the service has been slow. FLO TV is also partnering with Audiovox for in-car mobile television services.
In a previous interview with Wireless Week, FLO TV President Bill Stone said the service “has to be more than live, linear television” to succeed. To that end, Stone said the company will make the service “more robust,” with offers like daily passes and specialized content.
Following the DTV transition in June, FLO TV went live in 15 markets and plans to expand into 39 new markets by the end of the year.
However, the market for mobile television remains quiet, hampered by a lack of ubiquitous nationwide coverage, limited content and a device ecosystem limited to devices embedded with an ATSC receiver.
But no matter. If – or maybe the appropriate word is when – mobile television does take off, Qualcomm will have absolutely cornered the market. It may take several more years to spin off FLO TV and cash in on the investment, but that’s OK. With $14 billion in the bank, it can afford to be patient.
This type of wait-and-see strategy is characteristic of Qualcomm’s efforts in vertical markets. The company’s investments have a long investment horizon, but if they pay off, the jackpot is huge.
“Of the new platforms we’ll see, Qualcomm really needs only one or two to make their efforts worthwhile,” says Colello. “If a couple take off, then great. They don’t need all of them to hit.”
Qualcomm’s offerings include its low-power Snapdragon chipset, Gobi solution and foray into end-to-end M2M solutions with Verizon Wireless. The company has done work with healthcare, utilities and nontraditional consumer electronics like smartbooks.
Qualcomm’s ultimate vision is to see wireless technology embedded everywhere, from your handset to your body. It may take a long time for that vision to come true, but Qualcomm is in no hurry.
Excerpts from Qualcomm’s Legal Saga
Qualcomm’s epic legal battles are almost as notable as its contributions to 3G technology. The company was embroiled in fights with Nokia and Broadcom for years before they reached accord.
In July 2007, the International Trade Commission (ITC) imposed a partial ban on the import of new 3G handsets embedded with Qualcomm chips. The ruling left OEMs making devices with the chips and their carrier partners scrambling to avoid a major hit on their business.
Verizon Wireless and Sprint Nextel were particularly vulnerable as they sought out new handsets to fend off competition from the iPhone, which was not affected by the ban. Motorola, Samsung and LG also were left to find alternatives because all three relied on Qualcomm chips in many of their 3G handsets.
Fortunately, the U.S. Court of Appeals granted a stay that allowed some handset manufacturers to continue importing affected handsets while Qualcomm appealed the ITC’s decision. Qualcomm went on to win its appeal in October 2008. However, an appeals court upheld the validity of Broadcom’s battery-saving patent, instead ruling that the ITC used the wrong standard to determine whether Qualcomm made vendors and carriers infringe on the patent.
The two sides reached an agreement in April 2009 to settle the dispute. Under the terms of the agreement, Qualcomm agreed to pay $891 million to Broadcom over the next four years.
Around the same time Qualcomm was duking it out with Nokia over a royalty dispute concerning patent infringement. Nokia started the battle in 2005 when its first 15-year agreement with Qualcomm expired. Nokia argued that Qualcomm’s contribution to wideband CDMA intellectual property rights was less than it had been for CDMA and proceeded to cut its royalty payments to just $80 million a year.
A flurry of lawsuits followed, with the two companies eventually coming to a last-minute resolution in July 2008. The terms of the 15-year contract did not emerge until Nokia released its third-quarter financial results that October, when it was revealed that Nokia had made a one-time $2.29 billion royalty payment to Qualcomm.
In a previous interview with Wireless Week, Qualcomm COO Len Lauer has said the settlements with Nokia and Broadcom brought about “global peace” to the wireless industry.
Qualcomm still has to deal with regulatory threats in Japan, South Korea and Europe. Still, it looks like it’s done for now with some of its big legal spats within the industry. —Maisie Ramsay
Qualcomm & Its Acquisitions
Qualcomm has a substantial amount of acquisitions under its belt. Here are some of the company’s more notable acquisitions.
September 9, 2004: Qualcomm acquires its remaining stake in privately held display company Iridigm Display Corporation. The remaining 86 percent stake in the company went for $170 million in cash. Iridigm’s patents for Micro-Electro-Mechanical-Systems (MEMS) technology went on to form the core of the company’s MEMS Technologies subsidiary, which makes displays based on the same phenomenon that makes a butterfly’s wings shimmer. The low-power “mirasol” displays are in the process of being developed for handsets.
August 11, 2005: The company announces plans to buy Flarion Technologies for $600 million in stock and cash. Qualcomm paid an additional $185 million to Flarion shareholders eight months later when the company came through on its promise to deliver certain patents. The acquisition of Flarion’s OFDMA technology proved to be crucial to building out Qualcomm’s patent portfolio and allowed Qualcomm to support operators that preferred OFMDA or a OFDMA/CDMA hybrid.
November 16, 2006: Qualcomm buys machine-to-machine company nPhase for an undisclosed amount of money. The Chicago-based nPhase was absorbed into Qualcomm’s operations but re-emerged as a joint venture for the M2M industry between Verizon Wireless and Qualcomm this past summer. The nPhase joint venture is headed by the company’s original founder and CEO, Steve Pazol. Qualcomm has said the joint venture is intended to create an end-to-end solution for companies looking to incorporate machine-to-machine technology into their operations.
November 14, 2007: Qualcomm says it will pay $210 million in cash for mobile banking firm Firethorn, which continued to operate under its own name. Just over a year later, Verizon Wireless launched Firethorn’s mobile banking solution, allowing customers of several financial institutions – including Wachovia, SunTrust, FirstBank and BancorpSouth – to access their accounts from handsets. Firethorn has also partnered with AT&T, Alltel, Cellular South and Sprint.
April 4, 2008: Qualcomm beefs up its 700 MHz spectrum with the purchase of eight additional licenses. Qualcomm reported that the $558.1 million purchase doubled its 700 MHz spectrum holdings in 28 individual markets. The expanded spectrum went towards the expansion of the company’s FLO TV service, provided by subsidiary Media FLO USA. Qualcomm acquired the majority of its 700 MHz spectrum in the FCC’s June 2003 auction and the bought the remainder in October 2004 from its original owner.
February 27, 2009: In one of its most quiet acquisitions, Qualcomm buys privately held mobile broadcast and IPTV company Digital Fountain for an undisclosed sum. Much of Digital Fountain’s core technology had been adopted by standards bodies including 3GPP. —Maisie Ramsay
Filed Under: Infrastructure