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Qualcomm's Cutting-Edge Strategy

In 1985, Irwin Jacobs co-founded Qualcomm as a wireless-technology company with no particular product in mind. Nearly two decades later, it's a technology powerhouse, licensing its wireless knowhow to 115 telecommunications-equipment manufacturers and numerous cell-phone makers. While cell-phone users in Japan and Korea have used the superfast networks based on the company's technology for several years, U.S. carriers are just ramping up -- and Qualcomm (QCOM) is about to cash in.

Code division multiple access (CDMA), Qualcomm's digital-wireless technology, converts speech into digital information that is transmitted over a wireless network -- and reconverted to speech on the other end. Some of the first phones with such capabilities are just being introduced in the U.S. And Qualcomm's sales -- from both chips and licensing -- are soaring, even as revenues remain sluggish for most other chipmakers. On Nov. 7, Qualcomm reported that revenues rose 34%, to $874 million, in its fiscal fourth quarter ended Sept. 29. Meanwhile profits climbed to $190 million, vs. a loss of $75 million in the last quarter of 2001. Qualcomm expects 15% to 22% sequential sales growth in its first quarter ending Dec. 31, and 19% to 23% revenue growth -- excluding revenue from investments -- in 2003.

Jacobs, Qualcomm's chairman and CEO, talked to BusinessWeek Online reporter Olga Kharif on Nov. 22 about why his company is doing so well, its chips strategy, and what kinds of chips it expects to be in demand over the next few years. Following are edited excerpts of their conversation:

Q: You expect a good holiday season, while many other companies, even in the wireless field, expect flat sales. Why are you different?

A: Our chip business is focused on CDMA, and [adoption] of that technology by wireless-service providers has been going very well. [Business in] China began the year slowly but has been continuing to accelerate as new handsets have been introduced, marketing has been improved, and the network has been improved. And China is turning into a significant growth engine.

Secondly, we've been introducing [the latest CDMA technology] in Korea, Japan, and the U.S. And that's causing growth in [cell-phone] subscribers and driving [sales of] replacement phones. And so, pretty much across the board -- except for a little weakness in Latin America -- we're seeing strong demand. Plus, during this past year, [cell-phone maker] Motorola (MOT), which previously used its own chips, began introducing new cell phones based on CDMA and our chips -- and that increased our market share.

Q: Cell-phone replacement is a big issue in the U.S. Many consumers believe their phones already have all the capabilities they need. Will this change?

A: The phones like those sold by No. 3 service provider AT&T Wireless (AWE) and No. 2 carrier Cingular -- they have never driven replacement sales of cell phones anywhere in the world: The technology is limited and the cost of providing service is high.

Our CDMA technology, on the other hand, has been driving sales because it offers higher data-rate capability, allowing for downloads of multimedia applications [for sending photos over cell phones, for instance]. The introduction of that technology nationwide by both Sprint PCS (PCS) and [No. 1 service provider] Verizon Wireless, plus a number of regional carriers, like Alltel (AT), means we'll be seeing a strong reaction in terms of a growing replacement business.

Q: At one point several years ago, you decided not to spin off your chip operations. Are you happy with that decision?

A: Quite happy. At the time we considered the spinoff, we were starting to design cell-phone chips that supported all technologies, not just CDMA. And we had concerns that there would be significant intellectual-property battles unless we separated the chip division from the part of the company that develops new technology and does licensing. But then we were able to negotiate agreements that gave us confidence that we could reduce the battles over intellectual property.

Q: The phones that support all technologies, including CDMA, would work anywhere in the world. That's not the case now: Phones can only roam in certain regions. Who would use the new phones, and what advantages do they give carriers and cell-phone makers?

A: There are carriers such as Vodafone (VOD), which operates a system based on two different wireless technologies around the world. And Verizon Wireless is operating on CDMA here in the U.S. There's desire from both carriers to roam in both the U.S. and Europe. Our chips will support that.

Then there are wireless carriers, like China Unicom (CHU), that operate equipment based on CDMA and on another technology. Such carriers will want phones that operate on both parts of their network -- since that could lead to less expensive phones. Initially, these will be higher-end phones used by business travelers. But as we crank up the output of chips that have this capability, the cost difference between a regular cell phone and one that can roam globally will rapidly become quite small. So, as we look out, perhaps, a couple of years, I think most phones, except entry level ones, will have these capabilities [to roam globally].

Q: How does the chip business fit into your overall strategy?

A: Our strategy has always been one of trying to come up with significant innovations and introduce those to the market quickly. Since we're no longer in the handset nor infrastructure-manufacturing businesses, the way we're able to do that is by introducing new features onto our chips and in the software that accompanies our chips. That gives us the means of not just innovating [and licensing the technology] but also [getting the technology out] to other manufacturers and onto the market very rapidly. Our chip business is fundamental to doing that.

Q: What did you do to strengthen your chip business during the downturn?

A: We continued our research and development at an increasing rate, rather than at a decreasing rate, because we see the spread of CDMA across the world as a growth area long term -- and one for which we are fully prepared.

Q: Do you expect to further strengthen your position by acquiring some smaller players while the chip market is still weak and acquisition prices are low?

A: Qualcomm has mostly focused on growing through its internal resources. We don't see a need to make any acquisitions in order to execute our business plan.

Q: Competition in wireless is increasing, particularly in Asia, your strongest market. What does that mean for Qualcomm?

A: Asia's own manufacturers are becoming very active in providing equipment for the home and export markets. We work with many manufacturers, licensing to more than 115 different ones that make equipment. We provide chips, software, and quite a range of support to allow them to get products to market as early as possible. We think [wireless] competition will help build the market faster.

Q: How have your customers' requirements changed over the past few years?

A: The amount of software going into the phone is increasing rapidly, and that can increase test times, increase the risk of recall. So we've been working on supporting manufacturers with better software. And we're supplying more chips that go into phones -- and that further simplify design, manufacture, and testing. We're also offering support to manufacturers on how best to use the chips.

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