Qualcomm: Unproven, But DazzlingLarry Armstrong
Five years ago, Qualcomm Inc. was a tiny but bothersome thorn in the side of the cellular-phone industry. The San Diego satellite communications company came up with a scheme for expanding cellular network capacity, vitally needed in regions where radio waves are saturated. The problem: The industry had already settled on a method for doing just that. Qualcomm muddied the waters with an alternative that was theoretically cheaper and offered higher quality, but no one knew whether its complicated technique would work.
They still aren't sure--but Qualcomm is on a roll anyway. It has signed up 10 of the 14 largest cellular operators to use its proprietary digital technology, called CDMA, for code-division multiple access, even though it has yet to be tested in a commercial setting. And this summer, in stunning back-to-back announcements, two of the biggest bidders in the Federal Communications Commission's auction of licenses for personal communications services (PCS) unexpectedly said that they, too, would be using Qualcomm's technology. The 10-year-old company's stock rose along with its fortunes, from 26 in February to a record high 541/4 on Aug. 16, before dropping back to about 48, where analysts say it is fairly valued. It also rushed out a public offering on Aug. 9, raising nearly a half-billion dollars.
Qualcomm wants the money so that it can stop licensing its technology and start manufacturing gear itself. President Harvey P. White figures the industry's move to CDMA gives Qualcomm a once-in-a-lifetime chance to make the leap to the major leagues of the telecom equipment business. "I think wireless [equipment] could become a $40 billion-a-year business," predicts Qualcomm founder and CEO Irwin M. Jacobs, "so there's plenty of room for more manufacturers." Montgomery Securities analyst Matthew S. Robinson says Qualcomm's move into cellular equipment could push its revenues to $1 billion by 1998, from $385 million for the year ending Sept. 30 (chart).
Manufacturing isn't a new game for Qualcomm. As the world's largest satellite-based mobile communications company, providing communications and position information to truck fleets, it makes the equipment that goes into each truck as well as selling the service. Beyond telecom, Qualcomm is known for Eudora, the most widely used Internet electronic mail package. "Lots of students use it, and every time they use it, `Qualcomm' pops up on the screen," boasts Jacobs.
CDMA, though, is Qualcomm's ticket to the big time. The company has a 51% stake in a $61 million manufacturing venture with Sony Corp. that is revving up a San Diego factory to churn out up to 1 million phones a month by yearend. Qualcomm is also getting ready to manufacture the base stations that are used in wireless networks, which Northern Telecom Ltd. has agreed to bundle with its cellular and PCS switching systems for the North American market. "If Qualcomm can bring in enough industry expertise, or if it can develop successful joint ventures, then it can be a significant manufacturing force," says John B. Ledahl, analyst at market researcher Dataquest Inc.
Still, Qualcomm is only a tenth the size of its next-larger equipment competitor. It has no way to match the innovative financing plans that bigger companies routinely offer system operators. Instead, Qualcomm is taking minority positions in overseas cellular companies, such as Korea's Shinsegi Telecom Inc. and Chile's Entel Telefonia Movil, so that it can have some clout as to what technology they choose.
OLD PROBLEM. And it keeps winning CDMA converts at home. Some key players are still resisting--AT&T's McCaw Cellular, the largest U.S. cellular operator, is rolling out a competing technology called TDMA, for time-division multiple access. But CDMA's lower cost has convinced the Bell Atlantic-Nynex wireless joint venture. "We had TDMA in a few markets, largely for competitive reasons. We did not actively promote it," says a spokeswoman for the group. The group is switching to CDMA for the long haul.
Both technologies address the same problem--lack of capacity. Today's cellular systems devote a single channel to each conversation. TDMA, adopted by the cellular industry as a standard in 1989, can increase capacity threefold by slicing each conversation into tiny pieces and running them sequentially. CDMA is meant to create 10 times more capacity by chopping up the calls and spreading them across all available channels. It needs only one-half to one-third the antennas to achieve the same coverage as TDMA, because it can maintain voice quality over a longer distance.
The lower cost looks to make CDMA a hit in the emerging PCS industry. The biggest PCS bidder, Sprint Telecommunications Venture, a joint venture between Sprint Corp. and four cable-TV partners, has announced it will deploy CDMA in 29 markets. PrimeCo, a partnership between US West, Bell Atlantic, Nynex, and AirTouch, will also go with Qualcomm technology, all because of its lower cost. "CDMA requires fewer cell sites, and that was pivotal in the PCS decision," says F. Craig Farrill, vice-president for technology planning and development at AirTouch Communications Inc.
A lot is riding on AirTouch. It will launch the first commercial CDMA system this fall, an upgraded cellular network in Los Angeles. The launch has already been delayed a few times by problems with sound quality and interference from analog signals. Still, says Farrill, AirTouch's trials show capacity increasing by 8 to 12 times. That's the kind of test result that Qualcomm devotees like to hear about.