The Once And Future Qualcomm
In 2001, Qualcomm Inc. (QCOM ) executive Paul E. Jacobs was speaking at an Internet conference when he surprised his audience by showing a slide that summed up his vision of the future of Net technology. "Wireless Internet > Wired Internet," it said. His point: Someday, people will use cell phones and laptops to surf the Web more than they use desktop computers. The audience of dot-com bigwigs erupted in laughter. Paul was undeterred. "When people reacted with disbelief, I just kept trying to convince them," he says.
Paul wasn't the first member of the Jacobs family to nearly get laughed off the stage. In the late 1980s, his father, Qualcomm CEO Irwin M. Jacobs, developed a digital technology called CDMA for mobile communications, promoting it as a better way of delivering voice and data over wireless networks. Many in the cellular industry thought he was overpromising, and Wall Street analysts vilified him for hyping Qualcomm's stock.
Now both father and son feel vindicated. CDMA is the fastest-growing wireless technology, with the number of subscribers expected to grow 21% this year, to 230 million worldwide, according to market researcher Shosteck Group. The growth of such major CDMA carriers as Verizon Wireless (VZ ), Sprint PCS (PCS ), and China Unicom (CHU ) is so strong that Qualcomm has raised its earnings estimates three times in the last year. And on Apr. 21, the company reported second-quarter earnings of $488 million, more than four times the year-earlier total. For the full year, Qualcomm predicts it will boost profits 88%, to $1.6 billion, on sales of $5 billion, up 26% from last year. And one of the main drivers of Qualcomm's success is, you guessed it, soaring demand for Web-surfing cell phones and laptops. "What I thought -- that CDMA technology would turn out to be very good for wireless -- has turned out to be true," says Irwin.
Indeed, the 70-year-old former college professor has transformed a onetime wannabe into a cellular powerhouse. Now, with his son as right-hand man, he hopes to dominate the next era of wireless. They're busy persuading carriers to adopt a wireless standard called wide-band CDMA (WCDMA), a zippier way to handle voice calls and provide high-speed Net access. Analysts expect 15 million WCDMA phones to be sold in 2004 -- up from just 2.5 million last year. As a result, they say CDMA has a clear shot at becoming the No. 1 technology for cellular transmissions. Qualcomm, which gets an estimated 5% royalty for every CDMA device sold, plus revenues from the CDMA chips it sells, could see its fortunes surge.
That is, if a tricky succession process at Qualcomm doesn't screw things up. Although Irwin doesn't plan to retire anytime soon, the board has begun succession planning. Paul, now executive vice-president of Qualcomm's Wireless & Internet Group, is one of the CEO candidates, along with several other top managers. Irwin has removed himself from the decision, but friends say he hopes his 41-year-old son will be chosen. If he is, some investors and corporate governance critics are likely to cry foul. Nepotism is a sensitive topic in telecom these days because Motorola Inc. (MOT ) struggled during the six years Christopher B. Galvin, grandson of the company's founder, was at the helm. "Qualcomm's board needs to learn from that," says John T. Thompson, a vice-chairman at headhunter Heidrick & Struggles International Inc.
PROS & CONS. How does Paul stack up? He has some of Irwin's pluses and minuses. Both are engineering PhDs who had hands-on roles in developing CDMA. Both are willing to take huge risks, challenging conventional wisdom and evangelizing relentlessly to win converts. They're also prone to overreaching, which has caused problems for the company. But Paul's major shortfall is that he lacks a long track record of business experience.
For Paul to emerge as a leading candidate, he'll have to turn his current assignment into a raging success. He is the primary architect of Brew, a software platform he introduced in 2001, which allows cellular users to play games, watch videos, send e-mail, and download thousands of other extras onto their phones. In exchange for using the technology, carriers give Qualcomm a share of their revenues from these new services. Plus, the new services drive demand for CDMA phones, which flows back to Qualcomm as royalties and orders for chips.
Thanks in part to Paul's offer to manage the complex deployment of new services for carriers, 16 adopted Brew in the first two quarters, doubling the total. Paul faces rivals, mostly carriers developing their own software. But pressure from dad is even more intense: "He told me this couldn't be a small play. This has to have a big impact on the world."
Irwin has been pushing his son to excel in technology since Paul was a teenager. In the '70s, after Irwin quit his job as a professor at the University of California at San Diego to manage a consulting firm he had started, he lugged a clunky computer home on weekends for Paul and his three brothers to play with. Paul taught himself programming, and when he was in high school, his father gave him a summer job as a programmer. Later, Irwin invited Paul and his brother, Jeff, to join Qualcomm -- on the proviso that they work their way up. Jeff, now head of global business development, started in 1986 as a market analyst. Paul started four years later as an engineer. "Kids of executives fall into two classes: those who work harder and those who mooch off the name. Irwin's kids work harder," says Qualcomm co-founder Harvey P. White, now CEO of Qualcomm spin-off Leap Wireless International Inc. (LWIQE ).
Paul soon built a reputation as a bold innovator who wasn't afraid to stand up to his father. In 1992, Paul and his then-boss, Allen B. Salmasi, tried to persuade Irwin to let them develop a technology to improve the voice quality of CDMA phones. Fearing the technology would limit call capacity on CDMA networks -- a key selling point for wireless phone companies -- Irwin refused. But Paul strongly believed carriers would never adopt CDMA if voice quality was lousy. So he forged ahead -- in secret at first -- leading a team of engineers that worked for more than six months developing a prototype. When Irwin tried it, he was sold. "Paul is his own man," says Salmasi, now CEO of NextWave Telecom Inc. "If he disagrees with Irwin, he'll fight him."
Paul's next big test resulted in the one black mark on his record. In 1995, Irwin appointed the then-32-year-old to be president of Qualcomm's new cell-phone manufacturing unit -- a business in which neither Qualcomm nor Paul had any experience. Paul immediately ran into problems. One of the first phones, produced in a joint venture with Sony Corp. (SNE ), was so shoddy users heard loud screeching noises when they placed calls. He shut the factory for several weeks to fix the bugs. Analyst Albert Lin of American Technology Research Inc. in San Francisco, who once toured the factory, says: "It was a very, very chaotic environment."
Things got so tense that father and son fought openly. Once Qualcomm started producing phones that worked, the company couldn't keep up with demand. Paul, more process-oriented than his father, devised complex formulas to determine how many phones each carrier should get. Some unhappy customers went over his head to Irwin, who promptly reallocated the shipments. More than once, Paul tangled with his father, asking him to back off. In several cases, Paul got his way.
WAKE-UP CALL. Some board members urged Irwin to exit the phone business and leave manufacturing to companies that did it well. But Irwin stuck with it. He argued that Qualcomm needed to stimulate the market by producing its own phones. He insists the decision had nothing to do with his son running the business. In fact, Paul eventually sided with the dissenters. His wake-up call came in late 1999, when several competitors introduced CDMA phones priced 14% below Qualcomm's product. Qualcomm had no choice but to slash its prices, too, making it clear, Paul says, "that we couldn't make a profit in the phone business." Ultimately, in 2001, Irwin sold the unit to Kyocera Corp. (KYO ).
Paul's tumultuous reign at the phone unit has fueled questions about whether he's the best choice to succeed his father. Director Duane A. Nelles says the board is mindful of the risks and has interviewed more than 20 other candidates inside and outside the company. "We're looking at this up, down, and sideways," he says. Paul knows he won't get a pass to the corner office. "It's not my decision. It's not the family's decision. Irwin does not anoint me," says Paul.
While the board works this out, Irwin and Paul are building the business. They rarely see each other these days. Paul is on the road marketing Brew, and Irwin is jetting off to countries such as Vietnam and Indonesia, marketing CDMA. Irwin says he still has goals to reach before he's ready to retire. "The whole wireless area just keeps expanding," he says. "Qualcomm is still making progress. That's the reason I keep working." If he hangs on long enough, there's a potential side benefit for Paul: He gets more time to prove he's ready to fill dad's shoes.
By Arlene Weintraub in San Diego