Qualcomm's Jacobs: Silencing the Static?
When Paul Jacobs succeeded his father, Irwin, as chief executive officer of wireless technology powerhouse Qualcomm (QCOM) last year, he predicted a smooth transition and great things to come from a company whose technology has become a key ingredient in just about every cell phone on the planet.
Too bad things didn't turn out that way. The company is embroiled in an increasingly bitter royalty-payments battle with Nokia (NOK), the world's top cell-phone maker and Qualcomm's largest licensee. Qualcomm is also locked in a war of words with Intel (INTC) over whose standard is better for unwiring cities with fast data networks. And two major Indian cellular operators, which account for much of its business in that rapidly developing country, have staged an open rebellion.
As a result, San Diego-based Qualcomm's shares tumbled nearly 21% during the most recent quarter, closing at $40.07 at the end of June. The stock has declined further since then, closing near a 52-week low on the Nasdaq, at $36.56 a share. BusinessWeek's Technology correspondent, Cliff Edwards, recently spoke by phone with an unapologetic and feisty Paul Jacobs as he traveled to India to soothe the sensibilities of providers there. Edited excerpts follow:
You certainly have had a trial by fire in your first year on the job. Why do you think that is?
It's because we've been successful. We're a bigger company, so that makes us a bigger target. Everybody looks at us, and they're trying to figure out how to compete with us as we continued to execute. People are trying to figure out how to deal with our business model.
A lot of people claim your business model is unfair, that you're essentially picking their pockets by charging high prices that make it difficult for them to compete against new competitors such as Chinese manufacturers. Is that true?
It's very easy for people to focus in on royalty rates and claim that's a big problem. Let's say they're as high as 5% (of the cell phone price), for the sake of argument. You multiply those out, and you get $2. If you contrast that with what our business model brought about—which was enough competition to cause handset rates to decline year over year—that's nothing. It's the competition between these guys that causes the price to go down.
Your dispute with Nokia is getting nasty, though, with it threatening to exit the business in many regions, and each of you accusing the other of being anticompetitive.
Handset manufacturers might be inclined to point to the business model as somewhat negative. They were happy to be enabled, but once the business starts to grow, that's when they start complaining. They also recognize that we're a key part of the industry. We have this renegotiation of this contract with Nokia going forward next year. Both companies are trying to establish this position. In the end, we will come to an agreement. The possibility that continued escalation will happen until we come to a resolution is also quite [strong].
Let's turn to India. You have the two biggest CDMA [Code Division Multiple Access] technology providers, Reliance in particular being the biggest cellular operator in India, saying it would rather switch to a competing GSM [Global System for Mobile] technology than keep paying you. Is it right for CDMA to be bothered by what it considers to be favorable treatment you've given on royalties in China?
We had special negotiations with the Chinese government when we first launched CDMA there. Yes, they have lower royalty rates, but it doesn't turn into much money for us. In other words, it doesn’t impact the overall royalty situation for us because royalties generated out of India [with its higher ratio of low-priced phones] were 15% lower on an absolute basis than out of China.
Do you think your conversations have had an impact with your Indian customers?
Coming here, I'm probably more optimistic about the opportunity in India than I was when I first got on the plane. Some of the pressures that are on them are the way the Indian government has allocated spectrum. The government looks at the voice traffic and allocates spectrum that way. CDMA is better for data delivery, but these things are getting somewhat minimized by the way the government is allocating spectrum. Some of the solutions will come in the future as the existing spectrum is allocated and we're able to do more and more efficient things. We discussed how we can use some of data services to increase revenues.
So business is back on track in India?
Solving the issues Reliance has articulated for us isn't a slam dunk. We have work to do. We did talk about the fact that we were able to bring in new [cell phone] manufacturers in many countries to offer competition, with lower-priced phones and resulting higher sales. We can work with manufacturers in India to help them get in [to the market] as well.
You report your most promising markets actually are Europe and Japan, so why are India and China important at all?From a volume standpoint, they're great markets, but from a profitability standpoint and revenue standpoint, they're somewhat less because of the greater emphasis on the low end of the market. They're something like 8% of the volume and only 2.2 % of the royalty revenue. You want to build market share. As the economies improve in the developing markets, the subscribers will be able to buy up into the higher-end handset market.
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