Like Father, Like Son At Qualcomm
In college, Paul E. Jacobs would have been voted least likely to start a fight. Tall and thin, with an easy smile, he likes to tell the story of how he met his wife while choosing players for a pickup volleyball game, then packed the rest of the team "with guys who weren't all that attractive."
But in the 16 months since Jacobs, 43, took over from his father, Irwin, as chief executive of chipmaker Qualcomm Inc. (QCOM ), he has stirred up a hornets' nest. Lawsuits have piled up faster than silicon chips at an assembly plant. Cell-phone giant Nokia Corp. (NOK ) claims Qualcomm is using its 1,800 patents for wireless devices to extract outsize royalties on current and next-generation products. Chip rivals, led by Broadcom Corp. (BRCM ), say they are being denied licenses to key technologies at reasonable rates.
Jacobs and Qualcomm appear to their detractors every bit the bullies in mobile phones that Bill Gates and Microsoft Corp. (MSFT ) once seemed to PC software companies. The squabbles probably won't block any new Net-surfing, TV-viewing cell phones from reaching the hands of consumers. But they could shape the financial fortunes of numerous tech outfits, starting with Qualcomm.
More than two-thirds of the company's $2.3 billion in operating earnings last year came from patent royalties. Worries about the court cases have helped push Qualcomm's stock price down by 23% since the spring, to 39. "There's more speculation that maybe Qualcomm isn't as invincible as it has been in the past," says Michael Mahoney, managing director of EGM Capital, who sold his Qualcomm shares earlier this year.
A WORTHY HEIR
The battles are a chance for Jacobs, an engineer who got his PhD in robotics at the University of California at Berkeley, to prove himself a worthy heir to his 73-year-old father. Irwin Mark Jacobs, who founded Qualcomm in his den in 1985 and is still chairman, was known for his toughness--in the marketplace and in the courtroom. In the mid-'90s he pushed the patents for code-division multiple access (CDMA) technology--which made it easier for phones to send voice and data--with bruising lawsuits that included charging a Motorola Inc. (MOT ) scientist had stolen a prototype Qualcomm-made handset. The companies settled, and Motorola extended its licensing agreement. Today, Qualcomm's CDMA patents power an estimated 47% of U.S. cell phones, and payments for its patents make up about 5% of the wholesale cost of those handsets. "From Irwin's days, Qualcomm was a company that had to fight to get acceptance," says Dave Mock, author of the 2005 book The Qualcomm Equation. "And Paul learned from his dad."
This time around, though, it's Paul Jacobs and Qualcomm that are fending off rivals such as Broadcom, which has developed competing patents or cell-phone chipsets for phones that use the so-called universal mobile telephone standard (UMTS). Qualcomm's patents give it less of a controlling position in that newer technology. Indeed, a recurring theme in the complaints is that Qualcomm uses its patents to claim a larger role--and higher royalties--in next-generation devices than its research efforts warrant.
Qualcomm is hardly a tech laggard. The great majority of the 9,300 people it employs in San Diego and around the world are engineers and researchers, and it spent $1 billion last year on research into CDMA and other technology. Through its Flarion unit, Qualcomm is developing ways to provide wireless broadband service in competition with technology backed by Intel Corp. (INTC ), and it is creating an over-the-air TV service called MediaFLO that will provide live TV signals to cell phones.
Still, there's no denying that an oversized share of Qualcomm's success flows from the rights to such unexciting but necessary technologies as sending voice calls and connecting to the Internet using CDMA technology. For all the complaints, those technologies remain essential in next-generation phones as well. "Their patents are like the fourth wheel of a car. You could probably drive it without a key patent, but it would be a very bad ride," says economist and intellectual-property expert Christian M. Dippon, vice-president of National Economic Research Associates.
Jacobs doesn't apologize for playing toll keeper. He points out that for years, Qualcomm spent heavily to blaze the CDMA path that became wildly popular for phone carriers in the U.S. "I find it amazing that we're being sued by the No. 1 handset maker, the No. 1 chipset maker, and the No. 1 and 2 guys in Japan," he says. "A lot of these are the same companies who [once] said our technology was worthless. And now they say they can't live without it."
What rankles cell-phone and chip companies are Qualcomm's hardball negotiating tactics. Earlier this year, industry sources say, Intel accused Qualcomm of packing a standards-setting board with Qualcomm-hired consultants in order to try to favor its own wireless broadband technology. Qualcomm concedes that it had consultants on the panel, including the panel chairman, but denies it used undue influence. Jacobs claims the dustup reflects Intel's own interest in a competing technology. Still, in June, without mentioning Qualcomm by name, the Institute of Electrical & Electronics Engineers suspended its work on creating a standard, citing "dominance and other irregularities."
Broadcom, whose chips appear in cable-TV set-top boxes, modems, and other devices, has lobbed suits contending that Qualcomm won't license patents needed for UMTS-powered phones with the "fair, reasonable, and nondiscriminatory" rates required by the industry's standard-setting bodies. Qualcomm disputes that, pointing to the many license agreements it has with other companies. "How much more fair and reasonable can you get than bilateral negotiations with the rest of the marketplace?" asks Qualcomm general counsel Louis M. Lupin.
Qualcomm returned fire, filing three suits against Broadcom, including one alleging that it misappropriated trade secrets. And during contentious negotiations last year to extend an existing license agreement with Nokia, Qualcomm filed patent-infringement suits against the handset maker. Nokia responded in August with its own suit, complaining to Delaware's Chancery Court that Qualcomm was "threatening to enjoin Nokia from manufacturing or selling products...unless Qualcomm's demands for unfair and unreasonable royalties are accepted." In an early October ruling, a judge at the International Trade Commission found Qualcomm infringed on one of three Broadcom patents, but he didn't stop customers from importing phones containing its chips.
A far bigger threat may be shaping up in Europe. There, Broadcom, Texas Instruments (TXN ), and others have urged the European Commission to investigate Qualcomm's practices. The charges, which the European Commission has yet to investigate formally, would put Qualcomm before the same regulatory body that saddled Microsoft with nearly $1 billion in fines and imposed new rules on the software giant. Jacobs rejects any comparison out of hand. "We're not Microsoft," he says. "Microsoft's failure is that they don't share their technology with anyone at any price. We, however, will sell our technology to anyone who wants it."
By Ronald Grover and Olga Kharif