Qualcomm Inc.’s transformation is complete.
The CDMA innovator last week announced it intends to spin off its chipset and software business, leaving the company as primarily one that collects royalties from CDMA technology.
Qualcomm started out this way. It developed CDMA technology for mobile systems, patented its inventions and then entered the infrastructure, chipset and handset businesses to commercially jump-start the technology. With support in place from virtually all major manufacturers today, it has peeled away the businesses. Qualcomm sold its infrastructure business to L.M. Ericsson last year, followed by a sale of its handset business to Japan’s Kyocera Corp. As its chipset business threatened its royalty streams from CDMA technology, Qualcomm chose to spin off that business and take it public.
Qualcomm’s chip business, temporarily named Spinco, wants access to GSM intellectual property in order to develop multimode chipsets for the third-generation market. Operators initially will build out 3G technology in islands, relying heavily on the world’s most extensive technology, GSM, to fill in the gaps. GSM patent holders, however, want cross-licensing deals with Qualcomm, which threatens to erode the company’s royalty streams.
“There has been some industry concern that for us to get into GSM, we would need to in essence cross-license and reduce our CDMA fees,” said Qualcomm President and Chief Operating Officer Richard Sulpizio, who will become Spinco’s new CEO.
To solve the problem, Qualcomm is giving Spinco a certain set of CDMA patents so it can negotiate cross-licensing relationships with GSM patent holders. Spinco won’t charge royalties back and forth, nor will it make any money from royalties. And companies seeking CDMA patents, which Qualcomm says it owns for all CDMA-based 3G systems, still have to negotiate royalties with Qualcomm in order to deploy and use CDMA technology, said the company. In addition, the patents Qualcomm gives to Spinco won’t affect any future royalty streams Qualcomm receives. Qualcomm said it isn’t collecting any additional money on those patents today.
Qualcomm is the world’s largest CDMA chipset supplier, having shipped 100 million chipsets. It stands to gain an early market advantage in the W-CDMA market, a technology incompatible with today’s CDMA networks that GSM operators plan to use in the next generation. Due to the complex nature of today’s CDMA technology, Qualcomm has few chipset competitors today. But it can’t go into the next generation without GSM technology.
“The bottom line is that given how big GSM is, Qualcomm has no choice but to build bridges to GSM and W-CDMA if they want to keep growing,” said Ira Brodsky, president of Datacomm Research Co. in Chesterfield, Mo.
Qualcomm is planning an initial public offering for the new business in the fall for around $100 million. It expects the spinoff to begin in August 2001.
For Qualcomm’s part, it will continue to develop CDMA applications and new technology for wireless Internet applications, said Paul Jacobs, newly appointed president of Qualcomm.
“The spinoff will improve Qualcomm’s ability to evangelize and support all third-generation CDMA-based standards by collaborating with manufacturers and carriers on their development, deployment and implementation of the latest CDMA technology.”
The spinoff could take the public-relations sting out of the debate over cdma2000 vs. W-CDMA technology. Though Qualcomm continually claims it will receive the same royalties from W-CDMA technology that it does from today’s generation of CDMA technology, investors have been unsure. They have been reacting to speculation on which type of CDMA 3G technology the world’s markets will choose, and a move to W-CDMA doesn’t bode well for Qualcomm in their minds. The company’s stock has reflected this.
“By doing this, people will understand we’ll have the same licensing rates for either technology and not feel like we’re speaking with bias when we make statements,” Jacobs told RCR.
Although it has said it supports all modes of 3G CDMA technology, Qualcomm has continued to openly advocate the benefits of cdma2000 over W-CDMA technology.
“If you look at cdmaOne operators, it’s certainly more economical to go to cdma2000 because of the way the system is designed,” said Jacobs. “For greenfields, it’s an open issue, and you have to look at the economics one way and make those decisions … We won’t say we’ll convert people, our big goal is to get 3G out as quickly as possible. Qualcomm will be spending a lot of effort driving applications of high-speed wireless data and build applications that build customer demand.”
Even Qualcomm’s harshest critics admit the company is a master at advocating and marketing current CDMA technology. Today, it’s finding itself in a position where it must embrace a technology, W-CDMA, it never advocated in the beginning. It wanted harmonization of cdma2000 and W-CDMA technology, but ended up with a compromise technology that promised modes of CDMA that included both technologies.
“I think Qualcomm is trying to make its businesses more rational and less emotional,” said Brodsky. “If it works, Spinco becomes just another component supplier, albeit with lots of CDMA experience.”
The Office of the Chairman executive team for Spinco will include Dr. Irwin Jacobs, chairman; Richard Sulpizio, chief executive officer; and Don Schrock, president and chief operating officer.
Spinco will include Qualcomm’s integrated circuits and system software business, 1XEV product development, position location product development and research and development centers in Boulder, Colo., the United Kingdom and Israel.
