Inside Qualcomm: a vendor dossier

Walking around its headquarters in San Diego you'd be forgiven for thinking Qualcomm is a grey company. The walls are grey. Most of the furniture is grey. Even the carpets in the wide hallways are grey. But you'd be getting the wrong message. Qualcomm is a colourful and influential vendor, one at the very heart of future mobile communications. Yet its success isn't widely talked about, at least not in Europe.

That's all about to change. But first a little background. Qualcomm has fingers in several pies. It is a stakeholder in beleaguered satellite venture Globalstar, operator of successful fleet tracking company OmniTRACS, owner of Eudora email and increasingly a digital distributor of films for cinemas. However, it is for cellular communications Qualcomm is best known.

Qualcomm, and in particular its 66-year-old founder Dr Irwin Jacobs, have led the commercial adoption of a technology called CDMA (code-division multiple access), first used for secure wireless transmission as far back as World War II. CDMA during the 1990s was a competitor of GSM, which became the most popular digital, second-generation mobile standard. It is widely considered technologically as good as, if not better than, GSM - so why did most operators around the world not choose it?

The answer is partly political - Europe wanted to foster a mobile industry by creating a standard, which it did very well - but mostly because Jacobs and Qualcomm were late to the table. CDMA was only really viable by the mid-1990s - fine for some US operators then upgrading from analogue networks but too late for many regions and certainly those in Europe.

Only now, the move to third-generation (3G) mobile networks in most markets, with all the faster downloads and multimedia services they will entail, is putting a smile on Qualcomm's face. The acronym CDMA may sound familiar because W-CDMA is the standard most European and Asian operators will use for 3G.

Now W-CDMA is far from owned by Qualcomm - in the Americas and Asia, especially South Korea, a source of a third of its current sales, it is pushing a competing standard called CDMA2000, from which it will derive proportionately much more revenue - but as one spokesman put it: "Any move to 3G is good for us. We just want people to have it."

Does this mean we are about to see lots of Qualcomm-branded products? No. As part of the carve up of W-CDMA patents in the late nineties, Sweden's Ericsson bought Qualcomm's infrastructure business. Similarly, Japan's Kyocera now owns Qualcomm's former handset division.

Instead, the San Diego company makes money by designing mobile phone chipsets, manufactured by IBM and TSMC in Taiwan, and licensing its intellectual property. Visit that fabled HQ and you'll be greeted by a wall full of 700 or more patents, many of them the product of Dr Jacobs' own early work.

Given the efficiencies of being an IPR company - where Qualcomm has its highest margins - and the early roll out of its CDMA2000 1x technology in the US, South Korea (even though operators there hold W-CDMA licences) and Japan (where KDDI's subscriber numbers outshine those of NTT DoCoMo's, with its unorthodox FOMA flavour of W-CDMA 3G) you'd be forgiven for thinking Qualcomm is sitting pretty.

Better-than-expected sales of chipsets in the last quarter also made some analysts sit up and take note, as will new multimode designs allowing handsets to roam between GSM, GPRS, W-CDMA and CDMA2000. But there are a couple of big factors stacked against it.

First of all, Qualcomm will be among the first to admit that regardless of the landscape now, most operators around the world will eventually use W-CDMA, not some version of its CDMA2000. They are often obliged to because of licence conditions or will simply do so because it's the obvious upgrade path from GSM and GPRS (pumped up GSM) networks.

The issue of licence obligations is one that gets Qualcomm CEO Jacob's going. If CDMA is the best core technology, surely Europeans should be using services based on it, services which, as figures from the Korean operators show now, also boost key ARPU (average revenue per user) numbers.

To paraphrase Dr Jacobs in an interview with this publication, it goes like this: GSM brought huge benefits to Europe - to end users, government coffers and credibility, and most of all to a handful of equipment companies, headed by the likes of Ericsson and - especially - Nokia. Giving up that leadership position by putting a company from southern California at the heart of the industry wasn't acceptable - so W-CDMA was adopted (and called UMTS) with all the attendant roll out problems we are now seeing.

When politicians say European operators were free to have chosen CDMA2000, as UK E-minister Stephen Timms recently told The Economist, they are being "a little misleading", says Jacobs. Qualcomm thinks there was never that choice.

Nokia also looms as Qualcomm's nemesis. It may license CDMA technology but when proudly showing slides of 50 or more equipment vendors it supplies, conspicuously absent from the top of the list is the Finnish giant. This is significant on a number of fronts. Nokia's grip on the handset market may not be so strong in the Far East but for the rest of the world any player would want to be on good terms with it.

Qualcomm's BREW platform also directly competes with Nokia's Series 60 software. Both sit on top of an operating system and provide a standard environment for interfaces and the downloading of applications.

Qualcomm will cite about 17 million BREW-enabled phones already in the marketplace, good reviews and how it is air-interface independent. It doesn't like to talk about why major customer Sprint PCS went with a pure Java approach instead.

Nokia will talk about how Series 60 is licensed in source code format and its "awesome" user interface. It isn't inclined to mention current uptake. Neither vendor wants to acknowledge other options such as In-fusio, who have made headway with operators.

And lastly, there are the analysts. In Europe at least, they will harp on about CDMA2000 1x not really being 3G - the ITU classified it as such after a review and Qualcomm's decision not to go to CDMA2000 3x - and Qualcomm's reputation for sleek marketing.

The company's stock price may have dipped over the past two years but previous stellar gains show how investors have rated the company. Its roster of customers, who serve operators in the US (for example Sprint PCS, Verizon Wireless), Korea (SK Telecom, KTF), Japan (KDDI) and, most promisingly, China (China Unicom), is also impressive.

In the form of the vertically integrated Nokia, Qualcomm will always have a formidable rival but at the very least it will keep European vendors and operators on their 3G toes.