Qualcomm Inc (QCOM)

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Son Seeks To Repeat Father's Success In The Changing Of Guard At Qualcomm
BY MIKE ANGELL

INVESTOR'S BUSINESS DAILY

http://www.investors.com/editorial/tech.asp?v=7/1

Paul Jacobs last week stood on the field at Qualcomm (QCOM) Stadium, home of the San Diego Chargers football team, before some 9,000 employees of the stadium's namesake. The employees were celebrating a lot of company touchdowns, and the company's 20th anniversary.

But as Jacobs joined them in celebrating a successful past, he admits he felt the weight of the future.

Looking up at the employees in the stands, Jacobs recalls thinking: "The livelihood of these people rests on the decisions I make. That's a big responsibility."

The responsibility starts Friday, when Jacobs officially becomes chief executive of wireless product maker and technology creator Qualcomm. He's replacing the only other CEO the company's known, Paul's 71-year old father, Irwin. The company unveiled the succession plan in March.

Thanks to its patents on code division multiple access or CDMA technology — CDMA is one of the world's two major methods of transmitting wireless voice and data — Qualcomm's chips and technology are in one of every seven cell phones in the world. Rapid growth of CDMA use in Asia and the U.S. has made Qualcomm one of the most successful tech companies ever.

Jacobs says that trend will continue thanks to growing interest in newer, advanced cell phones and still untapped markets in developing nations. All of which Qualcomm plans to lead in the coming decades.

"The industry is going through a transition with new opportunities," Jacobs said. "We're well-positioned for those opportunities."

But the company faces plenty of challenges.

For one, many consumers are holding off on buying advanced cell phones because they cost so much more than older ones. For another, many makers of wireless chips and technologies are trying to break Qualcomm's grip on these new growth markets. And then there's the simple fact of the uncertain path of future cell phone use.

"Irwin's two decades have been about wireless voice going mainstream," said Standard & Poor's analyst Ken Leon. "Now, we're moving into the wireless data era. Paul's going to have to find the opportunities in these fields. They can succeed, but it's going to be more choppy and cyclical."

The younger Jacobs' first tests are already emerging. In April, Qualcomm warned analysts about excess chip inventory and slower than expected demand for advanced 3G, or third generation, phones. Qualcomm lowered its 2005 forecast for CDMA and 3G phone shipments to 213 million from 223 million.

Analysts then lowered their estimates for Qualcomm per-share profit for its third fiscal quarter ended Thursday by an average of 4 cents, to 25 cents. They trimmed full fiscal 2005 estimates an average of 5 cents, to $1.12 a share. That would be up just a sliver from 2004's $1.10.

Leon says Qualcomm is caught between a maturing market for regular CDMA phones and a slow upgrade to more expensive 3G phones. Such phones can do things like download videos and play music.

After sharp growth in Asia and Europe last year, 3G growth has slowed. And the largest potential 3G market, China, has yet to award carriers licenses to offer the service.

Jacobs says large subsidies that carriers offered for 3G phones helped spur the market initially. But carriers have had to back off from such subsidies to maintain their bottom lines amid slowing growth.

On the other hand, "3G chip prices will follow other technologies, with prices coming down over time," Jacobs said. That will help sales.

Ericsson's (ERICY) chip unit and chipmaker Freescale Semiconductor (FSL) have taken an early lead in 3G chips.

Ericsson supplies 3G phone makers NEC (NIPNY) and LG Electronics. Freescale supplies 3G chips to Motorola. (MOT) Ericsson and Freescale have nearly 60% market share between them, analysts estimate.

Analyst Leon says 3G is critical to Qualcomm's future.

"That's a big opportunity," Leon said. "Qualcomm needs to get a major piece of that transition."

Jacobs says there are about 30 phone makers using his company's 3G chips. LG has tapped Qualcomm as a second source for its 3G chips.

Analysts estimate Qualcomm's share of the 3G chip market at 20%.

"I'm not satisfied with the share we have," Jacobs said. "We can do a lot better."

Another challenge for Qualcomm is tapping growth markets in developing countries such as India.

CDMA's rival technology — GSM, or Global System for Mobile — is trying to capture the next billion customers that will come out of places such as India with phones that cost $40 or less. Motorola and a consortium of developing-market wireless carriers plan to have a $40 GSM phone ready by year's end.

True, CDMA is a more advanced technology than GSM. But that means CDMA phones are more expensive. Average selling prices for CDMA phones can top $200, while GSM phones are falling below $100.

Jacobs says CDMA prices have come down in developing markets. There are 15 million CDMA customers in India, he says, which shows it can compete on the low end against GSM. Qualcomm plans to take more steps to compete with GSM, such as using low-cost chipmaking processes and combining components on one chip.

In the U.S., too, Qualcomm faces a changing market. Voice revenue for carriers is essentially flat, so carriers are remaking themselves and cell phones into multimedia devices capable of listening to music, taking photos and watching videos.

To that end, Jacobs has spearheaded Qualcomm's MediaFlo project. It involves setting up two or three TV-like antennas in major cities to provide broadcast content to handsets. It's estimated to cost $700 million, with Qualcomm picking up most of the tab.

MediaFlo is essentially TV for cell phones. Jacobs says media companies are interested in finding ways to exploit this new media.

Broadcast video has caught on in South Korea. The details of how MediaFlo might pay for itself are still uncertain. Jacobs says it could be like cable, where customers pay for service. Or it might be ad driven.

Some analysts doubt that users would want to watch a video, much less commercials, on their small cell phone screens. Others say the real key to the cell phone's future is not necessarily with one-way broadcast, but in how customers use their phones to interact with each other.

"Text messaging is popular because you are communicating with someone else," said Dave Mock, whose history of the company, "The Qualcomm Equation," came out this year. "The future is in mobile blogging and taking pictures. Broadcast TV is a one-way communication."