Qualcomm Inc (QCOM)

[khemara_qc]

Souped up: Flarion purchase expands Qualcomm's horizons

By: BRADLEY J. FIKES - Staff Writer

http://www.nctimes.com/articles/2005/08/21/business/news/12_03_008_20_05.txt

Like eggs and bacon, Qualcomm Inc. and its Code Division Multiple Access technology have been inseparably paired. That's why Qualcomm Inc.'s purchase of wireless start-up Flarion Technologies Inc. is much more significant than even the deal's $600 million value indicates.

The Flarion purchase marks a fundamental change in strategy for San Diego-based Qualcomm, which announced CDMA to a startled and mostly disbelieving wireless industry in 1990. Now, it is poised to offer Flarion's rival technology, a proprietary version of OFDM, or Orthogonal Frequency Division Multiplexing, in addition to another technology called WiMax.

"The move looks so obvious" in retrospect, said Ira Brodsky, president of Datacomm Research Co., based in St. Louis. Brodsky said the wireless industry was apparently deceived by Qualcomm's extremely strong emphasis on CDMA.


Behind the alphabet soup of technologies is the continuing story of Qualcomm's astonishing rise in 20 years from just another San Diego start-up to world leadership in wireless technology. That influence can be grasped in one number: $65 billion, the current value of Qualcomm stock.

Starting with its 1993 acceptance as an official standard in the United States, Qualcomm's CDMA has gradually surpassed the rival standard of GSM, or Global System for Mobile Communications. In one form or another, CDMA is being adopted by wireless carriers worldwide as they upgrade to "third generation" technology.

However, not all wireless companies like adopting Qualcomm's technology. And the history of wireless technology ---- and technology in general ---- teaches that nothing lasts forever. Just as CDMA surpassed GSM, Flarion hoped to become the next Qualcomm with its own "fourth generation" technology, which was tested in 2002 by wireless carrier Nextel, now part of Sprint PCS.

Flarion's technology splits one signal into several signals, sent over different frequencies. This technology was specifically developed to allow fast transmission of data over wireless networks, while existing cellular technology mainly stresses voice. Qualcomm is betting that fast data transmission will become increasingly important, and CDMA is better at that task than existing rivals.

So by purchasing Flarion, Qualcomm not only eliminates one potential competitor, it gets a stake in what could be an even more promising wireless future.

Qualcomm will continue to develop CDMA, said Paul Jacobs, the company's new chief executive, in the Aug. 11 announcement of the Flarion deal. The difference is that now Qualcomm's plate will have a lot more food for the wireless industry.

Proof of concept

Qualcomm sold the wireless industry on CDMA based on two factors: It can squeeze more calls into a given portion of spectrum, and it is better at transmitting data at high speeds. The latter point is becoming increasingly important as laptop-wielding road warriors increasingly wish to connect to the Internet or their own company networks from wherever they are.

As its name implies, Qualcomm's technology transmits conversations by using a code. Each conversation is tagged with this unique code. A Qualcomm cell phone listens to transmissions tagged with this code, ignoring others. The conversation is sent on a range of frequencies, skipping back and forth. This means that CDMA makes full use of the frequencies all the time.

Qualcomm likens this to a person's ability to zero in on one speaker at a party where everyone is talking in a different language. You focus on the language you understand, and disregard the rest as meaningless background noise.

By contrast, GSM slices conversations into slices of time ---- first you go, then you, then you. That one-at-a-time strategy prevents confusion, but allows for fewer conversations.

These advantages of CDMA were mainly theoretical back in the early '90s, when Qualcomm began making its pitch to cell phone companies. Qualcomm was ridiculed for making assumptions about the progress of technology, especially microchip processing power, which Moore's Law said doubles in 18 months.

But the assumptions proved accurate, and problems with CDMA were solved. The first CDMA phones were nearly brick-sized, while GSM phones were much sleeker and had better battery life. Those discrepancies evaporated as Qualcomm engineers refined the technology.

Armed with CDMA, Verizon Wireless now offers wireless speeds of up to 2 megabits per second, nearly as fast as a cable modem. Sprint PCS is also introducing its own high-speed CDMA product. By contrast, GSM providers such as Cingular Wireless can only get speeds of up to about 130 kilobits per second.

Turf wars

These statistics convince even the most die-hard Qualcomm opponents that adopting CDMA was inevitable for third-generation, or 3G, technologies. In 1999, Qualcomm and its most bitter rival, Ericsson, settled their legal differences. The Swedish company bought Qualcomm's wireless infrastructure business, not including Qualcomm's cell phone manufacturing arm. That business was sold to the Japanese company Kyocera.

However, Qualcomm's lawyers are still busy. The company was hit in May with a patent infringement suit by Irvine-based Broadcom. A second lawsuit, filed in July, charged Qualcomm with unfairly using its own patents to monopolize a version of CDMA called Wideband CDMA, or W-CDMA. Qualcomm, which called the lawsuits meritless, fired back in July with its own patent infringement suit against Broadcom.

So far, there's no indication that investors are worried about either company. Both Qualcomm and Broadcom stock have risen since May, although Broadcom's stock has risen by a greater percentage. Still, Qualcomm's market value is nearly five times that of Broadcom's $13.9 billion market value.

No hardware, please ---- we're Qualcomm

Qualcomm's divestiture of its hardware business is nearly complete, except for its cell phone microchips. Instead, Qualcomm concentrated on developing its technology. This is similar to Microsoft's strategy of developing its Windows software, but letting companies such as Dell make the actual computers that run Windows.

And Qualcomm is getting Microsoft-like results, as its stock value signifies. There is virtually no marginal cost for Qualcomm in licensing technology; nearly all the expense is in development. Protected by patents and attorneys, Qualcomm does not have to fear competitors in developing CDMA.

But hardware makers have a much tougher time, since they must compete with one another. First Ericsson and then Kyocera began massive layoffs in their manufacturing businesses, including their San Diego CDMA operations. But Asian manufacturers such as Samsung have roared to the top.

These changes make little or no financial difference to Qualcomm, which still gets its royalties no matter who makes the equipment. Qualcomm's challenges are to get the best technologies, protect them with patents, and sell them effectively.

While CDMA has been fundamental to Qualcomm, it is only a means to an end. At its core, Qualcomm is built on the premise that people will want to have access to information in as many places as possible, as fast as possible. And if OFDM, WiMax or some other alphabet soup technology yet undiscovered proves a better path to that end, Qualcomm will want to be there.



Talking Wireless


Wireless terms and what they mean:

CDMA: Code Division Multiple Access. Qualcomm's digital wireless technology that identifies each cell phone conversation with a unique code, allowing multiple conversations to take place in the same frequency range. It's like listening to a person speaking one language, ignoring those speaking different languages.

GSM: Global System for Mobile Communications. A European-developed digital wireless technology that slices different cell phone conversations into tiny time slices, transmitted sequentially to and from a cell tower. The time juggling is done so fast that callers don't notice. It is less efficient in using wireless spectrum than CDMA.

IS-95: The technical name for the Qualcomm CDMA standard, approved in 1993. Qualcomm has since developed more advanced versions of CDMA.

3G: Third Generation. The newest generation of CDMA and GSM digital technology, now in deployment respectively by carriers such as Verizon Wireless and Cingular Wireless. 3G CDMA transmits data at speeds of up to megabits per second, far faster than any GSM technology. (The original digital wireless formats of GSM and CDMA are considered second generation.)

Analog: The plain old first-generation cell phone technology. Analog transmits a continuously varying signal, which is less efficient and more prone to static than digital technologies.

TDMA: Time Division Multiple Access. A less successful relative of GSM, which is gradually being abandoned by wireless carriers. TDMA was used by AT&T Wireless, now part of GSM-using Cingular. Former AT&T Wireless customers are being encouraged to give up their TDMA phones for Cingular's GSM phones.

Contact staff writer Bradley J. Fikes at [phone] or [e-mail].