Qualcomm: No Generation Gap Here

Paul E. Jacobs, chief executive-elect at cellular pioneer Qualcomm Inc. (QCOM), is unfazed by skeptics. The $5 billion company he'll take charge of in July was built by his father, Irwin Jacobs, Qualcomm's founder and chairman. A brilliant engineer, the elder Jacobs developed a cellular technology that became a global standard. The son now faces the obvious questions about how he will fill his old man's shoes. "It's not something that bothers me," he says with a shrug. "As the company continues to execute, that will take care of a lot of the questions."

Having worked at the company for 15 years and having managed the critical handset business for five of them, the younger Jacobs, 42, shares credit for Qualcomm's impressive track record. According to Tempe (Ariz.) researcher Forward Concepts Co., the company holds an 82% share of the world market for key semiconductors, or "chipsets," based on the digital technology Irwin developed. That standard -- called code division multiple access (CDMA) -- is growing so quickly that Qualcomm is challenging Texas Instruments Inc. (TXN) for the top spot in the market for all cell-phone chips sold around the world.

It gets better. Today, Qualcomm's CDMA standard has to duke it out with other cellular formats. But during the coming decade, as the world completes its transition to a new, zippy generation of multimedia phones, most countries are likely to adopt one or another flavor of CDMA -- at which point, more phone and equipment maker will be paying license fees to Qualcomm. Analysts estimate the company gets a 5% royalty for every CDMA device sold, plus revenues from the CDMA chips that it sells.

Jacobs vows Qualcomm won't rest. He sees a future where the wireless phone is an all-powerful communications platform -- a supergadget for TV, music, games, chat, and PC-style productivity tools. Jacobs recently sat down with Chicago Deputy Bureau Manager Roger O. Crockett. Here is an edited excerpt of their discussion:

As the new CEO, do you expect to change course in any important ways?

The strategy that we're executing is one that I played an integral part in shaping. It has been working really well, judging from the performance of the company, so I don't really expect any changes.

In the past few quarters, Qualcomm has lowered its financial outlook. Is it more difficult to forecast trends, such as next-generation Wideband CDMA [WCDMA]?

We did change the way we do our accounting of royalties because it was becoming difficult to forecast the WCDMA market. We also had a shortage of chips coming from silicon wafer suppliers in 2004. And we saw some inventory build up in the supply chain. But that is now clearing through the channels.

Are you still outsourcing your chip manufacturing?

Yes. Running a chip plant is a special expertise. It's a very large use of capital. You can argue that we got caught in shortages last year because of our outsourcing model. But I think it's really because demand went up so much.

What is your forecast for growth in 2005, including WCDMA?

Last year there were 170 million handsets that got shipped, and this year we're expecting a range between 208 million and 218 million shipped. But we brought down our guidance in WCDMA from 55 million to 50 million. There's still strong growth, just not as strong as expected.

Does Qualcomm still expect to reach the 50% mark in WCDMA market share?

That's our goal, although we haven't put a time frame on it. There are companies that have built handsets around our solutions. We have 30 device manufacturers that are doing testing around our chips. So we're poised to get a lot more share.

How will the cellular business evolve?

Our model is to innovate new products, integrate those into the chipset, and get them out in the market. The most recent thing we're developing is called MediaFLO. It allows us essentially to bring TV to the cellular handset. The commercial launch is the end of 2006. We're in the process of developing the additional chip technology that will go into the phone. Then it has to be integrated into the handset.

Please explain MediaFLO.

There are several pieces to it. One is a user interface on the phone that lets you get both content and program-guide information to the subscriber. We also have some new broadcast technology that allows you to send content to multiple devices at the same time. But the cellular network isn't the most efficient way to do that.

What's the alternative?

We actually developed a new radio technology. We purchased spectrum in the Federal Communications Commission auctions a couple of years ago, and we own 6 megahertz across the entire country. It's channel 55 in the UHF TV band. So instead of content coming out of a cellular network, it actually comes out of a TV tower. We're transmitting up to 5,000 times as much power as a cellular base station. We can do an average of maybe two to three towers per metropolitan area and get coverage, vs. hundreds of cellular base stations.

So you're in the broadcast business now?

We're coming up with new technologies and trying to look at the business from a holistic point of view. I used to run the handset business, so I have a lot of experience trying to understand what the consumers would want. And now we're starting to do some interesting things with advertising. If you see something you like on the cell-phone screen, press a button, and it will give you more information. But we're not selling to techies. We're selling to everybody's mom and dad and grandma and their kids. So we've got to make it simple.

What's the difference between MediaFLO and Verizon Wireless' V CAST or Sprint Corp.'s (FON)TV applications?

With V CAST you go through a catalog of things that you're interested in, choose one, and then it downloads to you. MediaFLO uses the cellular network also, but in off-peak times it's downloading content to your phone so that when you go to look, it's already there.

In what other ways are chips changing wireless phones?

We're starting to put TV, FM radios, MP3 players, and camcorder functions into the phone. The chips will have the capability of a digital video camcorder. In the next chips, we're adding computing functions. We'll have a gigahertz processor in the phone for 3D gaming. So the phone is becoming like a 1998 PC in terms of processing power.

How much of a limitation is a phone's small screen?

Well, telephones in Japan already have a "TV out" plug and a cable that goes from your phone to your TV. You do that to move video and photos that you've taken on the phone to your TV. Eventually you won't even need the wires. We're working on next-generation Wi-Fi because the consumer electronics manufacturers want to be able to put a screen up anywhere. The way to make that work with your audiovisual equipment and your phone, without rewiring everybody's house, is to do it wirelessly.

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