Qualcomm Embraces Its Software Side

Its purchase of Firethorn, a provider of mobile banking solutions, reflects another step into wireless technologies

by Olga Kharif

Paul Jacobs, chief executive officer of Qualcomm, speaks during an interview in New York, Aug. 9, 2007 Daniel Acker/Bloomberg News

Qualcomm is branching out. Long one of the leading makers of chips that run cell phones, Qualcomm (QCOM) in recent years has been expanding into a range of other wireless technologies. The most recent evidence came Nov. 14 with the $210 million purchase of Firethorn, a provider of mobile banking services.

The move makes sense, given the growing number of people using cell phones to carry out financial transactions. Analysts expect 35 million U.S. mobile phone users to make mobile payments by 2010, compared with 1 million now, according to financial services consultancy Aite Group. By 2010, about 10% of all payments under $25, or $140 billion, will be made with contactless cards, according to consultancy Celent. Of those, 10% could be paid with mobile phones, Celent estimates.

Chip Demand Challenges

The Firethorn purchase moves the chipmaker further into the lucrative market for the software running tools and features used directly by cell phone users. "More and more of the value proposition is in software," says Francis Sideco, an analyst at chip consultancy iSuppli. Software is an area that's become increasingly alluring to Qualcomm over time. The company created Brew, a software platform that developers can use to build mobile applications such as games, and it has made various software purchases, including Trigenix, a maker of cell phone menus.

On Nov. 5, Qualcomm became one of several semiconductor companies, including rival Texas Instruments (TXN), to join the Open Handset Alliance, an effort by Google (GOOG) to create a package of wireless applications and services. Qualcomm could attempt to weave Firethorn's mobile payments software into that package, which goes by the name Android, says Michael Mahoney, senior managing director at investment advisor Falcon Point Capital. Qualcomm was also one of the creators of the Skypephone, a mobile device running Skype's (EBAY) Web-calling service.

Why the interest in software? It behooves Qualcomm to move beyond its reliance on chips based on so-called Code Division Multiple-Access technology at a time when two of the biggest CDMA players, Verizon Wireless (VZ) and Sprint Nextel (S), are considering technologies that could lessen their demand for CDMA (BusinessWeek.com, 10/29/07) and related products. Firethorn also brings Qualcomm closer to AT&T, which historically has not been a Qualcomm customer. On Nov. 13, AT&T (T), the No. 1 U.S. cellular service provider, began loading Firethorn application onto select handsets sold nationwide.

Promising Payment Technologies

More immediately, Firethorn ushers Qualcomm into the promising market for tools that let customers pay for goods by waving a mobile phone past a scanner, so-called contactless payments. Qualcomm and Firethorn are already working on phones with built-in chips and software enabling such transactions to be done securely. "To get to contactless payments, Qualcomm is absolutely the way to go," says Tripp Rackley, CEO of Firethorn, who expects cell phones with contactless payments capabilities to become mainstream within three years.

That's likely to require a large investment. To encourage carriers to offer the application to their subscribers, Qualcomm may need to subsidize the price of the handsets, says Nick Holland, a senior analyst at Aite, who adds, "It will be very capital-intensive."

But with $11.8 billion in cash and marketable securities, Qualcomm can certainly afford the bill. And it's expected to invest considerable resources into new software, as well as updates of existing services, in the coming year. TowerGroup analysts speculate it may even be revamping Brew to allow for easier deployment of new end-user applications and services. "It's an area where Qualcomm will be making investments in 2008," says Lawrence Harris, an analyst with Oppenheimer (OPY). "There's nothing bad about diversifying into new areas."

Kharif is a reporter for BusinessWeek.com in Portland, Ore.