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Qualcomm: Interview with a cellular vampire

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Analysis The 1976 Anne Rice novel Interview with the Vampire which showed the a sympathetic and softer side of the vampire and which uncovered both the mind-numbing ennui of being immortal and the complete lack of a sense of belonging, and other disadvantages to being uniquely powerful and yet disliked, was the first image that struck us while listening to Qualcomm’s analyst relations conference the week before we took our summer break.

For years Qualcomm has been portayed as the industry pariah, due largely to its “triple” charged royalties and its headstrong invasion of the “cosy” European dominated GSM and UMTS hegemony.

CEO Paul Jacobs, in his opening address to the collected mass ranks of US and European analysts, turned this image on its head – expressing his “palpable relief” that the Nokia patents dispute had been resolved – and on terms that will not wreck the greater part of Qualcomm’s profits – those through royalty payments, and talked about having been smashed around for the past three years, and that now that it was over, the settlement driving huge positive momentum for his company.

The deal brokered with Nokia came after 40 straight hours huddled in a single room, constantly negotiating, and resulted in a deal couched in terms such that “if all our customers have the same terms as Nokia, Qualcomm would be very happy.”

So the dire warning that once Nokia had pushed back the barriers, then all other handset makers would be on the phone asking for their equivalent rebate, may have been wide of the mark. And given that only a few of the royalty deals that Qualcomm has with the rest of the world are due for renewal shortly, the pressure on the US chip designer’s margins appears to have evaporated except for the same kind of battle it still has with Broadcom.

Departing COO Sajay Jha, who announced his intention to take the CEO job at Motorola’s handset division the day after the conference, said of the suit: “The judge in the Nokia dispute set an artificial deadline and would not allow the start of the trial to move back any further, maybe the same will happen to trigger a settlement in the Broadcom suit.”

Multiple decision trees

Jacobs added: “We are not quite so worried about that action since we have workarounds for the Broadcom patents which are already in chips, and that give us negotiating leverage. We have worked through multiple decision trees on the outcomes of that legal action and although we’d like to see it resolved, whichever way its goes it will not have as great an effect as the Nokia action.”

So somehow, magically, Qualcomm has gone from a company that charges chip makers, handset designers and equipment manufacturers multiple layers of repetitive royalties, into a company that has brought its royalty practises into line, and done it without creating a hole in its future income statements, something it has been intimating to Wall Street that it thought was possible for some time.

The exact price of the Nokia settlement will come out in time, as the royalty numbers for subsequent quarters are analyzed, but the surge in chip revenues for Qualcomm leaves us with the impression that any shortfall will be swallowed up by 3G and HSPA chip shipment rises and specifically chip sales that are now possible to Nokia. Previously Qualcomm had been effectively banned from 40 per cent of the handset market, and while it has no orders yet from Nokia, speakers heavily implied that all of the barriers in the way of building chips for Nokia handsets and even Symbian devices, had now been removed.

This has been the market’s view of the world for the past year, that shareholder opinion counted too much for both of these companies and that they would not go down the costly litigious route and that they would merely play brinkmanship up until the trial date.

But from the vampire’s point of view this has been a sweaty time, and the jubilance of each individual there – despite the settlement being largely seen as a draw – shows that it had previously anticipated a savage defeat and having avoided it, the company is ready to embark on a period of sustained innovation and prosperity.

For the next two days Qualcomm then reminded us why it is perceived as the leader in dealing with multiple spectrum effects and embroidered a complex and rich series of messages, complete with technical hurdles, likely answers, and the spreading of the vampire’s cloak to envelop multiple surrounding domains.

Intel can begin to worry with the Gobi software-defined radio offering PC makers ways of talking to any kind of cellular network, in a single chip, with wins at Lenovo, HP, Dell and Panasonic. And it can worry some more as the Qualcomm Snapdragon processor begins to roll out into multiple devices, with Qualcomm claiming some 30 design wins on new types of devices which will emerge over the coming months, into the first quarter of next year.

Apple can begin to worry as Qualcomm chipsets emerge that make it far easier to produce a touch screen handset with the quality of graphics that the iPhone has. And Nokia, although no longer in legal dispute, will be keeping an eye on the huge range of services, especially payment, wallet, and location and mapping services that Qualcomm is investing in, at the chip level and above, along with a rival for its now promising Widsets widget platform.

If anything there is the feeling that Qualcomm is broadening its horizons a little too much, but the emphasis is always on services or device types that will drive chip sales. So in a way, Qualcomm is always sticking to its knitting, which increasingly is making any kind of chip with radios on it.

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