Paul's fifth anniversary

Both Xconomy and the U-T covered this week’s shareholder meeting. (I’m sorry I couldn’t make it, but it’s been harder to cover the meetings since I moved to Silicon Valley.)

Former U-T writer Bruce Bigelow focused on the five year anniversary of Paul Jacobs being promoted to CEO, while the U-T focused on the share price.

Alas for shareholders, the latter story is far less interesting. Now at $54, the stock has never tested its record $88 close at the end of 1999, at the end of the telecom bubble. While the stock has recovered wonderfully from its post-NASDAQ low of $13, for the past five years it has gone back and forth in a broad trading range of $30-60.

In that regard, it almost exactly mimics my Apple stock in the 1980s, when the correct strategy was to wait for the shares to double to $50, then dump them, and buy them back as they got closer to $25. (This strategy would have only worked twice in the last seven years with AAPL, with the dips of February 2008 and December 2008 legitimate buying opportunities.)

While 2010 provided record net income, sales have essentially been flat for the past three years. The stock price is highly dependent on the growth multiple, and the U-T quoted an analyst who’d downgraded the stock due to slowing growth.
So while the industry is continuing to expand its use of mobile data services — the driver of profitability for QCOM in this century — it’s not clear how much of that will accrue to the share price and its shareholders. The pressure on QCOM over the past few years has been the commoditization of even high-end handsets, pushing down wholesale prices and thus the basis for QCOM’s royalty payments.

As Bigelow recounts, Jacobs fis has a sound strategy for expanding Qualcomm’s influence and reach in the wireless industry, beyond cellphones and (with the Atheros purchase) beyond cellular to Wi-Fi and other forms of wireless communications. Still, it’s not clear whether these efforts will grow the company or merely replace shrinking revenues in existing business.

In this regard, Qualcomm is looking like any other mature tech company, like IBM, HP or Intel. A retailer or other low tech company can usually count on the same revenues year in, year out — but Moore’s Law tech companies must accepted that the old products will decline in price and thus must be replaced by upgraded or entirely new products.

Perhaps the world’s largest semiconductor company offers a ray of hope: Intel revenues were declining from 2007-2009 until things rebounded in 2010 with revenues up 24% and record earnings. According to its January earnings call, Intel benefitted from exposure to rapidly growing product categories and geographies. It remains to be seen whether Qualcomm’s diversification will bring it similar dividends in 2011.

End of Qualcomm's TV career

On Monday, Qualcomm announced it had sold its FLO TV 700 MHz spectrum to AT&T for $1.9b. Most of the articles focused on how AT&T will have enough spectrum to roll out LTE after the PR disaster of its 3G network congestion, post-iPhone.

By one estimate, Qualcomm spent $683 million for the former UHF Channel 55, whose national rollout to AT&T and Verizon customers was delayed when Congress (and the administration) delayed the DTV switchover in a futile attempt to prevent any inconvenience to analog TV owners.

The concept of FLO was twofold. First, broadcasting is a more efficient way to deliver spectrum-intensive video; second, Qualcomm had the money, connections and chutzpah to create a nationwide multichannel TV network.

FLO has been in critical condition much of the year. After an upbeat assessment for the NYT in May, a month later later CEO Paul Jacobs admitted problems but ruled out any closing:

“We are not shutting down MediFlo. … We’ve always said to our investors that we’re going to either sell it or spin it someday. It’s been that way from the very beginning so the question is to just find the right partners to work with and what’s the possibility to get more usage of it.”

Seven weeks later, Jacobs said that the company was looking to sell the service.

What happened to FLO? In July, Eric Zeman of Information Week said it was the price ($10/month), lack of devices and delayed release. For consistency’s sake, Zeeman said three years earlier that it was overpriced with no real market.

I think price is part of it. A related issue is that consumers were paying $10/month for increased spectral capacity that helped carriers, not necessarily something they would see or directly value. (Of course, if it’s a carrier pain point, perhaps they should have charged less).

But I also think the Internet has created a generation of instant-gratification, asynchronous entertainment consumers. Gone is the decade when the whole country tuned to watch Ed Sullivan on Sunday night (or I Love Lucy or All in the Family or Who Shot JR?) Today YouTube and Hulu (and iTunes and Amazon and Netflix) promise Generations Y and Z instant video gratification, whenever and wherever they want it. I think there’s no going back, at any price.

With the end of FLO, Elizabeth Woyke of Forbes suggested that it pointed to a pattern of failure for Qualcomm, after a 2005 Forbes checklist that also included Wireless Knowledge and Digital Cinema. (The earlier story noted that the latter failures were initiatives championed by Jacobs the younger before ascending to CEO, a point Woyke politely left out of her story).

In one of his earliest executive positions, Jacobs ran the QCP handset division for Qualcomm — which was a product failure but a strategic success. On the one hand, Qualcomm never learned how to make handsets and eventually both it and its Sony JV partner gave up (Sony later joining with Ericsson to learn its secrets). On the other hand, the exit came after the 2G IS-95 (later known as cdmaOne) was well established with multiple handset suppliers.

What are the consequences of failure. I recall a Sept 2006 telecom council event when Gina Lombardi, then-president of the FLO TV subsidiary, was prominent at the QCOM annual meeting and part of Paul’s inner circle. In January 2009 she was pushed aside, and left the company that fall (after 19 years there). So far her successor, former Handango CEO Bill Stone, remains a top Qualcomm executive.

So what is the lesson going forward? Certainly Qualcomm is a lot like Intel: it’s good at technology, its original franchise was a license to print money, but it has a mixed record creating products consumers want to buy.

It has done an excellent job of expanding its semiconductor business from radio modems to smartphone processors, particularly with Android smartphones.

But I think the reality is that the US wireless industry is bigger and messier and less malleable than in the early 90s when Irwin Jacobs pushed through CDMA and brought it to market. It’s also more linked to international standards, with lead cdmaOne and CDMA-2000 customer Verizon, forcing Qualcomm to kill its own 4G option two years ago and support LTE.

Fortunately, one other legacy strategy from Jacobs père remains crucial for Qualcomm’s success today. Cofounder Irwin Jacobs pushed aggressively to invest in rapidly growing overseas markets, most notably China but also Korea and India. Jacobs fils is continuing these efforts, even if all three countries (and Southeast Asia and South America and other developing countries) continue to be challenging places to do business for a heavily regulated industry like telecom.

Qualcomm: beyond the cellphone

CEO Paul Jacobs and two of his top executives were on stage Wednesday for the annual San Diego Telecom Council CommNexus “Qualcomm Town Hall”. Deutsche Bank analyst Brian Modoff pitched his own questions, as well as ones texted to him by audience members.

Bruce Bigelow covered the story for Xconomy San Diego. (At the reception beforehand, I chatted with Bruce — we’d never met although I’d traded emails with him when he was at the U-T.)

Bruce’s story focuses on one of the major themes for Qualcomm nowadays, which is the ongoing shift from voice to data. He emphasizes discussion of 4G deployment, although the 4G questions were all about LTE (particularly Verizon’s rollout starting next year) rather than WiMax. And indeed, looking at my notes, 4G/LTE was one of the major topics of the evening.

As Bruce notes, Jacobs noted that the 4G rollout will happen over time. One question relayed by Modoff: analysts are asking was when will there be single mode LTE devices? The answer was that there will be multimode devices as long as analysts have a job on Wall Street — and Jacobs added “hopefully that's not because they have a short career.” Jacobs also talked about limited prospects for improving spectral efficiency with 4G, something he and his dad had discussed in their rare joint keynote at CTIA in October (also held here in San Diego).

Still, in listening to Jacobs talk, I found at least one answer to my longstanding question: how will Paul be different than Irwin?

The short answer: Irwin is about radio and Paul is about mobile computing.

Yes, Irwin was UCSD’s most computing-oriented professor at the APIS department back in the 1960s — to the point that the department chair despaired of losing him when he left on leave in 1971 to take charge of Linkabit. However, Irwin’s publications and influence were as a popularizer and entrepreneur for Shannon theory, including his greatest career accomplishment — turning CDMA into a business.

And certainly Paul has his Berkeley EE PhD and can talk spectral efficiency with the best of them. But his career and his passion seems to be as a device geek, and Wednesday’s session seemed to emphasize that he is taking Qualcomm not just beyond voice, but also beyond the cellphone. (Of course, he was also born into the software/microcoding era, and has fully internalized software-based device design to a degree that perhaps Dad never could).
Indeed, the idea of Qualcomm beyond cellphones was a recurring theme during the executive Q&A. Beyond LTE, two other topics that came up over and over were the Snapdragon chip and the FLO TV 700 Mhz broadcast television service.

Prompted by Modoff, QCT president Steve Mollenkopf kept coming back to Snapdragon over and over again. It’s not clear how clear how successful the Qualcomm ARM cpu/communications chip will be, but it was very clear that pushing Snapdragon is one of Qualcomm’s major strategic thrusts for 2010 as it moves into mobile devices such as “smartbooks”.

Mollenkopf was asked to compare Snapdragon vs. Intel’s Atom. He made it clear that they’re in different niches now, but eventually the two products (and presumably companies) will be directly competing. Indeed, it’s hard to imagine how the Snapdragon smartbook will be distinct from an Atom netbook in 2011 or 2012 — other than the choice of operating system (Android or perhaps Windows CE vs. genuine Windows).

The other non-cellphone device that came up was the Personal TV portable device that Qualcomm is selling to promote use of FLO TV in the US. COO Len Lauer pulled it out more than once — and also mentioned that it was available at Best Buy, Amazon and Radio Shack. His ongoing plugs for the PTV became a sort of running joke for the evening.

It was not clear where the PTV is an attempt to bypass cellphones to win FLO TV adoption, or merely to create a buzz and urgency while waiting for cellphone makers and the Big Two (AT&T and Verizon) to more enthusiastically promote the service.

While they are less about radios and more about mobile devices, the PTV and Snapdragon also reinforce an existing Qualcomm strength dating back to Irwin (and Andy Viterbi’s) earlier company: Linkabit. It is clear that Qualcomm was born (and remains) a systems company, designing things from end to end rather than individual components. Yes, it may partner for other pieces of the value chain, but it can also bring products to market if that’s what it takes (CDMA cellphones, the PTV).

I think this is one area where Qualcomm is quite different than Intel: it is and has always been a systems company, while Intel has spent 30+ years seeking R&D and scale economies from high-volume semiconductor manufacturing. Given their complementary strengths, and overlapping customer base they could conceivably work together.

However, given their size and corporate egos, I think the two companies are destined to remain more competitors than coopetitors. To Qualcomm’s credit, its relations with the third titan in this segment (Nokia) are somewhat better than Intel’s.

Personal note: This was the first time I’ve attended an evening event in San Diego and then flown home afterwards. At the Southwest terminal in Lindbergh, I was relieved to see Modoff and an associate also there after the talk, catching a 9pm flight to SFO as I caught a flight to SJC.

Paul Jacobs negotiates way out of EU complaint

The European Commission today announced that it’s dropping the four-year-old antitrust case against Qualcomm‘s patent licensing policies. Don Rosenberg — general counsel of Qualcomm since October 2007 — was understandably pleased:

Qualcomm is extremely pleased to learn of the European Commission's announcement. After an extensive four-year investigation into Qualcomm's practices, and despite the coordinated nature of the complaints made against it, the Commission has terminated its investigation with no finding of a violation

The Case

The complaint was filed in October 2005 by two European telecom makers (Nokia, Ericsson), two Japanese makers (NEC, Panasonic) and two US competitors for Qualcomm’s chipsets (Broadcom, TI), sending Qualcomm’s shares down 4.6%.

Since that time, Qualcomm settled with two of the original complainants. Its biggest customer — Nokia — renewed its license to Qualcomm’s patents in July 2005 on terms believed to reduce its long-term royalty payments. After losing repeated lawsuits with Broadcom, last April Qualcomn settled all IP complaints between the two companies. Both parties dropped out of litigation against Qualcomm.

In anticipation of the commission’s decision, Ericsson on Tuesday dropped its complaint to the EC. (Note: this is Ericsson the leading supplier of cellular infrastructure, not Sony Ericsson, the handset also-ran). Ericsson claimed victory in its attacks on Qualcomm’s business model due to a $208m fine in Korea and an ongoing investigation in Japan.

Since 2005, TI and Qualcomm have avoided litigation, but in 2007 Qualcomm passed TI to be the top mobile handset chipmaker. Qualcomm is on track to be the 6th largest semiconductor vendor (albeit a fabless one) this year.

The official EC statement said

The Commission committed time and resources to this investigation in order to assess a complex body of evidence, but has not as yet reached formal conclusions.

All complainants have now withdrawn or indicated their intention to withdraw their complaints, and the Commission has therefore to decide where best to focus its resources and priorities. In view of this, the Commission does not consider it appropriate to invest further resources in this case.

The Commissioner

One possible factor in the decision may have been the expected end of the term of the EC’s Competition Commissioner, Neelie Kroes, who saw her role as remaking the global world order for the benefit of EU firms.

Kroes has openly campaigned for more aggressive oversight against US market leaders (Microsoft, Intel, Qualcomm). She unilaterally imposed a $1.4b fine on Intel for its actions against its US competitor. She hoped to use her success over Microsoft to bring down Qualcomm as well.

Two months ago rumors surfaced that Kroes wanted to convene a special panel to examine Qualcomm’s activities. At the time, some speculated that others within the EC opposed Kroes because there wasn’t much of a case. Tuesday, Kroes won reappointment to the European Commission, but is widely expected to be rotated out of the powerful Competition position.

The CEO

I believe that clearing up the uncertainty and risk associated with these various legal threats constitutes Paul Jacobs’ greatest accomplishment thus far as Qualcomm CEO. It’s tough to follow an industry legend — the only CEO the company had ever known — who also happens to be your father. (Note: for my book, I’ve interviewed Irwin Jacobs twice but have only heard Paul Jacobs give speeches.)

However, Paul Jacobs inherited these problems, the inevitable collision between Qualcomm’s take-no-prisoners royalty model and the decision of its GSM rivals to use CDMA technology in their 3G standard.

When Qualcomm (charitably) had mixed results in the courtroom, its new CEO took a more conciliatory approach with its most determined opponents (Broadcom and Nokia) to create a win-win outcome. (I’m betting Qualcomm also worked out less public accommodations with its other adversaries). The resolution of these cases brought the end to the EU case, the most serious threat to its business model.

When he ascended to the CEO position in July 2005, Jacobs was best known as a technology enthusiast who emphasized new revenue streams such as MediaFLO. The jury is still out on these businesses, but given his pragmatic approach towards litigation, one can hope he will take a dispassionate look at them and decide to pull the plug if they’re not panning out.

Unable to escape the shadow

Qualcomm CEO Paul Jacobs has had a really bad year. The company’s biggest customer, Nokia, stopped paying royalties until it gets a better deal. It keeps losing course cases to Broadcom. And there are rumblings among some investors who say he must go.

In a CNN interview published Friday, Jacobs admitted that he may never escape the shadow of industry legend and Qualcomm co-founder Irwin Jacobs:

Q: You joined the company established by your father in 1990, in your late 20s. Was there ever an issue for you, do you think, about whether or not to join the family firm?

Jacobs: Oh sure. I was trying to make a decision about whether I wanted to be a professor and go into academia or actually go into industry but you know that I decided I loved having the ability to see my ideas turn into products that other people were using, so that led me to go into industry and I figured that, if I was going to do that, Qualcomm was the best place to go.

Q: As you say, your father's an icon, he is a bit of a legend really in the industry, which makes it all the more difficult for you. How or when do you remember that you thought to yourself I am out of his shadow, I am my own person running this company now?

Jacobs: Oh I don't think that I will ever feel that way. I think he will always cast some shadow. I mean he is the person who built the foundation for the business and it is really up to me to take that platform and take it to the next level.

The last line of Moses’ stone tablets notwithstanding, I have been known to envy the successful tech executive who was in the right place at the right time. Perhaps here’s the cure.

It’s hard to see how one could envy Paul Jacobs, who will always be compared to Irwin Jacobs, an impossible act to follow. Yes, it’s tough for the children to measure up (think Ford or Motorola). But even without the nepotism charge, successors to a larger-than-life founder are but a pale imitation (think Apple or HP).

Jacobs fils can’t win. If he does “take it to the next level,” everyone will take Qualcomm’s continuing growth for granted or credit its initial trajectory. If it falters on his watch — whether the problem is maturation or incipient problems not visible at the time of the 2005 handover — shareholders and employees (and perhaps family) will say it was his fault.

On the other hand, Paul Jacobs doesn’t really have an alternative. This is the job he’s been training for for 20 years, and it’s been in the works since mid-2000 (with employees pointing to the (aborted) split between QCT and QTL as a plan to make Jacobs a CEO). There is no graceful way to give up reins of the company, unlike say the founder CEO who decides to become CTO. As Jacobs notes, this is really the only company he can work for in industry: he certainly can’t quit and go work for a competitor. Meanwhile, his older brother Gary been toiling since 1999 as a social entrepreneur, so even that domain would invite comparison.

It’s clear that the only thing Jacobs can do is to tough it out. Since most of the problems seem to be legal, the key thing would be to hire the best patent attorney around, both to retaliate against rivals and to give advice as to how to change the business decisions.

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