Atheros purchase continues shift north

Qualcomm doesn’t do acquisitions as often as Cisco or Oracle. The WSJ says it bought six companies in FY2010, one in 2009 and five in 2008. Almost all of its acquisitions are below $50m.

Like Apple, it prefers to make rather than buy. This could be due to a strong corporate culture, “not invented here,” hubris, or a realization that so many acquisitions are failures (at least for the acquiring company).

The $3.1 billion plan to buy WiFi chip maker Atheros is one of the biggest and most strategic acquisitions of the company’s history. (To put the size in perspective, the company’s market cap has hovered around $70-80 billion over the past decade). The next biggest acquisition was $1b in 2000 for GPS chipmaker SnapTrack, which made Steve Poizner a multi-millionaire and perennial candidate.

However, to me the strategic importance of Atheros seems more similar to the $800 million to buy Flarion in 2005, to acquire its OFDMA technology and cement its position as a 4G patent-holder.

Yes, the Atheros technology will help it compete more for tablets, as did its 2009 purchase of AMD’s handheld business. More broadly, it continues its shift away from a cellphone chip maker to a mobile device components company, as with the 2004 acquisition that led to the Mirasol color display technology that it hopes will power e-readers Real Soon Now.

But I think the major strategic importance is that it positions Qualcomm in direct competition with Broadcom, the Irvine-based patent nemesis. Broadcom has succeeded by integrating everything with everything else on a chip, commoditizing away single-purpose chips. For mobile communications device, Qualcomm is broadening its industry footprint in a way that gives current Broadcom customers more choices.

It also increases Qualcomm’s competition with Intel. In some ways, Intel helped Qualcomm by reducing Atheros recent growth and thus depressing the sale price. (San Jose-based Atheros was cofounded by Stanford University president John Hennessy).

Finally, I think this is part of the increasing evidence that Qualcomm is emphasizing growth outside San Diego. The SnapTrack acquisition formed the nucleus of what now is its Santa Clara campus. The big Q paid $80 million in 2007 for the low-rise campus to co-locate all of its Silicon Valley acquisitions. (Interestingly, Qualcomm has said nothing publicly about its Silicon Valley expansion efforts.)


View Larger Map
The 320,000 square feet facility is smaller than one building in San Diego, the 12-story building WT that is headquarters for QCT. Still, by modern office standards, the campus could hold nearly 1,000 workers, even if the parking lot seems to limit the campus to 500 or so.

Qualcomm’s founding CEO Irwin Jacobs moved to California to teach at UCSD. However, his successor, son Paul, did his Ph.D. at UC Berkeley and clearly has stronger ties to the Bay Area than his father ever did. The Santa Clara campus shows that rather than trying to relocate SV talent to San Diego — something that has been nearly impossible since the Linkabit days — that it will create a major foothold in the valley to take advantage of its tech talent and job mobility.

Life after Qualcomm: Sanjay's big reward

The breakup of Motorola became effective Tuesday: Motorola Mobility (MMI) gets cellular handsets and settop boxes, Nokia Siemens gets the cellular infrastructure business, Motorola Solutions (MSI) gets government & industrial radio clients, and Sanjay Jha gets to be COO.

The split brought a nice day one stock bounce of 9.5% for MMI and 6.6% for MSI.

On one level, it marks an ignominious end for the company that invented the handheld cellphone. It also clears the way for one or both of the companies to be gobbled up by bigger companies — no small concern given that Carl Icahn owns $2b worth of shares and (as always) wants to maximize his own short-term return rather than build a long-term winner.

It didn’t have to come to this: Motorola was the world leader in handset sales as late as 1997 and second until 2007, when it still led the US cellphone market. However, it was late to shift to digital and late to shift to software. (By comparison, the infrastructure business was never able to master the complexity of telephone switching and became uncompetitive once mobile radio technology diffused throughout the industry.)

Its handset business has been losing money for many years. As announced in March 2008, the handset spinoff was an attempt by CEO Greg Brown to dump the losing handset business after being unable to sell it. Even with its recent improvement, its survival is by no means certain.

Motorola co-CEO (now MMI founding CEO) Sanjay Jha deserves full credit for the turnaround over the past 30 months, in large part through his bold decision to bet the farm on Android. It’s too soon the say whether the turnaround is permanent, as MMI faces brutal competition in all the major categories where it competes: US market, smartphone market, Android handset market and even for Verizon’s loyalty (with the iPhone LTE due Real Soon Now.)

Still, it’s a good move for Jha, who as COO of Qualcomm was going to grow old waiting two or three decades for Paul Jacobs to retire. Very few Qualcomm execs seem to want to leave the mother ship — whether it’s because of the weather, lifestyle, or gross margins, I don’t know.

His gamble to move back east has certainly paid off. Even if MMI is unable to pull it off, he will certainly be snapped up by another tech company. Exhibit A: Eric Schmidt, who jumped from the sinking Sun Microsystems ship to become CEO of Novell and — without fixing its intractable problems — got named CEO of Google.

One unresolved question: will MMI keep settop boxes? The former General Instruments (with major operations in San Diego thanks to the Linkabit Videocipher spinout) accounts for about one-third of its revenue, but there are few obvious synergies. Now that Cisco owns its main competitor, Scientific Atlanta, there’s no obvious exit strategy, but I imagine finding a home for the STB business will be one of Jha’s 2011 priorities.

Cross posted to Open IT Strategies.

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.