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QualComm: The Aftermath

Posted on Wednesday, Sep 12th 2007

By Vijay Nagarajan, Guest Author

In the article “QualComm: Legal Battles Galore”, we reviewed the lawsuits that the company faced and also traced their genesis. In this article, we will look into the impact of these law-suits on QualComm (QCOM).

There was definitely some action following these rulings –

  • Verizon (VZ) signed an unprecedented agreement with BroadCom (BRCM) that allowed the former to sell the disputed phone models. The carrier agreed to pay $6 for every QualComm-based EV-DO handset, data-card or smart-phone that it sells. The deal also stipulates a maximum of $40 million per quarter and a life-time maximum of $200 million for the right to use all six patents disputed by the chip-vendors.
  • QualComm has devised a software work-around for the “ITC patent” and has been working with its customers to get it in. Whether this is infringement-free is unknown.
  • QualComm told the court that if it barred the company from making chips infringing the “Santa Ana patents”, Sprint (#3 US carrier) may lose up to $2 billion. The company admitted that it had not pursued a work-around until recently while Sprint (FON) does not have a fall-back for QChat, the feature affected by such a ban.
  • Louis Lupin, the company’s general counsel resigned following the continuous reversals and legal misconduct reports.

While a QualComm work-around for the “ITC patent” was expected, there are several other trends that these events represent –

  • The deal with Verizon signifies the traction that BroadCom is getting with the carrier. With Sprint too hinting on a deal, it is a sign that QualComm’s competitors are closing in on it not only in terms of product expertise but also in terms of customer traction, a hitherto unchallenged QualComm stronghold. Further, there is a consolidation of the market forces in the chip-vendor space, especially in 3G. Nokia exited the chip business last month initiating deals with Infineon (IFX), BroadCom and ST Microelectronics. Infineon purchased LSI’s mobile product group which in turn was part of Agere. Chances are that the other vendors who are yet to find traction will exit soon. This leaves BroadCom in the company of Ericsson, TI and QualComm to do the honors. The others who are still in the race include Freescale, Marvell (MRVL), Interdigital (IDCC), ST Microelectronics and iCera. In essence, there are now fewer but stronger competitors for QualComm. Besides, this competition will set the stage for pricing wars resulting in dropped margins for the chip-makers.
  • QualComm has to divert substantial engineering attention towards overcoming these infringements eating into its fast-paced development of future technologies.
  • The resignation of the general counsel is not only meant to be a face-saver but is likely to signify an over-hauling of its legal philosophy. It is to be noted that Mr. Lupin was the face of QualComm’s strong legal team and was associated with it since 1994. He should have been a key member of the core team that strategized means to monetize its IP portfolio. So, his resignation is a significant event.
  • Most importantly, the Verizon deal will serve as a precedent for any IP-based deals with QualComm. This, coupled with the stronger competition is likely to hit QualComm’s margins further and is potentially a disastrous recipe for QualComm’s business model.

In summary, more than the law-suits themselves, it is the trend they signify that should be QualComm’s worry. The ITC ruling has already opened a Pandora’s Box with Nokia seeking a similar ban. QualComm thus has its task cut-out for the next couple of years.

  • It should vociferously argue and appeal against most if not all of these rulings if it can. Else, it will have to modify its business model.
  • It has to continue to stay ahead of the competition in terms of a substantially better engineered and more holistic product offering as its USP.
  • Most importantly, with the diminishing returns (resulting from the IP devaluation and increased competition) from the current CDMA/WCDMA line of products (which is also likely to taper off over the next five years with the advent of OFDMA-based 4G technologies), the company has to diversify its product offerings and core competencies to focus on future trends in mobile technology .

In the event of the appeals failing, QualComm is likely to reduce its research budget. Further reverses may even result in the company overhauling its business model further.

In the sequels, we will focus on what these future trends are, where QualComm stands with respect to these trends and why a reduction in the research budget and a resultant change in its business model may not be such a bad thing.

This segment is a part in the series : QualComm

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How is Qualcomm going to leverage the Flarion purchase in regards to OFDMA-based networks, which almost all 4G & perhaps beyond-4G networks are planning to use for the PHY?

I know I’m jumping the gun since you’re gonna post tomorrow on “why a reduction in the research budget and a resultant change in its business model may not be such a bad thing”…

I feel that this concept is often great on paper, i.e. rationally thinking, its often hard for management to make such a decision due to:
– conflict of interest
– you can’t go out and say, indirectly, “yeah, we don’t expect to make more money = no growth … so we’re going to …”

But let’s wait till tomorrow…

Jigar Shah Wednesday, September 12, 2007 at 9:09 PM PT

Good points, Mr.Shah. While, I will post the details later, I do believe that QualComm is one of the few companies (right now perhaps the only company) that is well positioned to stay in any of the three 4G technologies that may win. However, it will not necessarily be an IP game, since OFDMA IP is more spread out than CDMA. So, QualComm should win only on engineering excellence as far as 4G is concerned.

Vijay Wednesday, September 12, 2007 at 10:47 PM PT

[…] legal events involving QualComm this year. We further looked at the significance of these events in “QualComm:The aftermath”. In this piece, I shall delve a little deeper into the impact of the legal battles and any further […]

QualComm: The Margins - Sramana Mitra on Strategy Friday, September 21, 2007 at 8:46 AM PT