Qualcomm executive Peggy Johnson says the company’s strength is pioneering technology but big challenges lie ahead

Chip giant plans what to eat first

Qualcomm executive Peggy Johnson says the company’s strength is pioneering technology but big challenges lie ahead

Qualcomm itself employs only 12,000 in a city of 1.3 million, and the wireless technology cluster that has grown up around it, including Nokia and Samsung offices, about 70,000.

By Christopher Williams, in San Diego

9:43PM GMT 16 Feb 2014

San Diego is a company city, in a very modern sense. The Southern Californian city’s economy is dominated by two very different expressions of American power: the US Navy’s Pacific Fleet and Qualcomm, one of the most important companies in the mobile industry.

Qualcomm itself employs only 12,000 in a city of 1.3 million, and the wireless technology cluster that has grown up around it, including Nokia and Samsung offices, about 70,000. They are highly skilled and high-paid workers, however, who have driven the transformation of San Diego in the last 25 years.

It was a run-down port town struggling with military spending cuts at the end of the Cold War and is now California’s second thriving high-tech centre, 400 miles south of Silicon Valley. Constrction firms are busy and it is home to dozens of fashionable restaurants, including a branch of Nobu, the Robert De Niro-backed restaurant chain that sells sushi to the extravagant in Moscow and Mayfair.

Qualcomm’s executives are justifiably proud of the role the company plays in the local economy; the city’s NFL arena is the Qualcomm Stadium. But the company’s influence on a global scale will be on display next week at Mobile World Congress in Barcelona, the annual gathering of everyone who matters in the mobile industry.

“You just have to have your head down and keep running as fast as you can,” Peggy Johnson, Qualcomm’s president of global market development, who has been at the company since its difficult early days in the late 1980s when she joined as a software engineer.

“We probably spend less time thinking about the competition now and more about what trends we need to integrate.”

“I would say our competitive edge is whatever we hear the demand is we can integrate it and get it out of the door quickly.”

Virtually every significant player who will be in Barcelona has to deal with Qualcomm. It invented some of the technology at the heart of the 3G and 4G mobile network standards, so Apple, Samsung and anyone else who builds a smartphone has to pay a Qualcomm a royalty for every handset they sell.

Every network operator relies on its intellectual property and so creates the handset market, so it is their demands to which Ms Johnson and her colleagues listen most closely.

The success of Britain’s big players in mobile technology is also dependent on Qualcomm, one way or another. It is a major customer for ARM, which designs the architecture of virtually every main smartphone processor. It is a major competitor to Imagination, which has dominant chunk of the market for graphics chip intellectual property. Qualcomm designs and builds its own, however, and is very strong in that market.

Qualcomm’s intellectual property licensing business, together with the microchips the company supplies to smartphone manufacturers itself, has driven the company to a market capitalisation of nearly $130bn (£78bn), more than double its value five years ago and making it among the world’s 50 most valuable public companies.

The early days were tough, however. Qualcomm was founded in 1985 to commercialise the work of Irwin Jacobs, an electrical engineering professor at the University of California in San Diego. He developed CDMA, a digital mobile system to replace the analogue technology that early mobile networks relied on and was already reaching capacity in the late 1980s.

“We had to fund the research and development ourselves,” says Ms Johnson. “There are stories here about mortgaging houses and literally worrying about making the next payroll.”

Qualcomm’s corporate character was forged under that pressure. In spite of its scale and dominance it casts itself as an upstart working counter to the mobile industry establishment. When it developed CDMA, the mobile industry was dominated by European vendors such as Nokia and Ericsson, and they were backing the rival GSM digital network technology.

The innovation that kept Qualcomm viable throughout the battle was not technological, but legal. Its lawyers suggested licensing others to use its intellectual property en masse. The portfolio now includes tens of thousands of patents.

The company says by supplying actual chips as well as designs it is “not just a filing cabinet of patents collecting royalties” and boasts “there isn’t a manufacturer out there that doesn’t use our silicon in some way”.

“We’ve used them [patent portfolio licenses] as a means bring the industry and manufacturing base around a standard,” says Ms Johnson.

The reality of Qualcomm becoming part of the establishment was more violent. While the first generations of CDMA and GSM – known as 2G – were separate, the technologies overlapped when mobile networks moved to 3G. It sparked years of litigation and counter litigation between Qualcomm and Nokia, and other players, that became known as the industry’s ‘holy wars’.

They can now be seen as part of a shift in power in the mobile industry from Europe to America. At the time Nokia was preeminent in the world, but today it has sold its handset division to Microsoft and its network equipment business has major financial problems and is under threat from the rising telecoms giants of China, Huawei and ZTE.

Qualcomm meanwhile jettisoned its handset division 15 years ago and is doing well on selling intellectual property and microchips.

It faces its own challenges from China and other emerging economies, however. Qualcomm’s patent licensing business accounts for half its $24.9bn annual revenues but two thirds of its $6.9bn profit. Those margins are under threat, analysts fear, because the royalty the company receives for each phone is based on its selling price.

Their argument says that most of the growth in the smartphone market is now in emerging markets, where consumers will not pay for a top of the range iPhone or Galaxy S4, so those juicy margins will come under pressure.

The fears proved so far unfounded when Qualcomm reported its third quarter results last month and boosted its projected earnings per share. But the average selling price of smartphone’s is bound to come down. Ms Johnson is responsible for finding new markets for the company’s technology to help continue its growth trajectory.

“I was around back when India first opened up. I remember going in and talking to the operators and the price points were just shocking to us,” she says.

“We had to go back and examine the type of features we put in to chips that we could cost reduce so we could come up with a lower tier chip. At the time we basically just had one tier of chips so in order to penetrate those emerging markets we had to come up with low tier and then a super-low tier.”

Ms Johnson now faces the challenge of how to extend mobile technology into new profitable markets. The maxim ‘mobile is eating the world’ has become common across the technology sector as it realises that internet-connected computers people have with them at all times are more important and powerful than those that sit on desks. The question for Qualcomm is almost what it fancies to eat first.

It has developed its own smartwatch, the Toq, not because it wanat to be a consumer gadget maker, but to prove to the market what is possible. The devices has a unique low-power touchscreen that can be left on all the time time so wearers don’t have to push a button to tell the time, for instance. Ms Johnson is also pushing Qualcomm’s mobile education and healthcare efforts.

“There is layer upon layer of new partners that we need to get to know. It’s very hard to break into a traditional industry like education, harder than we thought.

“The needle will move first in the emerging markets where there is never be a big PC base. They going to start with a phone or a tablet.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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