Qualcomm Dialed 26,078% Gain As It Transformed Mobile

By
A A A

In 1989, San Diego upstart Qualcomm asked the Telecommunications Industry Association to approve using its technology to upgrade the U.S. cellphone system.

The cellular industry was implementing a 10-year, $10 billion plan to launch technology that would multiply the calls that telecom providers could handle.

Qualcomm ( QCOM ), founded in 1985 by Irwin Jacobs and Andrew Viterbi, initially developed a satellite-based data communications system for transportation -- technology the founders said could transform cellular communications. The company name is shorthand for "quality communications."

When Jacobs, then chairman and chief executive, asked the TIA to approve Qualcomm's technology as a cellular industry standard, many industry experts scoffed.

Qualcomm's technology had never been tested in a major city and was said to be three years behind a competing U.S. digital cellular technology called time division multiple access, or TDMA.

And the TIA had already approved TDMA as an industry standard. It was backed byAT&T ( T ) and other giants and in the early stages of deployment.

Jacobs, though, boldly stuck to his guns that Qualcomm's digital cellular technology, called code division multiple access, was superior. CDMA, he said, would increase call capacity more than three times that of TDMA. Skeptics laughed.

"There were very few believers," Jacobs told IBD. "Nobody found a hole in our technology, but neither was anyone willing to proceed with CDMA."

No Overnight Success

With rollouts of TDMA infrastructure and phones underway, Qualcomm was barely in the game.

"During that period I'd often wake up at 4 a.m. and ponder if there were any technical issues that we were missing," Jacobs said. "Any time you are trying a new innovation that will impact a lot of people's businesses, you are going to get a lot of skepticism. People around the world were arguing that I was overstating the case."

His firm had to make its case for CDMA. "Qualcomm introduced a fundamentally new way to think of digital communications," said George Gilder, author of "Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World," a book one-third devoted to Qualcomm. "Because Qualcomm was founded on a new theory, it was rejected fiercely."

Gilder, an economist, was an early advocate of CDMA, which he promoted at his Telecosm Forum.

"People would leap up in the audience and denounce me in the middle of my speeches," he recalled. "They thought it was a scam and a scandal that violated the laws of physics. They were afraid of a system they did not really understand and sensed that it could threaten their future."

Qualcomm pressed on. In the spring of 1989 the company convinced California-based Pacific Telesis, now part of AT&T, to help conduct a test of CDMA in San Diego to 50 influential leaders in the wireless industry.

The test proved that the technology worked, but Qualcomm faced an even bigger challenge. The technology's bulky components had to be shrunk to fit into cellphones and other gear. With no one willing to deploy CDMA, Qualcomm had to build the cellphones, base stations and chips to prove CDMA's commercial viability.

Qualcomm went public in December 1991, generating $53 million in much-needed proceeds.

The company's first major commercial breakthrough came in 1992 from South Korea, where a small market test of CDMA proceeded. It was a fertile market for cellphones. The Asian country was trying to develop a tech manufacturing base that could compete with Japan. A year later, Korea announced its national cellphone system would be based on CDMA. Hong Kong was also on board.

That got the ball rolling. In 1993, CDMA was accepted as a standard, but its battle against TDMA was just starting, with cellular heavyweights on both sides. In the end, CDMA would become the U.S. digital cellular standard instead of TDMA -- and Qualcomm would be one of the top-performing stocks of the past 30 years.

Qualcomm's December 1991 IPO had a presplit price of 16 and touched an all-time low of 6.25 the following September. But the company was about to get its big break.

On Sept. 30, 1992, US West, then one of the Baby Bells from the breakup of AT&T, became the first U.S. cellular firm to announce it would deploy Qualcomm's CDMA, calling it "a superior technology."

Tireless Wireless Stock

In one year starting that September, Qualcomm stock soared 593% as other telecom firms also jumped on the CDMA bandwagon.

But the stock's biggest run was five years away.

Despite Qualcomm's progress, CDMA skeptics continued to howl. And some phone companies feared relying on Qualcomm alone for key cellular technology.

Qualcomm responded by loosening its licensing restrictions, making CDMA technology available to a range of manufacturers, many in Asia. It would rely largely on licensing fees and royalties.

That model worked. Qualcomm revenue soared from $271 million in 1994 to $3.3 billion in 1998.

But Qualcomm had still another major hurdle to overcome.

Jacobs knew he was facing an international battle. Getting into Europe would be a tough challenge. The Continent used a standard called GSM. There was an understanding among European governments that GSM, which is a TDMA-based technology, would remain the single standard for Europe.

Sweden'sEricsson ( ERIC ), a leading telecom gear maker, was among vendors reluctant to give Qualcomm the opportunity to promote CDMA as an alternative to GSM.

Qualcomm was a threat to Ericsson's market dominance. In addition, Ericsson claimed its own CDMA patents and accused Qualcomm of violating them.

Thus began an intense court battle, further stalling Qualcomm's acceptance in Europe. "Europe was developing its own CDMA standard and wouldn't quite let us get involved with that activity," Jacobs said. "It created heated discussions. We were trying to have them use parameters that would allow us to make chips that would work both in the U.S. and Europe."

A Handshake Lets Data Flow

In 1998, Ericsson introduced a technology that was based on CDMA, but not compatible with Qualcomm. The war ended on March 25, 1999, when the pair announced a definitive agreement resolving all disputes and that would allow for compatibility among the competing technologies.

The settlement sparked Qualcomm stock, which soared 2,600% from January 1999 to January 2000. Starting from its all-time low in October 1992 to its peak in January 2000, Qualcomm stock gained 26,078%.

As part of the deal, Qualcomm agreed to sell its CDMA infrastructure division to Ericsson. It paved the way for a global CDMA-based wireless communications system.

It also let Qualcomm focus on what it did best -- advancing digital technology through its chip designs and software that it licenses worldwide. "Qualcomm emerged just as the Internet emerged and ultimately was a leading force in adapting all mobile technology to the Internet protocol," Gilder said. "Qualcomm triumphed by moving beyond physics to the new science of information, transforming the physical scarcity of bandwidth into an abundance of wireless communications."

Jacobs, now 80, stepped down as CEO in 2005, on the firm's 20th anniversary. He was succeeded by his son Paul, who left as CEO in March, succeeded by former Chief Operating Officer Steve Mollenkopf. Irwin Jacobs resigned from the board in 2012. Paul Jacobs remains as executive chairman.

"The most exciting aspect at Qualcomm is the impact it has had on the lives of people around world," Irvin Jacobs said, "providing very good communications at a price people can increasingly afford."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: QCOM , T , ERIC

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

85,467,945
  • $16.74 ▼ 0.30%
83,530,302
  • $12.49 ▲ 85.31%
68,697,805
  • $42.55 ▼ 0.77%
58,516,965
  • $101.63 ▼ 0.03%
49,234,469
  • $74.58 ▼ 3.74%
39,038,134
  • $8.56 ▲ 2.27%
37,813,410
  • $49.38 ▼ 5.24%
37,004,144
  • $46.24 ▼ 0.97%
As of 9/15/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com