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Qualcomm seeks mobile domination

07 May 2013  | Tam Harbert, EBN

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Intel was quietly overtaken in market capitalisation by wireless chip company Qualcomm last fall. As of mid-April this year, the two companies are neck and neck, with Intel's market cap slightly ahead at $112 billion against Qualcomm's $110 billion. That Qualcomm is able to breathe down Intel's neck is impressive, as its annual revenue is only 40 per cent of Intel's.

Its soaring value is just one more sign of how mobile communications is overtaking the traditional computing market. According to IHS, semiconductor revenues from data processing are falling at about the same rate that wireless communications chip revenues are rising (7.8 per cent). At that rate, it won't be long before wireless communications revenue—which now makes up 23 per cent of all semiconductor revenue—surpasses data processing's 34-per cent share.

Qualcomm's revenues have almost doubled over the last three years, rising from $10.4 billion in fiscal 2009 to $19 billion in 2012. Its revenue was up 27 per cent in 2012, and rose another 29 per cent in the first quarter of this year. This past quarter, it also shipped a record number of chips—182 million.

Qualcomm is now the third largest semiconductor supplier (in terms of revenue) in the world, behind Intel and Samsung, according to IHS. (Click here for an in-depth analysis of the company.)

Patent gold

A key to Qualcomm's profitability is the fact that it holds key patents for 3G CDMA cellular technology. Royalties and licence fees from those patents generate about 80 per cent of the company's profit today. Companies that use CDMA in their products—both chip vendors as well as handset manufacturers—pay Qualcomm $6 to $7 per phone, according to Brett Simpson, partner and co-founder of Arete Research, an independent equity research firm in London.

Now, the company has launched a big push to spread its cellular technology, and thus increase its royalty income, not to mention chip sales, beyond mobile phones. As wireless communications move more and more into the computing market, Qualcomm needs to make sure that OEMs adopt its technology. Although the company's 4G patents have yet to be tested, analysts think the company has good technology and a strong patent position there as well.

"It won't be long before every tablet and computer has LTE inside," Simpson told me. "The challenge for Qualcomm is to figure out how to accelerate that process. How do they make LTE ubiquitous across other product categories outside of mobile phones?"

So far, the adoption of cellular in products outside of phones has been limited. The iPad offers 3G/4G, but keeps it an expensive, high-end option. That's why only a quarter of all iPads ship with cellular today, Simpson notes. To try to encourage more OEMs to incorporate cellular connectivity in more products, Qualcomm is starting to market directly to consumers.

This year, it created the new position of Chief Marketing Officer and hired Anand Chandrasekher, who was responsible for Intel's Centrino marketing campaign. That campaign was highly successful. A decade ago, before Intel's big marketing push, few, if any, laptops had WiFi, Simpson says. "Today, 100 per cent of notebooks have WiFi."

At the beginning of this year, Qualcomm introduced its latest application processor, the Snapdragon 800, which, in addition to high-end smartphones, is also targeting consumer products like TVs and set-top boxes. Shortly thereafter, it launched an ad campaign featuring a cute little dragon designed to charm consumers.

Partnership push
Another approach the company may take is to forge innovative new agreements with telecom carriers to encourage OEMs to put cellular in more tablets and other mobile devices, Simpson speculates. Perhaps the carriers would subsidise the cost of the LTE chip so OEMs would offer it as a more affordable option. After all, "Verizon would benefit from every LTE-enabled device," notes Simpson.

In addition, Qualcomm has a huge R&D budget—$3.9 billion last year, not to mention cash on hand of $27 million—to fund other efforts. For example, at CES, it announced it was teaming with AT&T to design an "Internet of Everything" development platform. The goal, of course, is to help OEMs design cellular into everything from automotive to smart meters to "future verticals and applications that haven't even been thought of yet," Qualcomm said.

Time will tell whether Qualcomm will be successful in saturating the world with its technology. But I wouldn't bet against them.

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