Qualcomm Inc.'s recent decision to sell its ill-fated hardware businesses has quickly transformed the company into a major fabless-IC design house equipped with a wealth of wireless-chip technology and intellectual-property.
But having positioned itself as a chip-only entity, Qualcomm now faces some major challenges in its core business-CDMA-based chipsets, which provide the critical functions in a handset.
Qualcomm, San Diego, is expected to get some new and formidable competition from the likes of Intel Corp. and Lucent Technologies Inc. And established CDMA chipset suppliers, including LSI Logic Corp., Philips Semiconductors, and PrairieComm Inc., are preparing to expand their presence in the chip market next year.
It also remains to be seen whether Qualcomm can make good on its earlier promises to expand beyond its CDMA-based chipset niche and become a broad-line supplier of wireless ICs, software, and design services for OEMs.
While Qualcomm stands a good chance of succeeding as a stand-alone chip maker, the company could end up losing some market share in its core CDMA-based chipset business in the process, according to Edward Snyder, an analyst with Hambrecht & Quist LLC, San Francisco.
"So far, Qualcomm has been very successful in the chip business," Snyder said. "In the future, I expect that it will continue to be successful in this business. But the biggest challenge for Qualcomm will be to maintain its overall market share and profitability in this segment."
Right now, Qualcomm's sales and profit picture looks a bit murky, especially after recently selling two of its key hardware businesses in the last year.
Early in 1999, Qualcomm sold its loss-ridden infrastructure-equipment operations to Swedish cell-phone giant Ericsson Inc. for an undisclosed price. And late last week, Qualcomm exited the CDMA-based handset business by selling the operations to Japan's Kyocera Corp. for an undisclosed amount.
As part of the deal, Kyoto-based Kyocera assumed control of Qualcomm Personal Electronics, a recently dissolved handset-manufacturing venture between Qualcomm and Japan's Sony Corp. Kyocera's fledgling handset operations also agreed to buy CDMA-based chipsets from Qualcomm.
As a result, Qualcomm will incur a one-time charge in the first quarter of fiscal 2000 of about $30 million.
Qualcomm's move to sell its handset business could be a blessing in disguise. In the past, the company generated revenue by selling both handsets and chips. But that created conflicts with its OEM customers, including Samsung and Sony.
"By selling the handset business, we can also focus more on developing our chip business," said Johan Lodenius, vice president of marketing at Qualcomm's CDMA Technologies Division, the company's semiconductor and software arm.
It could also boost the company's profitability. Even though the handset business was Qualcomm's largest revenue producer, accounting for nearly 50% of its overall sales, the operation had been spilling red ink for some time, according to Snyder.
The company was also losing market share against the likes of Motorola, Nokia, and Samsung, despite its second-place position in the worldwide CDMA-based handset market, he added.
Having bailed out of the base-station and handset businesses, Qualcomm is now involved in only two equipment-oriented operations-Globalstar and Omnitracs. Globalstar is a joint satellite venture between Qualcomm and Loral Space and Communications Ltd., and Omnitracs is a satellite-based tracking business for the trucking industry.
Qualcomm's main revenue stream in the future will be derived from value-added products like CDMA-based chips, software, and related IP products, Snyder said. And the stakes are indeed huge.
Worldwide production of CDMA handsets will grow from 8.7 million units in 1997 to 69 million units in 2002, according to Dataquest Inc., San Jose.
Qualcomm's chip business already has been able to capitalize on the high-growth market. In fact, the company's chip sales have jumped from $547 million in 1997 to $1.1 billion in 1999, making it one of the world's largest fabless-IC houses. In total, the company reported a profit of $1.5 billion on sales of $3.9 billion in fiscal 1999.
Still, competitive pressures from an assortment of companies could hurt Qualcomm's position.
In 1998, the company held 89% of the CDMA-based chipset market, but its share is expected to drop to 77% in 1999, and to 43% in 2000, according to Hambrecht & Quist.
In the mid-1990s, Qualcomm hoped to proliferate the CDMA market by licensing its proprietary chip technology to four companies, DSP Communications, LSI Logic, PrairieComm, and VLSI Technology-all of which have announced CDMA-based chipsets.
DSPC, which has been acquired by Intel, and VLSI, which was bought by Philips, had been barred by Qualcomm from selling their CDMA-based chipsets. Qualcomm claimed that the chip licenses were not transferable when DSPC and VLSI were acquired.
Shortly after Intel acquired DSPC in November, it renegotiated the CDMA-based chipset license with Qualcomm. This, in turn, gives Intel the rights to sell DSPC's line of CDMA-based chipsets in the market, according to a Qualcomm spokeswoman.
The spokeswoman added that Qualcomm is still in negotiations with Philips/VLSI to renew the CDMA chip license, but she declined to elaborate. Officials from Philips/VLSI could not be reached for comment.
Still others are entering the fray. For example, LSI Logic recently shipped its initial CDMA-based chipset. And PrairieComm is working on a CDMA-based chipset licensing arrangement with Lucent Technologies.
Perhaps the biggest threat to Qualcomm's market share are two major OEMs-Motorola and Nokia-both of which sell CDMA handsets based on their own, internally developed chipsets.
"The competition is fierce," Lodenius said. "But overall, the business looks very strong for us."