Qualcomm Inc.'s spinoff last week of its chipset and software business -- temporarily dubbed "Spinco" -- sets the stage for the CDMA chipset leader to scale the wall of GSM.
Previously, Qualcomm's customers -- handset producers such as Ericsson and Nokia -- had impeded its entry into the mainly European GSM market because they were only willing to license their technology to Qualcomm in exchange for its CDMA licenses.
Such cross-licensing agreements, however, would have hampered Qualcomm's CDMA royalty business, its core revenue stream.
"The spinoff will allow both Qualcomm and Spinco to more fully realize their potential by eliminating possible conflicts between chip sales and royalties," said Irwin M. Jacobs, chief executive of Qualcomm, San Diego. "By divesting our [chipset] business, we no longer require the same cross-licenses to make and sell wireless products."
Ericsson and Nokia were reluctant to license their GSM technologies directly to Qualcomm because the company was supplying CMDA chipset technology to their competitors.
"Qualcomm allows the Samsungs of the world to compete against Nokia and Ericsson," said Greg Teets, an analyst at A.G. Edwards & Sons Inc., St. Louis. "GSM license holders were saying 'why don't we just cross-license the [CDMA and GSM] technologies?' But Qualcomm didn't want to give up that royalty stream, and Spinco will be able to get into GSM without damaging Qualcomm's royalty business."
Under the terms of the spinoff, slated for completion next year, Qualcomm will offer Spinco patented technologies to provide the company with leverage to negotiate cross-licenses for technologies incorporating GSM, which in addition to being the predominant wireless standard in Europe, is gaining ground in other regions.
Entering the GSM market through the back door will enable Qualcomm to expand its offerings beyond CDMA, which, while considered the third-generation wireless standard, is currently a niche business compared with the GSM standard, analysts said.
"During this transition to third-generation networks, you're going to have to roam between a CDMA and a GSM network, so Qualcomm needed to build chipsets that give both," Teets said.
While Nokia and Ericsson have already developed their GSM technologies in-house, Spinco will find many other potential customers for its GSM offerings, said Will Strauss, an analyst at Forward Concepts Co., Tempe, Ariz.
Spinco will be looking to offer GSM to second-tier handset players such as NEC, Panasonic, Philips, Samsung, and Siemens, he said. Instead of cross-licensing CDMA for GSM technologies, however, Spinco will likely seek to buy into GSM, Strauss said.
"The first thing I would do if I were Spinco would be to find somebody who is an expert in GSM and go out and buy them," he said.
Texas Instruments Inc., the clear leader in chipsets for the cell-phone market with more than a 60% share, recently agreed to pay about $475 million for Dot Wireless Inc., a San Diego-based supplier of software and transceiver technologies for CDMA that Strauss said Qualcomm "should have bought."
The spinoff is Qualcomm's latest, boldest step to become a pure-IP player, observers said.
Its remaining non-IP holding is OmniExpress, which delivers two-way mobile communications and tracking systems to the transportation industry. Analysts say Qualcomm is likely to spin off OmniExpress.
"With the public offering of our chipset business, we will complete the transformation of our original businesses into a horizontal model," Jacobs said. "This will increase Qualcomm's ability [to expand on] and support third-generation CDMA-based standards by collaborating with manufacturing carriers in their development, deployment, and implementation of the latest CDMA technologies.
"There are deployments of 3G systems in markets we do not address," he said. "The convergence of wireless data and Internet access and related applications will also present new sources for licenses and royalties. After the spinoff, we will have the engineering expertise and resources dedicated to developing new technologies and enhancing our patent portfolio."
Qualcomm's most recent sell-off was the sale of its CDMA module business to Sierra Wireless Inc. Last year, Qualcomm sold its troubled infrastructure-equipment operations to Swedish cell-phone company Ericsson Inc. and exited the CDMA handset business by selling the operations to Japan's
Although Qualcomm is largely associated with CDMA -- for which it holds an 85% market share -- the company also has an ample treasure chest of other technologies.
Qualcomm recently entered the power-amplifier market as part of a major deal with RF Micro Devices Inc., and separately rolled out a CDMA chipset.
Qualcomm penetrated the RF-chip market last year, and in January expanded its global positioning system efforts by acquiring GPS software maker SnapTrack Inc. for $1 billion.
More recently, Qualcomm jumped into the Bluetooth arena in a co-development deal with Ericsson.
Qualcomm today also struck a deal with Ford Motor Co. to create a new company aimed at developing wireless information services into cars and trucks, according to the Reuters news service. Known as Wingcast, the new San Diego-based company will offer voice, entertainment, Internet access, and safety services to drivers of Ford vehicles. The first services will be available in late 2001.
Terms of the deal were not disclosed, but Ford and San Diego-based Qualcomm each will own equity in Wingcast. Also, Cartell, a Romulus, Michigan-based supplier of telematics equipment to automakers, is a minority equity stakeholder in the company.
Ford expects more than a million of its new cars and trucks to be equipped for mobile communications by the end of 2002, three million by 2003 and nearly all of its cars and trucks by the end of 2004.
Harel Kodesh, formerly of Microsoft, has been chosen to as Wingcast's president and chief executive, Reuters reported.