Qualcomm: Leading The Wireless Revolution: Group Selected Case Analysis
Qualcomm: Leading The Wireless Revolution: Group Selected Case Analysis
Qualcomm: Leading The Wireless Revolution: Group Selected Case Analysis
Electronic Commerce
Management 671
Radford University
Spring 2001
Elizabeth Curl
Karl Zartarian
Mike Biscotte
Page
I.
Introduction
II.
III.
IV.
V.
VI.
VII.
Business Model
VIII.
Target Markets
IX.
X.
XI.
XII.
Problem Statement
XIII.
XIV.
Summary
XV.
References
a.
INTRODUCTION
There is a revolution in the world of communications and information transfer
today, and this revolution is wireless.
The Internet has affected the way people work, play, and communicate.
Shopping, research, and messaging are all popular uses of PC-based internet
applications. The internet has streamlined business, personal, and financial
transactions, and provides a cost-effective method of communications.
Cellular phones have also affected the way people communicate. Cellular usage
has exploded as society has embraced the ability to talk with each other any time
in any place. Safety and convenience issues have become significant drivers in
its rise in popularity.
The next generation of wireless devices, however, will merge these two
functionalities. Consumers desire access to internet-based activities from their
wireless handsets. Businesses want to perform all manner of transactions in a
mobile manner. Consequently, the companies that can support and standardize
the required wireless equipment and technology will prosper.
QUALCOMM is such a company. QUALCOMMs patented technologies form the
basis for the global wireless platforms. Their significant research and
development activities have allowed them to stay at the forefront of wireless
technology, and their broad patent base provides a significant revenue stream.
QUALCOMM, however, faces challenges from several fronts if they are to retain
their industry leadership position. These challenges come from other chip
manufacturers, alternate wireless standards, and government-sponsored
communications systems.
This case analysis will document QUALCOMMs present situation, investigate the
overall industry, discuss the challenges QUALCOMM faces, and provide
recommended actions for the future.
b.
III.
I.
V.
Suppliers
QUALCOMM depends on third parties for manufacturing, assembling and
testing of their integrated circuits. Most of these suppliers are sole source
vendors and they are used in the start-up phase of a product life cycle.
This is risky for QUALCOMM, because should any of these suppliers ally
themselves with QUALCOMMs industry rivals, it could delay product
development and hinder sales revenue. In addition, should any of these
suppliers allocate capacity to other products, it could hinder
QUALCOMMs product development.
Much of QUALCOMMs intellectual capital is developed by their own
technical personnel. Should they lose any of these qualified personnel to
industry rivals, it could cause them to lose their intellectual property.
Designers of CDMA integrated circuits, as well as companies that promote
non-CDMA technologies, include Ericsson, Intel, LSI Logic, Lucent,
Motorola, Nokia, Nortel, Philips, Samsung and Siemens. All of these
competitors are also licensees of QUALCOMM. These suppliers are also
buyers, but could harm QUALCOMMs product development if they were
to align themselves with other network providers. These suppliers can
also obtain licenses from QUALCOMM to manufacture CDMA integrated
circuits that compete directly with QUALCOMM products.
Satellite systems providers are necessary for QUALCOMMs success with
OmniTRACS, Truckmail, and Omniexpress. Transponder capacity is
critical for these systems to be successful. If the capacity were not
adequate, it would harm their business and operations of these systems.
Satellite systems could also affect the Globalstar product. Globalstar is a
satellite based wireless telephone. If the satellite network should lose
capacity or change, it would have adverse affects to their revenues.
B.
Buyers
QUALCOMM has buyers in the transportation, entertainment, and
communication industries. Some of QUALCOMMs buyers in the
communication industry could pose competitive problems. A high
percentage of QCTs revenue, 39%, is generated from agreements with
Samsung Electronics, LG Information, and Hyundai Electronics of Korea.
QUALCOMM needs to expand their customer base since the loss of one
or more of these customers would pose a significant loss of revenues and
could affect QUALCOMMs profitability.
8
C.
Industry Rivals
QUALCOMM may be threatened by existing rivals who have more
established relationships and distribution channels. These rivals could
also form alliances among themselves or existing customers, which could
affect buyers decisions to purchase products or license technology from
QUALCOMM. This could also cause new competitors or alliances among
competitors to emerge, causing QUALCOMM to lose market share.
D.
New Entrants
New entrants might consist of competitors offering low cost terrestrialbased products, in addition to future satellite-based systems, may intensify
competition in new markets and impact margins. Telephone companies
can pose threats as new entrants into the market. If they enter with newer
technology for 3G networks, this could impact QUALCOMM growth. An
independent military contractor could emerge as a new entrant into the
market with a radically different technology.
E.
Substitutes
New satellite systems could be a substitute for CDMA. Also, new GSM
technology for 3G networks could replace CDMA altogether. Another
substitute threat is WCDMA for the European network system. Lastly, new
land-based technology as substitute for CDMA or a different form of
wireless could pose a substitute threat to QUALCOMMs technologies.
VI.
B.
2.
3.
4.
QUALCOMMs Strengths:
a. CDMA technology has a high adoption rate in the North
American market.
b. Their patent protection ability is a key competence as they
aggressively protect their intellectual property.
c. QUALCOMM is financially sound with stable earnings,
profitability, and growth providing them with necessary
resources for continued expansion in research and
development.
10
2.
Competitors Strengths:
a. Existing royalty-free, cross-licenses for competing and emerging
technologies.
b. Longer operating histories and established presence in key
markets.
c. Greater brand recognition.
d. Access to larger customer bases.
e. Greater financial, sales, marketing, manufacturing, distribution,
and technical resources.
3.
QUALCOMMs Weaknesses:
a. Loss of any major customer. Of the QCT business segment,
39% of their revenue is a result of three customers in Korea.
Sales to Globalstar accounted for 30% of revenue of the
QWS business segment.
b. Dependence on a limited number of third party manufacturers to
produce and test products. As explained in Porters five
forces, any disruptions in the operations of these third
parties could harm delivery obligations.
c. QUALCOMM provides financing for CDMA networks to their
licensees. If these customers default on their loans,
QUALCOMMs financial position could be harmed.
d. Globalstar has high infrastructure costs, which could adversely
affect the growth and market acceptance of their product
and directly affect QUALCOMMs revenue and profitability.
e. QUALCOMM has poor overseas sales channels, specifically in
Europe. They also spend exhaustive amounts of money in
legal proceedings for patent protection.
4.
Competitors Weaknesses:
a. The competitors network technology mainly focuses on GSM
technology. If they do not emerge with newer technology to
meet 3G networks it could limit their growth.
b. Competitors have limited North American market share.
5.
QUALCOMMs Opportunities:
11
a.
b.
c.
d.
6.
Competitors Opportunities:
a.
7.
b.
c.
b.
c.
d.
e.
f.
VII.
BUSINESS MODEL
QUALCOMMs basic business model is centered on their innovative and creative
abilities. QUALCOMM invests heavily in research and development with a focus
on creating new products and services. In 2000, they invested 23% of revenues
in research and development. They patent their new ideas and use the ideas to
create new products and services. QUALCOMM generates revenue through
licensing fees and sales. A diagram of QUALCOMMs basic business model is
shown in Figure 2.
Revenue Stream
- Sales
- Licensing Fees
- Royalties
13
QUALCOMM refers to its specific business model as the Virtuous Cycle. The
Virtuous Cycle centers on the development, implementation, and application of
their CDMA technology. QUALCOMMs business strategy is to innovate new
technologies with large market potential to significantly increase wireless traffic.
Increased wireless traffic translates to an increased need for high data rate and
efficient technology, an increased subscriber base, and increased revenue.
QUALCOMMs objective is to meet this market need using the benefits of CDMA.
The key to the QUALCOMM business model or Virtuous Cycle is their
emphasis on technology patents. QUALCOMM develops ideas based on CDMA,
patents those ideas, then develops CDMA-based applications designed to
increase wireless usage by increasing usage per subscriber and the number of
subscribers. They promote CDMA technologies and products by licensing
CDMA patents to manufacturers and by making necessary partnerships,
acquisitions, and start-ups to enable CDMA product and service advancement
worldwide. All of QUALCOMMs revenues are generated through the licensing
fees, royalties and product sales based on CDMA.
14
VIII.
TARGET MARKETS
QUALCOMM is a major part of the wireless telecommunications and application
industry and targets all the buyers that comprise that market. QUALCOMM also
targets other industries that are served by the wireless telecommunications
industry such as the satellite, transportation, and entertainment industries. They
also provide services to the U.S. Government.
QCT targets all consumers along the wireless telecommunication value chain.
Those consumers include wireless network providers and hardware
manufacturers including network infrastructure, chip (or integrated circuit),
handset (or phone), laptop, hand-held computer, and other mobile devices. QCT
provides products to over 30 handset manufacturers. They also provide
complete system solutions for wireless networks. First, they provide products that
allow manufacturers to design very small, feature-rich handsets. Second, they
provide network infrastructure manufacturers integrated circuits and system
software so that network infrastructure manufacturers can provide standardscompliant processing for wireless voice and data.
QUALCOMM targets satellite industries that are serviced by wireless
telecommunications. QUALCOMM, in partnership with Loral Space and
Communications, created Globalstar in order to promote and develop CDMA
based technology in the wireless telecommunications industry that is enabled by
satellites. Wireless Systems, another division of QUALCOMM, targets the
satellite industry by designing, developing, manufacturing and deploying the
infrastructure, handset products and modems for use in Globalstars CDMA
based networks.
QUALCOMM targets the transportation industry with products that enable
position location, tracking technology, and intensive data transmission to various
commercial fleets and automobile manufacturers. Examples of their current
customers are the Ryder truck fleet and Ford Motor Company.
Two other target markets for QUALCOMM are the entertainment industry and the
U.S. Government. First, in the entertainment industry, QUALCOMM has
partnered with Technicolor to provide end-to-end digital cinema systems for
delivering motion pictures to theaters worldwide. Secondly, QUALCOMM
performs a variety of work for various departments and agencies of the U.S.
Government involving commercial related technologies.
15
X.
B.
Patent Defense
In order to protect the advantages of their R&D efforts, QUALCOMM has,
by necessity, developed and maintained a very aggressive and effective
stance toward defense of its patents. They maintain a large staff of inhouse patent lawyers to protect their patented products and technologies.
C.
Startups/Spinoffs
As another outgrowth of its R&D efforts, QUALCOMM has become very
effective at developing internal, or identifying external, innovative
companies for startup or spinoff opportunities. In fact, QUALCOMM has
set up QUALCOMM Ventures as a separate subsidiary to fund potential
startups.
D.
Visionary Management
Tying these qualities together is the overall vision of QUALCOMMs
management. QUALCOMMs goal is to grow the CDMA markets
worldwide. By supporting and fostering new and innovative companies
and products which advance CDMA technologies, QUALCOMM helps
support the Virtuous Cycle.
16
XI.
17
Industry
Sales
(Billions)
Current
Ratio
Profit
Margin
P/E
ROA
QCOM
Standards
Chip Manu.
3.9
5.72
4.91
364.6
2.3
ALA
Network
28.2
1.7
4.8
31.1
3.3
NSM
Chip Manu.
2.31
2.55
19.2
10.3
18.2
TXN
Chip Manu.
11.9
2.88
26.0
18.3
17.4
AWE
Network
9.6
2.0
-2.1
NA
-0.68
ERICY
Handset Manu
Chip Manu.
29.5
1.3
6.9
22.4
9.4
S&P 500
Index
1.61
12.36
28.1
8.81
QCOM - QUALCOMM
TXN - Texas Instruments
ERICY - Ericsson NSM - National Semiconductor
ALA - Alcatel
AWE - AT&T Wireless
FIGURE 4 - REVENUES
Total $3,197M
39%
17%
$1,239
$532
QCT (CDMA)
QWS (Wireless Systems)
QCT (Licensing)
$705
$721
22%
22%
18
XI.
KEY COMPANY CHALLENGES
QUALCOMM faces a number of significant challenges, including asserting
cdma2000 as the dominant worldwide standard, maintaining competitive
advantage in developing new technologies, and continuing to manage their
growth.
First and foremost is the struggle for a dominant worldwide wireless standard.
The market has not yet determined which standard they will ultimately choose.
Currently the choices are cdma2000 or WCDMA. QUALCOMMs ultimate
business focus is to ensure that cdma2000 is the dominant standard.
However, even though third generation wireless is in the early stages of
implementation, the industry appears to be choosing WCDMA, particularly in
cases of newly issued spectrum. The industry seems to prefer cdma2000 when
implementing third generation wireless in pre-existing spectrum. QUALCOMMs
management recently commented on reasons why industry is looking to WCDMA
and offered counterpoints as to why cdma2000 is the better alternative:
Industry:
QUALCOMM:
Industry:
QUALCOMM:
Industry:
QUALCOMM:
Industry:
QUALCOMM:
Industry:
QUALCOMM:
20
XII.
PROBLEM STATEMENT
21