Qualcomm Inc. Business Information, Profile, and History

Company Perspectives:

Telecommunications reform put an end to the monopolistic and duopolistic control of many markets, clearing the way for new players, new alliances, and new ideas. We believe that, as an agile and innovative organization, Qualcomm is well-positioned to seize the opportunities created by this change.

We believe that greater competition, better technology, and economies of scale will bring the price of wireless service to more affordable levels in the future, while new features and applications will add value and appeal. We also believe that more consumers will choose wireless as a high-quality, cost-effective alternative to today's landline networks, and that wireless usage will increase dramatically.

We've prepared the company to play a major role in this burgeoning market.

History of Qualcomm Inc.

In 1959, two former engineering classmates at the Massachusetts Institute of Technology, Irwin Jacobs and Andrew Viterbi, reunited at an academic conference and resowed the seeds of a friendship that during the 1960s evolved into a consulting business and then, in 1968, into Linkabit, a San Diego-based manufacturer of digital communications equipment.

After graduating from MIT in 1959, Jacobs had become a professor of electrical engineering and in 1965 authored Principles of Communication Engineering, later described as "the first comprehensive textbook on digital communications." Viterbi had gone into research, helping to design the telemetry equipment of the first successful U.S. satellite, Explorer I, and playing a pioneering role in developing the potential of digital transmission technology for the telecommunications systems of space and satellite equipment.

At Linkabit, Jacobs and Viterbi applied their considerable talents to developing satellite communications applications for the television industry and by 1980 had transformed tiny Linkabit into a thriving communications enterprise with more than 1,000 employees and over $100 million in sales. In August 1980, Linkabit merged with M/A-COM, forming M/A-COM Linkabit, a developer of cable television, data transmission, and other electronics technologies. Though Jacobs had risen to M/A-COM's executive vice presidency by 1983, mobile satellite communications technology had developed to the point where both he and Viterbi saw a golden opportunity to create a new business with the potential to dominate its industry. If they could work out the as-yet-unsolved technical obstacles, Jacobs and Viterbi reasoned the wireless mobile communications (WMC) market was so young--and so complex--that they could grab an insurmountable three- to five-year headstart over any future competition.

Revolutionizing the Trucking Industry: 1985--88

In 1985 they therefore left M/A-COM (which was later sold and broken up) to form Qualcomm Inc., a provider of contract research and development services and which Business Week later described as a "tiny military house." Their real goal, however, was a full-fledged integrated research-to-manufacturing business, and they began to cast about for an application of digital satellite communications with commercial potential. Military uses were considered first but Jacobs soon decided that the transportation industry offered the best opportunity for building a WMC-based company.

If there was any segment of the U.S. transportation industry that needed the help of wireless, long-distance communications it was the trucking industry. Valuable shipping time was routinely lost as truckers pulled off the road to call into their dispatchers with updates on their location and expected arrival, and dispatchers' inability to precisely monitor and coordinate their fleets' schedules meant many "deadhead" miles as truckers wasted return trips with empty trucks that could have been used to haul more freight. Moreover, shippers themselves often had to act as ersatz dispatchers, continually checking in with trucking companies to see if their shipments would arrive on time. To solve these problems, between 1985 and 1988 Jacobs and Viterbi began developing a wireless, two-way messaging and positioning system that would enable trucking firms to closely track their drivers' progress across their routes while enabling drivers and dispatchers to send messages to each other.

Christened OmniTRACS, the system would lease the capability of existing communications satellites to create continent-wide coverage. Qualcomm's proprietary signal processing technology meant that OmniTRACS could operate without interfering with other satellite transmissions, and the position-reporting component would use either the federal government's Global Positioning System (GPS) satellites or a signal generated on a leased satellite using Qualcomm's own automatic satellite position-reporting system. Down on earth, a keyboard-and-terminal hardware and software package would be located next to the driver in the cab and a huge integrated network management facility in San Diego would route messages between truckers and dispatchers.

By 1988 Qualcomm was ready to unveil OmniTRACS to the public. Jacobs invited 300 trucking industry leaders to San Diego for a demonstration of the 30-pound device. It worked, and within months Qualcomm had signed up its first customer--Schneider National Inc. of Wisconsin, one of the largest long-haul truckers in the country. The Schneider contract alone was worth $20 million and involved 5,000 trucks, and by the end of 1989 Qualcomm's revenues had soared to $32 million. Qualcomm established OmniTRACS systems for Canada and Europe, and in August 1991 OmniTRACS enjoyed its first profitable month. On the eve of Qualcomm's initial public stock offering as a public corporation in the fall of 1991, it landed a deal to launch OmniTRACS for Brazil's and Japan's trucking industries, and by early 1992 more than 23,000 OmniTRACS terminals had been installed worldwide by some 150 transportation companies and 50,000 trucks and their dispatchers were generating 400,000 messages and position reports each day. By 1993 Jacobs was being anointed by Fleet Owner magazine as "The Man Who Changed Trucking."

Revolutionizing the Cell Phone Industry: 1989--91

In the late 1940s, AT&T's Bell Laboratories conducted the first test to determine the commercial feasibility of cellular communication technology. In 1970 the Federal Communications Commission (FCC) set aside radio frequencies for land mobile communications and by 1977 had announced the construction of two cellular development systems in Baltimore/Washington and Chicago. A U.S. cellular phone industry began to emerge in the 1980s, and by 1985 some 300,000 Americans were making cell phone calls from their car phones. It was clear to Jacobs and Viterbi that the analog transmission technology with which the cellular industry had started would eventually be replaced by digital signals (which transformed the electrical signals of the traditional phone into the zeros and ones of computer technology), and they began to develop a new standard that they hoped would become the sole medium by which all cell phone calls would eventually be made. In 1989, however, the Cellular Telecommunications Industries Association adopted a cell phone standard developed by Sweden's Ericsson called time division multiple access (TDMA), which divided phone conversations into blocks of digital data that were streamed one after the other over specific radio frequencies, allowing cell phone channels to carry three to six times as many callers as traditional analog systems.

Jacobs and Viterbi's own standard, called code division multiple access (CDMA), took a different approach. Instead of assigning an entire frequency channel to each cell phone call, CDMA tagged each conversation with a code that could be identified and retrieved only by the phone of the intended recipient. Once coded, the call was divided into 10 different digital pieces that were then transmitted across all available cell phone channels. By thus using the cellular frequencies more efficiently, voice quality could be sustained over greater distances, reducing the number of antennas needed to cover a given territory and cramming twice as many conversations onto the airwaves as TDMA phones--and 10 times as many as analog phones.

The catch was twofold: the cell phone industry had already adopted TDMA, and Qualcomm's CDMA was untested and, as far as the industry was concerned, thus only a theory. In 1989 Jacobs nevertheless pitched CDMA's advantages before the Cellular Telecommunications Industries Association. He was given a cool reception but resolved to rally the financial support of key industry firms to conduct a series of tests that would conclusively establish the superiority of CDMA over TDMA. The wireless division of Pacific Telesis agreed to commit $2 million toward a CDMA trial, and throughout 1989 Qualcomm lined up some $30 million to construct limited CDMA test networks in San Diego and New York City. While Qualcomm closed licensing or development agreements with such companies as Nokia, Motorola, Northern Telecom, and Sony; established international CDMA partnerships in Europe, Japan, and Canada; and convinced AT&T and Nynex to adopt the CDMA standard for their cellular service, it continued to test CDMA's call quality, coverage area, and call capacity.

In November 1991, 14 international and domestic cellular carriers and manufacturers conducted a large-scale field validation test of Qualcomm's CDMA technology. The tests were conclusive enough to convince the Cellular Telecommunications Industries Association to reopen the cellular standard debate. Buoyed by the news that its technology might indeed become the new cellular standard, Qualcomm nevertheless faced a daunting challenge. A national CDMA infrastructure simply did not exist, and to make CDMA cell phones a commercial reality a huge base station and network system had to be created--at Qualcomm's expense. To help raise the funds, Qualcomm went public in December 1991, generating $53 million.

While Jacobs and Viterbi were recasting Qualcomm into a cellular industry giant, they were also pursuing other cutting-edge technologies. In 1991, Qualcomm continued research on high-definition television signal processing components, data link systems, specialized modems, and custom VLSI (very large scale integrated) circuits, as well as a number of classified communications-related research projects for the U.S. government. It also formed a joint venture with satellite-maker Loral Corporation to develop a network of low earth orbit satellites called Globalstar that would use CDMA technology to provide--beginning in 1998--mobile communications service to regions of the world that could not be economically served by ground-based cellular systems. It also unveiled Eudora, a cross-platform email software program originally licensed from the University of Illinois that by 1997 claimed some 18 million Internet users.

CDMA Approaches Critical Mass: 1992--94

Though 1992 represented the third straight year in which Qualcomm suffered a net loss, its sales continued to climb and its future continued to brighten. In 1992 it prepared for the rollout of CDMA in 1993 by signing a technology agreement with Nokia and a licensing agreement with Northern Telecom; by promoting CDMA in Korea, Australia, Switzerland, and Germany; and by opening regional offices in Pittsburgh, Dallas, Atlanta, Salt Lake City, and Washington, D.C. It secured a license from the FCC to tailor CDMA technology for the new personal communications service (PCS) niche of the cellular industry and created a PCS corporate group to create applications for this market. By bundling traditional cellular phone service with paging, messaging, fax, and email service all from a single all-purpose "pocket communicator," PCS appeared to have become the future of CDMA and of the cell phone industry as a whole.

Sales of OmniTRACS meanwhile leaped 68 percent over 1991 to 36,000 installed units and 200 trucking customers in North America. In 1992, OmniTRACS's first and largest customer, Schneider National Inc., renewed its OmniTRACS contract; Qualcomm added Werner Enterprises, one of the five largest truckload carriers in the United States, to its stable; and Mexico, Japan, and Brazil committed to adopting the OmniTRACS system in 1993.

The tidal shift toward the CDMA cellular standard began to snowball in 1993: the U.S. Telecommunications Industry Association adopted CDMA as a cellular standard; three Bell regional operating companies and Alltel Mobile Communications placed orders with Qualcomm and its partners for CDMA handsets and infrastructure equipment; and major telecommunications firms conducted tests of CDMA service. Internationally, companies in Korea and the Philippines placed orders with Qualcomm for CDMA systems, and Chile, China, India, Malaysia, Pakistan, and Russia signed memoranda edging them closer to the adoption of Qualcomm's CDMA technology for the wireless local loops (WLL) that would take the place of traditional copper wire for connecting telephone switching centers to homes in the developing world. OmniTRACS, however, remained--for the time being--Qualcomm's money machine, and the company sold 62 percent more units in 1993 than it had the year before. Moreover, 50 new trucking firms adopted the system--including J.B. Hunt, the largest truckload carrier in the United States.

In 1994 the CDMA rollout anticipated for 1993 was delayed until 1995 while the FCC began auctioning off PCS licenses to potential service providers and Qualcomm battled off patent suits brought by competitors who claimed it had lifted its CDMA technology from their own research. A growing number of U.S. cellular carriers--now including AirTouch, GTE, Sprint, and Ameritech&mdash′epared to deploy or test CDMA-based PCS service in major American markets, and the International Telecommunications Union adopted CDMA as one of four global wireless communications standards. Moreover, China and Argentina began testing CDMA cellular systems, and Qualcomm opened offices in Beijing, New Delhi, and Buenos Aires. With more and more companies signing onto the CDMA/PSC standard, Qualcomm moved to fill the void of manufacturers offering CDMA/PCS equipment by partnering with Sony Electronics to to create Qualcomm Personal Electronics, a joint venture to manufacture and market up to a million PCS cell phones a year.

OmniTRACS had meanwhile increased its customer base to 425 and by the end of 1994 was processing 2.5 million trucking messages and position reports every day on 13,000 OmniTRACS units in 25 countries. Qualcomm augmented its OmniTRACS software offerings by acquiring Integrated Transportation Software Inc. in 1994 and continued to integrate the 10,000 customers of Motorola's CoveragePLUS ground-based radio operation it had acquired in late 1993 into its OmniTRACS network. Qualcomm's long-planned Globalstar satellite communications system also got a welcome boost when Qualcomm signed the largest development contract in its history--valued at $266 million&mdashø develop Globalstar's ground communications equipment and telephones.

Qualcomm Arrives: 1995--97

For all the billions spent on development, testing, equipment, and market by mid-1995 CDMA still remained a largely unknown quantity. In a feature article on Qualcomm's battle to establish CDMA as the cellular standard, Britain's Economist magazine described CDMA as a "clever--but fiendishly complicated and unproven--technology" that was still "a good year away from the market" and one that might never be made to work as well as the thoroughly operational TDMA standard. Moreover, despite 1995 earnings estimated at only about $30 million, Wall Street investors had hopefully driven Qualcomm's stock valuation to an atmospheric $2.4 billion. What is more, Qualcomm was entering a telephone equipment market in which it was dwarfed by such giants as AT&T, NEC, and Motorola.

Nevertheless, by July 1995 Qualcomm could claim that 11 of the 14 largest telephone carriers in the United States had committed to CDMA. In addition, 12 cell-phone suppliers, including Motorola, NEC, Mitsubishi, Matsushita, and Sony, had each paid Qualcomm $1 million for its CDMA technology, and six manufacturers--including AT&T, Northern Telecom, and Motorola--had each surrendered $5 million for the right to make CDMA network equipment. From its CDMA royalty fees and microchip sales alone Qualcomm stood to profit handsomely in the years to come. In August 1995, it raised $500 million in a public stock offering to fund its transformation from a cellular standard licenser to a cellular phone maker.

By partnering with virtually every major telecommunications carrier and manufacturer in as many markets as it could, Qualcomm sought to translate the CDMA PCS market from an idea into a foregone conclusion almost overnight. In late 1995 the first telephone calls on a commercially installed system using CDMA were made by Primeco customers, and AirTouch announced plans to launch the first commercial CDMA system in Los Angeles.

Qualcomm's equipment joint venture with Sony received an $850 million order for handheld phones in 1996, and by mid-year a Qualcomm/Sony truck departed from San Diego for the East Coast with thousands of PCS phones ready for delivery to Primeco customers. When it was discovered that a software bug rendered the phones' menu screens inoperable, however, a Qualcomm team was dispatched to the Primeco warehouse with the software fix. Four days later, the 40,000 handsets had been reprogrammed and overnighted to Primeco's anxious retail outlets. With a potentially damaging PR gaffe evaded, in March 1997 Qualcomm introduced its newest PCS handset, the Q phone. Motorola sued Qualcomm for stealing the Q phone design from Motorola's own StarTAC phone, but a San Diego court ruled in Qualcomm's favor a month later.

By mid-1997, 57 percent of all digital wireless systems under construction used Qualcomm's CDMA standard, which now boasted some 4 million users, and Primeco and Sprint had agreed to spend $850 million over the next two years to buy Qualcomm/Sony handsets. Handsets and equipment orders from China, Korea, Russia, and Chile were expected to add another $500 million to Qualcomm's coffers, and Qualcomm made plans for new equipment factories in Asia and Latin America. In June 1997, it opened a Moscow sales office and could claim that it had licensed CDMA to over 45 leading telecommunications manufacturers worldwide.

Because it was wedded to the CDMA standard, however, Qualcomm's fortunes as a cellular phone maker were threatened by its larger phone-making rivals, who had long offered handsets for every cellular standard. Nevertheless, by the end of its 1997 first quarter, Qualcomm's sales were a full 165 percent greater than a year earlier, and with the penetration of the U.S. wireless communications market expected to increase from 16 percent to 48 percent by 2006, Qualcomm appeared to have plenty of room to grow. Its one-time cash cow, OmniTRACS, had in the meantime grown to encompass 200,000 terminals at 800 transportation companies in 32 countries worldwide. When Qualcomm announced in May 1997 that San Diego's Jack Murphy sports facility had been officially renamed Qualcomm Stadium, Jacobs and Viterbi's dream of building a communications business that could dominate its industry appeared to have been fulfilled beyond anyone's rosiest expectations.