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6 June 2017

Qualcomm battles its demons with a mixture of innovation and alliances

Qualcomm looks like a beleaguered company. Hardly a week goes by without another government probe, legal attack or other setback. In the past couple of weeks, it has paid a settlement fee to Qualcomm, continued to up the ante in its litigation with Apple (an important customer which may be slipping away to Intel and others), and faced possible challenges to its highly strategic acquisition of NXP.

But amid all these difficulties, Qualcomm continues to hurl out the innovations. It is likely that it will be forced to make significant changes to its business models, its licensing practices and its scale of royalties in the coming few years. Those may lead to a Qualcomm with a very different level of margin and of control over the mobile platform, compared to the salad days when CDMA was the only game in town. It may lead to a break-up or radical reorganization, though the company has resisted activist investor pressure for that so far. But it is unlikely to lead, at least in the foreseeable future, to a takeover bid for Qualcomm, or a failure of its core business.

This is partly because many of the challenges, although they are currently in the news, are nothing new. Since OFDM was selected as the basis of 4G and Qualcomm abandoned its own 4G upgrade path for CDMA2000, major changes to its licensing business – and the huge measure of power that gives it – have been probable. The company has been making changes for years to prepare itself – engaging with open source initiatives to extend its influence by other routes than patents, taking a leaf out of Google’s book; making acquisitions and R&D efforts to bolster its position in 4G and 5G technologies and IPR; forming strategic alliances in China as the balance of control shifts eastwards.

The product side of its business has its own challenges, such as pressure from lower cost Chinese competitors, the declining growth and profits in smartphones, and the difficulty of expanding beyond its mobile device heartland and into new revenue areas such as servers (where Intel has a powerful wall erected) and the Internet of Things. Further acquisitions will help, such as NXP to bolster connected car and IoT efforts (and its FPGA partner Xilinx would be a good bet, to strengthen its nascent server chip business).

Through all this, nobody doubts Qualcomm’s ability to harness its engineering prowess to develop new products and patents – in parallel as it always has. The past week’s headlines alone highlight how the company’s R&D consistently keeps it ahead of the game both in patents and chips, and helps it fend off the slings and arrows. If it can innovate in its business model too, via open source, Chinese partnerships and new licensing arrangements (even the dreaded patent pools), it will remain very hard to catch as it moves into the 5G and cloud eras.