Creating QualcommStanford Graduate School of Business Case Study Presented by Natalie Chillo-Bradley BUSN 550 -1, Minder Chin May 13, 2013
Cell phone usage today • A typical smartphone has more computing power than Apollo 11 did when it landed on the moon • World population is approximately 7 billion people, and there are nearly 6.6 billion mobile connections - 3.2 billion of which are unique users • In the U.S. alone, there are 323 million mobile subscriptions for a population of 315.5 million • Those with a mobile phone tend to check it about 150 times per day — an average of once every six-and-a-half minutes • Two-thirds of people sleep with their mobile device next to their bed, and more than one-third of U.S. smartphone users interact with their device before they even get out of bed
Where it all started • Qualcomm Incorporated is located in San Diego, CA • Founded July of 1985 • Created by 7 industry veterans, including Dr. Irwin Jacobs • Set out to build “Quality Communications” which became Qualcomm Incorporated
Early days at Qualcomm • Research and development incubator • Early projects in the first few years included: • Low-orbiting satellites for the military • Satellite communications for trucks • Digital high-definition television • Component business selling decoder chips • *Mobile telephone satellite system
Early Mobile Phones • Sent sound through the air using radio waves allocated to mobile phone service in a limited portion of the radio frequency spectrum • During a call no other user could use that frequency
Early Mobile Phones • Regions were divided into geographic units called cells • Analog systems deployed in the U.S. during the late 1970s and early 1980s sent each conversation as a continuous signal on its own dedicated radio frequency • By the mid-1980s, analog systems in the U.S. were running out of capacity
Response to growth • Upgrade from analog systems to new digital technologies with more capacity • Digital technology converted conversations into ones and zeroes and transmitted these by means of digital signaling • Networks could accommodate more calls • Calls would be clearer because interference noise could be better controlled • The leading candidate for digital upgrade was a technology called Time Division Multiple Access (TDMA) • Improved on analog by dividing a single frequency into three time slots and then allocating those slots to three individual conversations • Allowed a single channel to support three calls whereas analog systems allowed only one
Qualcomm moves in • Apply satellite technology to commercial mobile networks – specifically Code Division Multiple Access (CDMA) • During a phone call, the communicating parties generally speak less than 100 percent of the time. • Share those quiet times with other conversations • CDMA divided a conversation into packets, tagged each packet with a unique numeric code, sent the packets of a conversation across the air, and then sorted and reassembled the packets at the other end • Used the entire spectrum of frequencies • CDMA systems had the potential to carry up to 20 times as many phone conversations as then existing analog systems
Qualcomm’s Initial Success • Qualcomm pioneers M2M communications • In August of 1988, Qualcomm launches OmniTRACS • A satellite-based data communications system for the transportation industry • Enables truck fleet operators to effectively track and monitor their vehicles in the field • In 1989, Qualcomm receives its first major OmniTRACS order from Schneider National Trucking Company
Early Wireless Communications • In 1987, Europe agreed on GSM (Global System for Mobile Communications) • In the U.S., the U.S. Telecommunications Industry Association (TIA) voted in January 1989 to proceed with TDMA • In 1991 Japan’s telephone monopoly would also adopt a single standard, called PDC (Personal Digital Cellular), another TDMA variant • Handset makers, infrastructure manufacturers, and carriers poured significant resources into the development of products and services conforming to TDMA • The U.S. had not mandated a single digital standard for wireless communications • The upshot for Qualcomm was that, although the TIA was in the process of standardizing TDMA, any willing player in the market might still choose CDMA
Barriers to CDMA • Labs reporting that the technology was too complex to be feasible • Critics pointed out that CDMA failed to increase capacity under full load conditions as much as it was advertised • Jacobs was accused of exaggerating CDMA’s advantages and of being combative and uncompromising
CDMA Approach • Get the standards setting bodies to standardize CDMA • Convince the major communications handset and infrastructure equipment makers to develop and sell CDMA based equipment • Convince the major carriers to use CDMA based services • Convince the consumers that their service would not be degraded while transitioning from analog to digital technology
Limited Analog Space • Pac Tel Cellular was quickly running out of capacity • TDMA offered to give the carriers at most, another year or two of growth headroom, before running out of capacity again • The carriers would be the most receptive to Jacobs’ message • Compel handset and infrastructure manufacturers to commit to CDMA
Pac Tel Cellular & Qualcomm • CDMA would enable Pac Tel Cellular to grow its subscriber base by 10X compared to analog • Smooth transition from analog to digital, since both CDMA and analog networks could operate at the same time • If handset manufacturers could develop dual mode (analog and digital) handsets, it would be possible to stage an orderly rollout of digital services • Jacobs wanted Pac Tel Cellular to invest a $100K for Qualcomm to make a “Proof of Concept” • “We’ll give you ten times that amount for you to make a working prototype.” • Bell Atlantic, NYNEX, and Ameritech Investments invested a million dollars each
First CDMA cell phone calls • November 1989, Qualcomm and PacTel Cellular demonstrated the first live CDMA system in San Diego. • Three months later, NYNEX Mobile successfully demonstrated CDMA in New York City, proving that Qualcomm’s technology worked in urban settings lined with tall buildings and massive structures.
Qualcomm’s Collective Action Approach • CDMA-based chipset availability was a pre-requisite for the serious manufacture of equipment • Use CDMA knowledge and chip-design expertise to maximize the “footprint” and consumption of CDMA chips • License its substantial patent portfolio to any company that made CDMA chips, handsets, and or infrastructure • Required to pay a one-time fee, typically of multi-million dollars, for the rights to use Qualcomm’s patent portfolio, and ongoing unit based royalties that were a percentage of the sales price of the CDMA-based products
Implementation hurdles • Partners would not move fast enough to facilitate CDMA’s adoption by the carriers • NYNEX executives told Jacobs that given the standardization process, manufacturers would not ramp up production of equipment to meet its timeframes • Motorola, who had promised to develop handset development plans, was showing little sense of urgency • AT&T was having similar problems allocating the required resources to develop and sell networking equipment in a timely manner • The movement to CDMA was stalled by the need for collective action among an entire ecosystem of large, slow-moving organizations
Implementation hurdles • Qualcomm’s management discovered that making CDMA chips was a very expensive endeavor that could overwhelm the company’s cash flow • Research and development expenses ballooned • Losing money even as its revenues grew markedly • Pac Tel Cellular and other carriers announced that, even if CDMA equipment were in abundance, they would not be able to deploy complete CDMA-based networks in one fell swoop • The implication was that when CDMA handsets did appear, they would need to be dual-band in order to allow them to work in CDMA and non-CDMA cells
Growth • In December of 1991, Qualcomm conducts its IPO, making 4 million shares of the Company available to the public on the NASDAQ. • In March of 1993, Qualcomm introduces the industry's first dual-mode CDMA-AMPS mobile phone, the CD-7000 is the first in a series of CDMA-based cellular telephones designed by Qualcomm.
First Qualcomm phones • By 1992, they were able to make the phones more mobile but the practical use was mostly relegated for cars and vans. Some were made to be worn at the back with a backpack. • By 1993, Qualcomm was able to create a truly handheld phone — named CD-7000.
Milestones • In July of 1993, the U.S. Telecommunications Industry Association adopted CDMA as a cellular standard, validating Qualcomm’s business model and opening the door to the global proliferation of this advanced digital wireless technology. • In 1996, Bell Atlantic, PrimeCo, SKT (S. Korea) and Telefonica (Peru) launch CDMA commercially. There are more than 1 million subscribers worldwide by year’s end. • In September of 1998, Qualcomm unveils the pdQ CDMA phone. Based on the popular Palm operating system, this device represented the world’s first CDMA smartphone. • In 2008, carries were no longer required to support analog and companies such as AT&T and Verizon have discontinued this service permanently.
Questions • In the early years of Qualcomm, what project spearheaded the CDMA cellular technology? • Low-orbiting satellites for the military • Digital high-definition television • Component business selling decoder chips • Mobile telephone satellite system • Satellite communications for trucks
Questions • Why was there a need to upgrade from analog systems to a new digital technology? • Want for faster service • Promise of more capacity • Sounded cooler • Qualcomm was border and decided to create a new concept
Questions • Which of these were barriers to CDMA and Qualcomm’s approach were outlined in this presentation? • Labs reporting that the technology was too complex to be feasible • Critics pointed out that CDMA failed to increase capacity under full load conditions as much as it was advertised • Jacobs was accused of exaggerating CDMA’s advantages and of being combative and uncompromising
Resources • Creating Qualcomm, Stanford Graduate School of Business, Case E-301(A), 05/2008 • Qualcomm website, www.Qualcomm.com • Philippine Technology News & Reviews, www.yugatech.com • U.S. House of Representatives Energy and Commerce Committee, report by Robert Jarrin, Senior Director of Government Affaires at Qualcomm Incorporated, March 19, 2013