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Qualcomm May Feel Pinch of Competition from Texas Instruments

Posted on: Wednesday, 6 August 2003, 06:00 CDT

Aug. 5--For years, Qualcomm has enjoyed a near monopoly in selling wireless phone chips based on its patented technology.

But that stranglehold might soon be broken. Texas Instruments, the No. 1 cell-phone chip maker in the world, is poised to enter the market that San Diego's Qualcomm almost single-handedly created.

Almost all of Qualcomm's business is based on its wireless technology standard CDMA, short for code division multiple access. Qualcomm makes money from selling CDMA cell phone chips and from collecting royalties when other companies use the technology.

In May, TI, Nokia and STMicroelectronics said they were uniting to produce chips using CDMA. Nokia, the world's largest wireless phone maker, and Texas Instruments previously had focused almost exclusively on the dominant wireless standard called GSM, or global system for mobile communications.

But with CDMA usage beginning to grow, increasing its share of the worldwide market to about 20 to 25 percent of all cell phones, those companies decided to focus more heavily on CDMA.

But even before Texas Instruments has sold its first CDMA chip, the battle has turned acrimonious. Last month, Qualcomm filed suit against TI, saying the Dallas company had breached a confidential licensing agreement the two companies signed in 2000. The agreement allowed the companies to use each other's technology in making wireless chips.

Qualcomm charged that Texas Instruments violated the confidentiality pledge by disclosing key information about its business relationship in early May. At the time, Texas Instruments was making public its plans to manufacture and sell CDMA phone chips. While Qualcomm won't comment on what information was disclosed, many analysts assume it was TI's revelation that it will not pay CDMA licensing fees to Qualcomm.

The lawsuit and Texas Instruments' entry into the CDMA market could have huge implications for Qualcomm and the growth of the technology that it helped spawn. While TI's entry could help expand CDMA's reach, it could also hurt Qualcomm's bottom line as it snatches away CDMA customers.

"It is sort of a one-two punch," said Michael King, a wireless industry analyst for Gartner Group. "Texas Instruments will force Qualcomm into a more competitive situation, but in the long run it will help Qualcomm and CDMA."

Still, other analysts say that Qualcomm's lawsuit seems designed to keep Texas Instruments out of the CDMA business, and that could actually hurt Qualcomm.

Brian Modoff, an analyst with Deutsche Bank Securities, said Qualcomm's lawsuit seems short-sighted, and he questioned the company's motives. In a recent report, Modoff said the lawsuit was a way for Qualcomm to bar or delay Texas Instruments from competing in a CDMA market that Qualcomm "has kept a tight noose on since it first pioneered the technology."

Qualcomm has long dominated the CDMA chip business, with about a 90 percent market share.

Modoff said the lawsuit could end up alienating Qualcomm's customers, such as phone makers and cell phone companies.

"We foresee a detrimental impact to Qualcomm within the industry and that its perception among the company's current customer base or with potential suitors, which define its long-term growth, has been damaged," Modoff wrote. "In our view, investors should not ignore this likely damage either."

While Modoff has supported Qualcomm's decision to enter into other legal battles in the past, he said this is one lawsuit he can't condone.

"This action brings to mind the old Russian proverb, 'What's mine is mine, what's yours is negotiable,' " Modoff wrote in his report.

Qualcomm insists that it filed the lawsuit not to thwart a potential competitor but rather because Texas Instruments violated a key condition of the agreement that will cause difficulty in its relationships with other technology licensees.

But Texas Instruments disagrees, saying Qualcomm's lawsuit has no merit and will not prevent the company from selling CDMA chips.

Rick Kornfeld, vice president and general manager of Texas Instruments' wireless chipset business, said the company's plans to release its chip in the third quarter of this year are on schedule. So far, he said, the litigation is not scaring off any prospective customers.

"I would say that this is certainly a topic of discussion," Kornfeld said. "But there isn't a tremendous amount of concern."

He said that Qualcomm should welcome the competition, because it will help build up the market for CDMA, which is used in some 145 million cell phones.

Because Qualcomm owns 90 percent of the market, Kornfeld said there is not a strong "ecosystem" of suppliers, which has thwarted CDMA's growth and innovation.

Texas Instruments' entry will make it more cost-effective for equipment makers to build CDMA phones.

"I personally think this is a very positive thing for the market," Kornfeld said.

Kornfeld should know about the CDMA market, because he is a former Qualcomm executive. After he left the company, he started Dot Wireless, which aimed to be a boutique CDMA chip company. That changed in 2000 when Texas Instruments bought the small San Diego company for $475 million. While Dot Wireless aimed for small niche players, Texas Instruments plans to go after bigger markets.

"Clearly the way Dot Wireless would enter the market would have been different from the way TI would compete," Kornfeld said.

Johan Lodenius, Qualcomm's senior vice president of market and product management, said the company is unconcerned with TI's entry into the market and said that CDMA will continue to grow with or without new chip makers.

"The CDMA market is growing fine by itself," Lodenius said.

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(c) 2003, The San Diego Union-Tribune. Distributed by Knight Ridder/Tribune Business News.

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