Qualcomm: Quality Communication and Semiconductor Innovation

Qualcomm is widely recognized for its advanced semiconductor technology, with its chipsets powering smartphones worldwide. However, many are unaware of the company’s industry-transforming breakthrough and the strategic advantages it has maintained for decades through its patent portfolio. Join us as we explore the fascinating story behind Qualcomm's rise to dominance and the innovation-driven moats that have defined its success.

• Bold vision: Qualcomm achieved its breakthrough driven by the founders' steadfast belief in the potential of Code Division Multiple Access (CDMA) technology.

• Patent operation: Building on its early success with CDMA technology, Qualcomm’s licensing business quickly became a major revenue driver, generating income from its extensive patent portfolio.

• Semiconductor giant: Qualcomm is the world's largest fabless semiconductor company by the volume of orders placed at chip foundries, surpassing competitors like NVIDIA and Broadcom.

Qualcomm was founded in 1985 by Irwin Jacobs, Andrew Viterbi, and five of their colleagues from their previous venture, Linkabit, a digital communication consulting company. The name of the newly created company was derived from their commitment to creating "QUAlity COMMunications.”

Qualcomm began as a contract research and development center, initially focused on government and defense projects. After expanding through a merger with Omninet in 1988, Qualcomm expanded rapidly through its new offering of satellite communications systems for trucking companies. The new venture was an immediate success, with revenue reaching $32 million in 1989, with Walmart as a key customer. The success enabled the company to pursue the bold vision that had been brewing since the company's inception.

The idea that would redefine Qualcomm's future was the founders' shared belief in CDMA technology, in favor of the widely used Time Division Multiple Access (TDMA). In short, CDMA allows multiple users to share the same frequency by assigning unique codes, offering greater capacity and efficiency for high-demand networks, while TDMA divides the frequency into time slots, with each user occupying a slot in the rotation.

Qualcomm's idea initially faced resistance, but through rigorous testing and persistence, they demonstrated CDMA's superior performance in call quality and data transmission. By the mid-1990s, CDMA adoption increased rapidly across all continents. Ironically, despite the early skepticism, CDMA went on to power a majority of all cellular networks, connecting billions of people worldwide. Its huge success in this area eventually led to Qualcomm's public breakthrough, and over time, the company established itself as a leader in other segments.

As CDMA technology gained widespread recognition, Qualcomm began integrating it into various parts of the telecommunications ecosystem. The company's revenue model capitalized on multiple value chain segments, with its most profitable being patent licensing. Qualcomm licensed its extensive CDMA patent portfolio to telecom companies and device manufacturers, earning royalties from each device and infrastructure component that used its technology.

Qualcomm also developed and sold CDMA-based chipsets, becoming a critical supplier to mobile phone manufacturers such as Nokia, Samsung, and Motorola. Additionally, the company produced infrastructure equipment, such as base stations, enabling CDMA network deployment.

With CDMA technology now the standard in the industry, Qualcomm's licensing revenue took off massively. During these years, revenue increased from $383 million in 1995 to $814 million in 1996. Another testament to the vision's success was that in 1997 over 50% of the US market was connected through CDMA, whereas only 14% was connected to TDMA.

At the turn of the century, the company started to streamline its focus. In 1999, Qualcomm sold its infrastructure division to telecom equipment manufacturer Ericsson, and its mobile handset manufacturing business to Kyocera. The divestments allowed Qualcomm to concentrate on its highly profitable licensing business and the emerging potential of its chipset operations. A strategic decision that was very well-timed and proved successful.

As the chipmaking process shifted from the integrated device manufacturing (IDM) model to an unbundled value chain, driven by pioneers like Morris Chang and his TSMC, Qualcomm found its niche as a fabless design company early on. This model allowed Qualcomm to focus on chip design and development while outsourcing production to foundries such as TSMC, Samsung, and GlobalFoundries. This strategy enabled Qualcomm to innovate rapidly while leveraging the advanced manufacturing capabilities of specialized foundries.

While Qualcomm's licensing business thrived following the widespread adoption of CDMA in 2G and 3G networks, its chipset operations initially struggled to gain momentum. This began to change with the launch of the Snapdragon line of processors in 2007. Snapdragon was engineered to optimize the interaction between the central processing units (CPU), digital signal processors (DSP), and graphics processing units (GPU), ensuring efficient performance by using each component only when needed. This design improved processing power, speed, and battery life, quickly making Snapdragon the preferred choice for smartphone manufacturers like Sony Ericsson and Alphabet's Android devices.

At the same time, Qualcomm's modem chips were thriving, as the company had become—and remains—a major supplier for smartphones like Android models and Apple's iPhones. These modem chips are critical for powering cellular connectivity and have played a key role in enabling 3G, 4G, and, more recently, 5G networks.

A testament to Qualcomm's incredible technological advancements in the semiconductor field is the inclusion of six chips in Apples highly demanding iPhone 15. These include its Snapdragon Modem, three radio frequency (RF) chips for managing wireless signals, and two envelope trackers that optimize power efficiency.

Beyond smartphones, Qualcomm chipsets are used in IoT devices, wearables, automotive systems, and smart home technology.

As explained earlier, Qualcomm's early bet on CDMA gave the company an extremely lucrative market position, securing the patents to ensure it would profit from the technology for decades. In 2021, Qualcomm ranked 5th globally for patent applications by the World Intellectual Property Organization, reflecting its vast portfolio in CDMA and other wireless technologies that the company has pioneered for decades.

Qualcomm charges about 5% or $30 per device in royalties—significantly higher than most patent holders—arguing the critical role its patents play in the industry's infrastructure.

This stance has led to frequent disputes with competitors, clients, and regulators, who accuse Qualcomm of charging excessive rates and engaging in anti-competitive practices. Over the years these disputes have led to several high-profile legal battles.

While Qualcomm's licensing segment was once its primary revenue driver, the company's business has shifted significantly, with approximately 85% of its revenue now coming from its semiconductor-related operations. This transformation highlights Qualcomm's dominance as the world's largest fabless semiconductor company, surpassing industry giants like NVIDIA, Broadcom, and Apple in terms of orders placed at chip foundries.

Qualcomm's history is a truly remarkable one. Fueled by its bold vision, the company secured a significant first-mover advantage, reinforced through an extensive patent portfolio. This intellectual property allowed Qualcomm to monetize and leverage its innovations for decades, evolving into a key player in the semiconductor industry. With its advanced chipsets powering smartphones globally, Qualcomm's technology is found in nearly every pocket or hand around the world.