"The key issue is of tiering and having a product in all segments"

Paul Jacobs doesn't look like a man who is contemplating breaking his company into two, as he admitted in mid-June that he would if it were necessary (the company faces an investigation over anti-competitive practices in Europe; competitors such as Nokia, Ericsson and Texas Instruments allege that it bundles its two offerings, chips and patent licences in such a way that makes competing all but impossible; for more, see Two Companies Or One? on page 94). Coincidentally, the company that faces a Microsoft-like investigation formed an alliance with the latter in May (see Microsoft + Qualcomm on page 94) that could, if all goes well, help both companies in areas where they are on weak ground, Microsoft in the area of mobile telephony software, and Qualcomm in the area of a converged communication, computing and entertainment platform. In many ways, these are but two more chapters in the continuing saga of Qualcomm, a technology powerhouse that hasn't always had the better-end of policy and regulatory developments. For instance, WCDMA (Wideband Code Division Multiple Access), a standard on which Qualcomm collects royalties (as it does on CDMA itself), was expected to be at the core of third generation (3G) mobile telephony networks and handsets (phones), but with Europe picking the 2.1 ghz spectrum for 3G, this was not to be. At that frequency, WCDMA doesn't work very well (it does at 450 mhz) and consequently, isn't economically viable, one reason why European telcos have gone slow on 3G. For the record, Flash-OFDM (Orthogonal Frequency-Division Multiplexing), a 4g (fourth generation) technology provides a better alternative, and in mid-2005, Qualcomm acquired the company behind this technology, Flarion.

In India, too, Qualcomm hasn't had it easy. Jacob's recent visit was to defuse a budding crisis over royalty payments (which are perceived to be too high). The CEO of Qualcomm met with Telecom Minister Dayanidhi Maran, Tata Group Chairman Ratan Tata, and Reliance Infocomm's Anil Ambani. Jacobs is clear that India is a key market for Qualcomm (it accounts for just 2 per cent of the company's royalty revenues, but this number will increase) although GSM, a rival standard, is the prevailing one in India (as it is in most parts of the world). He adds that the company's investments in India will be "substantial", explaining that 15 per cent of Qualcomm's employees are Indians. In an interview with BT's Brian Carvalho and Krishna Gopalan, Jacobs put forth Qualcomm's point of view on the issue of royalty and why he is so kicked about India's telecom story. Excerpts:

Is CDMA it?

It is the technology of the third generation (3G networks and phones). Everyone today is moving to 3G CDMA for improved data capability and better spectrum usage. The entire wireless market is moving that way. Even in a market like Western Europe, for instance, which is considered a GSM market, 25 per cent of the handsets sold in December 2005 were CDMA-based.

Would you say that CDMA is suited more to some markets than others?

Clearly, there are a lot of markets that are more price-sensitive like India. So, you have to focus and tier the product in terms of what the consumer wants to buy. For instance, our brew (Binary Runtime Environment for Wireless) software allows applications to be downloaded to your phone. This will depend on how capable your phone is. I think the key issue is that of tiering and making sure that you have a product that can address every market segment.

But when a company like Nokia says the CDMA market has changed (and that it is exiting the business of making CDMA phones altogether) what does it imply?

Nokia enjoys an 80 per cent market share in GSM (phones) in the Indian market, which means it can charge higher prices. It is getting out of the CDMA 2000 market because there is intense competition. The thing is, there is certainly pressure in developing markets to get people to focus only on voice when we know the rest of the world is moving towards data capability. The world is moving to CDMA. If the rest of the world is moving towards CDMA, why move to GSM? Again, Nokia has not been successful in the CDMA 2000 market.

The only place where there is a battle between GSM and CDMA is in the developing markets, which are very cost-sensitive. It is true that at the very lowest end of the market, a GSM phone is slightly less expensive than a CDMA one.

"The whole world is moving to CDMA"

Nokia also speaks of the licensing terms not being acceptable...

I am not sure what they were talking about, but we do have a contract with them right now. We are in discussions with them on the renewal of that contract and that is going to happen next year. There is a lot of competitive positioning going around those negotiations.

And there are a few people in India who want the same thing.

That issue got blown out of proportion. If you look at our royalty rates after netting everything out, you are talking of about 5 per cent. This means, for a $40 (Rs 1,840) phone, it would be at about $2 (Rs 92). If the price is halved, then the royalty is down to about a dollar (Rs 46). The whole thing is about handset pricing since royalties are paid by the manufacturers. In exchange for the royalties, we do the fundamental R&D. They (handset manufacturers) are actually saving money on the R&D side. Earlier, only the large handset manufacturers who could do the fundamental R&D had the next generation technology, which is why you saw only a few manufacturers in the market.

In India, both CDMA operators, Reliance Infocomm and Tata Teleservices seem to have an issue with your royalty structure. Surely, there must be some substance to it.

There are various issues that we were negotiating on. We do the licensing with the handset manufacturers and not with the operators. If I am a manufacturer and if I want a higher price, who is the best person to point at (and say, "My price is higher because we have to pay royalty to these guys.")? It's us and that is why we are becoming more open about our royalty rates. What we have been trying to explain to the operators is that the handset prices are the key thing and we have been driving down the prices. The royalty is a very small percentage of the price of the handset. How can prices be reduced? We are investing more into chipset R&D, which means at the very low end, we integrate more and more capabilities into a single chip. There are other things like aggregating volumes for manufacturers covering a wider range of operators. Overall, we are not here to tell the operators what to do. We are here to assist them in their business.

How real is the threat when Reliance says it is considering moving to GSM? Is that logistically possible?

Almost anything is possible if you have money and spectrum (laughs). We have an issue in India on the way spectrum is allocated. It does not really provide an operator the ability to take advantage of CDMA to provide not just voice capability, but also incremental data services. That is an issue that we are trying to manage.

How do you strike a balance in a situation where you have two CDMA and about six GSM operators in India. What is the future for you in that context?

The GSM operators will take the WCDMA route to 3G. We are at an interesting position. All the operators will be our clients. There was a time in the past where we had the CDMA versus GSM battle. Clearly, in some of the developing markets, there is a little bit of that still going on. But people who are in GSM will move to the WCDMA base (when they go 3G) and we are here to talk to them and show them how we can help. That happened in Europe as well. We went into Europe where we were seen as complete outsiders. Now, we have very good relationships with operators. They start to understand when you show them the facts that our business model is very healthy for them. If you look at growth rates, 3G CDMA is growing at about 30 per cent while the handset industry is growing at 10 per cent.

Hutchison's 3G model appears to be working. What has the company done right?

Hutchison is known worldwide as a WCDMA operator. It is at the vanguard of changing the mindset from selling voice to selling multimedia. In fact, Hutch in Italy looks at itself more as a publisher than a wireless operator. It is thinking about how to do more entertainment, how to get multimedia on the phone, how to launch TV services on the phone and things like that. Hutch in the UK took the WCDMA improved voice capacity and went for the GSM operators with larger bundles of voice minutes and attacked the pricing of the model. Hence, the GSM operators who had not gone the WCDMA way had to do that eventually.

About four years ago, you came pretty close to picking up a stake in Reliance Infocomm. That deal never went through. Today, would you look at investing in an operator?

We had an infrastructure business in the beginning and as a part of that, we had to do vendor financing, which is how we landed up with investments in operators. Since we were a new entrant then, some of those investments were not necessarily the best. Our shareholders were giving us a very tough time and telling us not to invest in operators. We had an awful lot of pressure from our shareholders. Today, picking up stakes is certainly not our preferred method of working with operators. We are doing things where there are new opportunities. For example, in the US, we have a TV technology called MediaFlo where we actually purchase spectrum. That is a subsidiary of Qualcomm that will eventually get spun off. We have announced an $800-million (Rs 3,680-crore) investment into that until break-even.