ASEE Prism Magazine - Oct 2001

 

 

The Man Who's Betting the Store

- By Dan McGraw

Irwin JacobsQualcomm CEO Irwin Jacobs is gambling big time that the world will adopt the cell phone technology that his company pioneered. The payoff could be billions of dollars.

In the old days—that is, up until about thirty years ago—technological innovation and business building were achieved in places where the physical mattered more than the intellectual. Cleveland and Pittsburgh grew because of their proximity to oil and coal fields, because they were conveniently located near rail and water transportation, and because of an abundance of unskilled laborers ready to do the dirty work required by their factories.

In this old economy, places like San Diego were where you went to vacation or retire, or to get shipped out for military service. Any kind of real technological innovation was thought of as unlikely because no one in their right mind would want to buckle down in the lab when the waves were breaking off of La Jolla.

And when Irwin Jacobs arrived in San Diego in 1966, after seven years teaching electrical engineering at the Massachusetts Institute of Technology, he faced those kind of expectations. He had given up a prestigious teaching position at M.I.T. for a professorship in computer science and engineering at the University of California at San Diego, which was then only six years old. His MIT colleagues scratched their heads at his move, and Jacobs himself has said that one of his primary motivations was a good deal on real estate. “We (his wife and four children) decided that if we were going to make the move before retirement, the sooner the better, because the land prices would only go up,” Jacobs told Fortune magazine last year.

But Jacobs's move to the west coast would have a huge impact on not only San Diego but also on the worldwide application of wireless technology. Now 67, Jacobs is the CEO of wireless giant Qualcomm. San Diego, once considered too laid-back for serious business, is now one of the top clusters of high-tech businesses in the country, according to the Council on Competitiveness. The main reasons for the distinction is San Diego's proximity to brain power at the U.C.S.D. campus, the numerous biotech research facilities, military research contracts, and of course, $4 billion Qualcomm.

And as the world races toward the next generation of wireless technology (the third generation or “3G”), and all the billions of dollars in revenues that 3G will generate, the world of wireless technology is keeping a careful eye on Jacobs and Qualcomm in San Diego. Wireless communications on telephones and palm pilots are ready to take the next quantum leap where high-speed Internet access—with video applications and instant worldwide communication from a mobile phone—is a reality on every continent. But even though the technology is available, there are still the logistics of sorting out competing platforms and the difficulty of obtaining licensing from governments around the globe. Winning the race to be the dominant company implementing the lucrative technology isn't going to be easy.

It is much like the Betamax-VHS battle over video recorders two decades ago. On the one side is Qualcomm, which favors the CDMA2000 platform, which uses existing radio frequencies and would support older phones (CDMA stands for code division multiple access, a technology that breaks data into packets and which Qualcomm pioneered in the 1980s). On the other side is WCDMA (wideband code division multiple access), led by the Finnish wireless company Nokia Oyj. The two platforms have their roots in the same technology, and there is much debate over which is technologically superior. One major difference is that WCDMA requires operators to buy more airwaves, while CDMA can use spectrums they already own.

Finding a worldwide platform has been a dogged pursuit for the telecom industry worldwide. Whoever wins this battle needs to sign up governments to favor their platform, get the mobile carriers to sign on, and make their services affordable. If all this sounds extremely complicated and competitive, it is. At this point in time, 3G is being rolled out in a few countries, but until a worldwide platform dominates, the real promise of 3G wireless technology will go largely unfulfilled.

And into this battle for access to more information strolls Jacobs, a man who would be as well known as Bill Gates if he weren't so reserved. Jacobs has
championed CDMA technology since the late 1980s, showing how CDMA's code packet-based technology was superior (it uses radio spectrums frugally) to the well-established time packet data platforms. It has been a crusade for Jacobs, who admits he does not particularly like public speaking and does not relish being the point man for pushing CDMA2000 around the world. But Jacobs has always believed in the importance of brain power, and the former professor is passionate about the superiority of his company's invention. “People have referred to this as a religious war,” he said in a recent interview. “I have always tried to keep it rational.” (Jacobs would not comment for this piece, citing the sensitive timing of the current negotiations over his platform's acceptance).

But if anyone were to bet on which platform will dominate, a bet on the risk-taking, hard-charging Jacobs would be a good one. Qualcomm is not so much a high-tech manufacturer as much as it is a company that leverages its brain power and turns it into patents. The patents result in licensing agreements, and royalties are earned from them. (Qualcomm has more than 100 such agreements with wireless technology companies). Most of Qualcomm's revenues come from supplying mobile phone chip sets, which it contracts others to make. But the rest is from royalties, which in fiscal year 2000 accounted for $705 million, about 25 percent of the company's $2.8 billion in annual revenue.

In many ways, Qualcomm operates as a think tank, where 7,000 employees create intellectual property. Some analysts think that the royalties from the CDMA2000 technology could eventually net Qualcomm and Jacobs $20 billion a year. Although that's no sure thing, the numbers are staggering. Jacobs has long valued intellectual property over manufacturing as he built his company. And had he not started out as a research scientist, the business model for Qualcomm might have been very different.

Jacobs's background in academia and his plucky rise from a lower middle-class family illustrate the two sides to his personal stamp on his company: his credo that the best science should always win and his willingness to take on the giants of the telecom industry. Born in New Bedford, Mass., his father held a series of jobs (taxicab driver, insurance salesman, electrician's apprentice) before owning a small restaurant. In the early fifties, Jacobs's guidance counselor told him there was no future in science and engineering, and suggested he study hotel management at Cornell, so that he might work in a business similar to his father's. After 18 months at Cornell, he switched to electrical engineering and received his doctorate from MIT in 1959.

He earned $5,500 a year at MIT before moving to U.C.S.D. In 1972, he and two other colleagues formed Linkabit, a technology consulting company. Some of the early contracts Linkabit worked on were for satellite research and coding for the military. The company was also an early player in the development of the Internet, getting an assignment from ARPAnet (a precursor of the Internet) to get European universities, phone companies, and government agencies to tie into the fledgling network. He sold Linkabit in 1980, and stayed on as a consultant until 1985. In that year, he formed Qualcomm.

The impetus for Qualcomm was the work on CDMA Jacobs had done for Linkabit. He had worked on antijamming techniques for the military, and the CDMA technology allowed the military to weave multiple data messages over a slim stream of radio bandwidth. Jacobs began looking for civilian applications, eventually coming up with an application called Omnitracs, a way for trucking companies to use satellite technology to track their semi-tractor trailers as they crisscrossed the country.

And from there, Jacobs has pressed hard for the packet-based transfer of data over the time-transfer method. Two early successes were AirTouch and Sprint, which signed up in 1993 and 1995, respectively. As of 2000, Qualcomm's CDMA technology was still in third place with 13 percent of the worldwide market, but has proven to be the easiest way to move data quickly, and provides a cheap and easy way to move to the more lucrative 3G services.

 

Obstacle Course

But as the world waits for 3G technology to be implemented, there are many problems for Qualcomm and the rest of the wireless companies looking to take advantage of the new technologies. First, the collapse of the high-tech stock market has made investment money more difficult to come by. (Like most high-tech companies, Qualcomm's stock has been battered during the past year). Likewise, the spectrums licensed by governments around the world have been slow to be made available. And many analysts even question whether companies can make money on the 3G investments because they will have to charge high prices for the service. They point to the failures of wired high-speed access, which is still trying to find the right market at the right price.

“The wireless industry, like every other chunk of the communications sector, is suffering major, major waves of anxiety,” said Reed Hunt, former chairman of the Federal Communications Commission and a senior advisor at McKinsey & Co., a technology consulting firm. “Where is the spectrum going to come from? How are they going to get the money to invest and build the infrastructure?”

But the sheer numbers of potential users will make the 3G battle worth fighting. In the United States, 110 million Americans use cell phones for voice transmissions, but only 2.5 million use the wireless Web, according to the FCC. Worldwide, wireless firms have gone from 90 million subscribers in 1995 to 727 million by the end of 2000, according to the International Telecommunications Union, which expects 1 billion subscribers by 2003.

And the fight over the competing platforms is likely to be bloody. Qualcomm is concentrating heavily on China, where $2 billion worth of wireless equipment was sold last year. But the effort in China shows how politics and propping up local telecom companies will influence decisions as much as which platform functions best. With 105 million cellular subscribers, China could provide the critical mass to tip the scales to CDMA2000 or WCDMA. But since 1994 Qualcomm has lobbied the Chinese government hard on behalf of Qualcomm's technology, only to have negotiations start and stop with maddening frequency depending upon the latest Sino-American relations and local companies China wants as Qualcomm's partners.

“Both sides have used CDMA as a political football,” Terry Yen, an official with Beijing-based CDMA Development Group (a Qualcomm partner) told Newsweek. “I can't say the Clinton administration cared specifically about the technology—it was part of a bigger message of engagement. I think that worked against us because China knew America cared about this issue. They've viewed CDMA as a way to signal their displeasure with U.S. policy or events.”

Still, Qualcomm is further along than its competitors in China, having signed licensing agreements with two Chinese telecommunications equipment makers in July. Qualcomm has also announced the opening of a CDMA development center in China. “The center will support the transfer of hardware and software technologies for product development and manufacturing, as well as implementation methods to licensed manufacturers, carriers, and government bodies in China,” Jacobs said in a company press release. “Through our CDMA University and Technology Transfer programs, the center will support localized research and development in China.”

And in his approach in China, the former professor is still using the template that worked well for him in both academia and private business. Because Jacobs prizes brain power, whether in San Diego or China, he realizes whoever competes to the fullest in development of new technology will have a leg up on the competition, regardless of the vagaries of international politics or the stock market. And he realized the export of such brain power is a key for the Unites States' economic and strategic growth.

Pointing to a U.C.S.D. study that adult education extension courses are booming, and one third of the 400,000 adult learners in the University of California system are taking science and technology courses, Jacobs wrote in the San Diego Union Tribune that higher education is lagging behind the needed technological education to support innovation.

“These citizens have grasped something that federal policymakers must keep in mind: We cannot afford to drop out of the global innovation race,” Jacobs wrote. “We must restore America's primacy in science and technology. We must give American workers the skills they need throughout their lives to perform high-knowledge, high-value jobs. We must not sacrifice long-term investments in economic prosperity for short-term political gains.”

And this may indeed be Jacobs's holy war. His lessons in academia and business have taught him that regardless of the fights in market share and international politics, pure and practical research is what is valued in the new economy. It's what he has learned in the classroom and the boardroom, and as Qualcomm continues to push for more application in the wireless world, he is using that experience to fight on behalf of brain power, on behalf of innovation with purpose.

Dan McGraw is a freelance writer based in Fort Worth, Texas.