qcom business model

QUALCOMM BUSINESS MODEL A Formula for Innovation & Choice

QUALCOMM Incorporated January 2008


01/2008 page i

Table of Contents

[1] Introduction .......................................................................................... 1 [2] QUALCOMM Business Model and the Benefits to Its Customers................................................................................................. 3 [3] Open and Universal Licenses ............................................................ 6 [4] Summing Up Licensing Options......................................................... 7 [5] Third-Party Rights Incorporated into QUALCOMM’s Chipsets ........ 9 [6] Continuous Inclusion of New IPR..................................................... 10 [7] Predictable Royalty Rate Structure.................................................. 11 [8] Enabling an Industry ......................................................................... 14 [9] Increased Competition in 3G............................................................ 15 [10] QUALCOMM – Making a Difference.............................................. 17


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[1] Introduction

“Imagination is more important than knowledge.”

- Albert Einstein

Einstein’s words ring true today, because intellectual property (IP), and its innovative implementation, is driven by the power of imagination.1 Today, Eric Schmidt, CEO of Google, envisions that “Internet access via mobile telephony will … [help to] close the knowledge divide between rich and poor [nations].”2 Imagination leads to innovation, and is now enabling inventors to develop the low-cost technology that will help close the knowledge divide.

QUALCOMM embraces this philosophy of using imagination and innovation to drive technological advances that benefit end users. According to Dr. Irwin Jacobs, one of QUALCOMM’s founders and its chairman, “We started QUALCOMM with the idea that we would try to be innovative – look for an idea that could make a significant difference.”3 For more than 20 years, QUALCOMM has invested significantly in research and development (R&D), which has resulted in thousands of innovative ideas, methods and products that have changed the wireless world.

This paper discusses how QUALCOMM develops new enabling technology through investment in R&D and strategic acquisitions and has fostered competition by broadly licensing the rights to use its patented technology. Further, QUALCOMM provides its customers the opportunity to easily and quickly develop and introduce their products by providing chipset and software solutions that integrate QUALCOMM’s technology. Additionally, QUALCOMM has worked to reduce its customers’ overall intellectual property costs and minimize intellectual property disputes within the industry through the cross-licenses it has obtained from a very large number of significant patent holders.

1 Kamil Idris, Intellectual Property: A Power Tool for Economic Growth – Overview, World Intellectual Property Organization, 2nd Edition, June 2003. (Henceforth cited “WIPO, Intellectual Property.”) 2 Eric Schmidt, “Let More of the World Access the Internet,” Financial Times, May 21, 2006. 3 Ken Wagner, “The Future Depends on Innovation: An Interview with Irwin M. Jacobs,” IEEE Design & Test of Computers, May–June 2005.

For more than 20 years, QUALCOMM has invested significantly in research and development (R&D), which has resulted in thousands of innovative ideas, methods and products that have changed the wireless world.


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The paper highlights how QUALCOMM enables its licensees, chipset customers, operators and ultimately end users to benefit from these advances.

As illustrated in figure 1, QUALCOMM has pioneered a new business model, based on accelerating and focusing its internal R&D, in addition to selling chipsets and licensing software, which enable system and device manufacturers to get to market faster and at lower costs than if they conducted all their own R&D and integrated their own chipset and software solutions.

Today, following QUALCOMM's lead, a number of technology companies are more likely to be specialized, focusing perhaps on chip development, display technologies or power management rather than manufacturing an entire handset. They are far different from the vertically integrated telecom manufacturers of old. Before their transitions to more flexible entities, these vertically integrated monoliths typically undertook basic research exclusively for their own end products and from that designed, developed, manufactured, and sold complete end-user products.

This new model has also evolved further through a shift in telecom technology from hardware- to software-based solutions. This has enabled new players to enter the market and find opportunities that the larger companies were too slow or unable to fulfill. These companies have accelerated the innovation that has characterized the new world of telecom and the Internet and, most important, has rapidly reduced prices

Figure 1. QUALCOMM Business Model - Technology Enabler

QUALCOMM has pioneered a new business model, based on accelerating its internal R&D, in addition to selling chipsets and licensing software, which enable system and device manufacturers to get to market faster and at lower costs...


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while increasing functionality, notably for mobile phones. For this reason, the developing world is experiencing more of its early connectivity to the Internet through mobile devices rather than through fixed computers.

QUALCOMM is one of many companies that are championing mobile technology as a first bridge to the Internet for users in developing markets. It has continued to focus on innovation and enabling all manufacturers (other chipset suppliers, handset suppliers, and infrastructure and test equipment suppliers) through its broad technology licensing program and by providing enabling chipsets and software. “QUALCOMM believes the next evolution in wireless will be less about competing technologies and more about complementary technologies working together in a seamless and concurrent fashion.”4

By driving invention, broadly licensing the innovations and providing equipment vendors with complete chipset and software solutions, QUALCOMM is enabling suppliers to bring infrastructure, test equipment and mobile devices to market more quickly and at lower cost. It is enabling operators to offer richer and more compelling services to subscribers at a lower cost. Equally important, it is enabling end users – especially in developing countries – to gain access to mobile communications and the Internet at a rate inconceivable only five years ago.

[2] QUALCOMM Business Model and the Benefits to Its Customers QUALCOMM views itself first and foremost as a technology developer and enabler. It works in partnership with suppliers and operators to ensure their success in deploying wireless standards. This remains true whether the technology is CDMA (for WCDMA- and CDMA2000-based systems), emerging OFDMA systems or others. In order to accomplish this, QUALCOMM has invested significant amounts in R&D and strategic acquisitions, protected its innovations with patents, commercialized the new technologies by incorporating them in its chipsets, and broadly licensed its technologies to expand the number of vendors participating in the market.

As figure 2 below documents, the company’s R&D spending has increased by more than 525 percent over the last seven years, increasing from $340 million or 10.6 percent of total corporate revenues 4 Dr. Paul E. Jacobs and Steven R. Altman, 2005 QUALCOMM Stockholder Letter.

QUALCOMM views itself first and foremost as a technology developer and enabler. It works in partnership with suppliers and operators to ensure their success in deploying wireless standards.


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during fiscal year (FY) 2000 to $1.8 billion or 20.6 percent during FY 2007. Cumulatively, QUALCOMM has invested more than $8.6 billion in R&D (through December 31, 2007). This has resulted in a continuously improving and expanding patent portfolio that has been made available, essentially in its entirety, to handset and infrastructure equipment licensees – unlike many other companies that limit their licensing activities to only patents essential to a standard and seek to exclude competitors from using other inventions.

Like other companies that invest heavily in R&D, QUALCOMM has been granted numerous U.S. and international patents. As of December 31, 2007, the company had more than 35,000 issued and pending patents globally (nearly 11,000 issued) and close to 6,800 patents issued and patent applications pending approval in the U.S. (approximately 2,400 issued).

Not only has QUALCOMM’s patent portfolio grown, but more important, as a result of its broad licensing model, these extensive R&D investments have translated into additional technology available for its licensees and the industry, faster time to market for vendors, a wider selection of handsets, lower handset average selling prices (ASPs) for operators and, ultimately, more benefits to end users.

QUALCOMM's Fiscal Year R&D Investments2000 To 2007

$0.34 $0.42 $0.45 $0.52$0.72

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20%

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Ann

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Source: QUALCOMM Incorporated

Figure 2. QUALCOMM's Fiscal Year R&D Investments, 2000 to 2005

...as a result of its broad licensing model, these extensive R&D investments have translated into additional technology available for its licensees and the industry, faster time to market for vendors, a wider selection of handsets, lower handset average selling prices (ASPs) for operators and, ultimately, more benefits to end users.


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Additionally, QUALCOMM makes major contributions to standards setting organizations. This effort is significant – QUALCOMM participates in open standards and shares its contributions with all. Currently, the company has a significant presence in the standards bodies which are charged with developing, enhancing, and designing the next generations (based upon OFDMA technologies) of UMTS/WCDMA and CDMA2000 (3GPP and 3GPP2, respectively). QUALCOMM considers its investments in its standards efforts critical for helping to assure the stability of the technologies and the interoperability of handsets and infrastructure among all manufacturers – a key to the overall success of the standard, whether CDMA2000, WCDMA, or OFDMA.

Because QUALCOMM’s R&D efforts are primarily aimed at developing core technologies as opposed to incremental or peripheral product enhancements, the company ultimately has enabled its licensees to forgo having to make these same R&D investments, thereby saving these licensees significant expenditures. This drives competition and continuous product improvement and price reduction in two ways:

o It lowers the cost of entry, enabling companies, both large and small, to access technology that they could not efficiently develop themselves or could only do so at a very high cost. This allows more companies to enter the market easily. It also accelerates their time to market as much of the relevant R&D has already been completed. Together, these ultimately benefit consumers by driving down costs and increasing choice of features and functionality.

o It enables small and large vendors alike to build their value-added capabilities onto a proven QUALCOMM foundation.

In addition, QUALCOMM recognizes that technologies developed by other companies may prove valuable to both itself and its licensees. Because of this, QUALCOMM pursues strategic acquisitions of companies with complementary technology. Among QUALCOMM’s most well known acquisitions are: Flarion Technologies ($805 million in 2006), which has provided additional OFDMA engineering talent and increased QUALCOMM's existing OFDMA-related patent portfolio, and SnapTrack ($1 billion in 2000), which has provided low-cost, high-accuracy, position-location technology. The innovations of these acquisitions have been generally licensed to QUALCOMM’s licensees for use in CDMA/WCDMA products at no increase to QUALCOMM's standard royalty rates for CDMA/WCDMA products (subject to other standard terms and conditions).

QUALCOMM considers its investments in its standards efforts critical for helping to assure the stability of the technologies and the interoperability of handsets and infrastructure among all manufacturers...


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QUALCOMM’s licensing team is proactive, seeking out companies who might be able to offer new wireless products and engaging in bilateral negotiations with manufacturers who wish to license QUALCOMM’s patented inventions. There are four basic types of QUALCOMM licenses: ASIC (application specific integrated circuit) licenses, subscriber equipment licenses, infrastructure equipment licenses and test equipment licenses.

The scope of the license may include rights to use QUALCOMM's patented CDMA2000, WCDMA, OFDM(A) and/or other wireless technologies. Subscriber equipment licensees range from large vendors such as LG, Nokia, Motorola and Samsung, to small and mid-sized companies such as Option, Novatel, Sierra, HTC and Soma. This model has particularly benefited new entrants such as Japanese, Korean, Chinese, Taiwanese and smaller European vendors who can now enter the wireless market with competitive products in a timely fashion. ZTE and Huawei are just two of the new vendors from China that are successfully competing in the global marketplace, including in the European market. Subscriber equipment manufacturers may develop their own chipset, purchase chipsets from QUALCOMM, or purchase chipsets from chipset suppliers which have been granted rights under QUALCOMM’s patents, such as Texas Instruments (TI), Infineon, NEC, Fujitsu, Renesas, VIA, and Agere. Such chipset manufacturers have entered into agreements with QUALCOMM, granting them non-exhaustive rights to make and sell their chipsets, but expressly precluding any of QUALCOMM's patent rights from flowing to such chipset manufacturers’ customers. However, their customers have generally entered into subscriber equipment licenses with QUALCOMM, providing the chipset customer with rights to use QUALCOMM's patent portfolio in making and selling their subscriber products.

[3] Open and Universal Licenses QUALCOMM’s licensing philosophy centers on the company’s core conviction that the wireless industry will grow most rapidly and effectively if all participants have access to patented inventions. As a consequence, QUALCOMM believes that the entire industry – itself included – will profit more through open, rather than restricted, licensing. For this reason, although under no obligation to do so, the company has offered to license essentially its entire patent portfolio to any subscriber device supplier on terms and conditions that are fair and reasonable and free from unfair discrimination. QUALCOMM’s standard CDMA and WCDMA terms include an effective royalty rate that is less than 5 percent of the wholesale selling price of a licensed handset. This

QUALCOMM’s standard CDMA and WCDMA terms include an effective royalty rate that is less than 5 percent of the wholesale selling price of a licensed handset.


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standard royalty rate has been unchanged since the early 1990’s while the number of patents in the portfolio – and therefore the number of innovations made available – has increased dramatically and continues to do so. Indeed, because handset prices have continued to fall (due in part to the competition that QUALCOMM has fostered), the average royalty per phone has actually decreased over the years. In order to foster development of more complex wireless devices (e.g., laptop computers) that are more expensive than high-end wireless telephones, QUALCOMM also has voluntarily instituted a “cap” on the amount of the royalty paid by its licensees for such products. In addition, QUALCOMM has licensed modem card or module suppliers to sell PCMCIA-type modem cards and embedded modules for use in downstream products (e.g., telematics units, laptops, vending machines, meter readers, point of sale terminals, etc.) so that where the module manufacturer pays a royalty to QUALCOMM, the downstream product manufacturer generally does not have to pay any additional royalties to QUALCOMM for use of the patents incorporated into those modules

Likewise, all infrastructure and test equipment suppliers are offered licenses to QUALCOMM's patent portfolio. Even the chipset vendors who compete directly with QUALCOMM have the ability to enter into agreements under which they are granted certain non-exhaustive rights under QUALCOMM's patents.

Today, more than 145 companies have entered into license agreements which provide them access to QUALCOMM’s patent portfolio. This includes licenses to manufacture and sell products implementing CDMA-based air interfaces (e.g. cdmaOne, CDMA2000, WCDMA and TD-SCDMA), and, for multimode CDMA/OFDM(A) products, an OFDM(A) patent portfolio made stronger through QUALCOMM’s acquisition of Flarion Technologies. Additionally, QUALCOMM’s chipset and software customers benefit from the exhaustive licenses granted to QUALCOMM by certain third-parties. As of January 2008, QUALCOMM had announced that it has licensed its patent portfolio for single-mode OFDMA subscriber devices and infrastructure equipment to seven companies.

[4] Summing Up Licensing Options A QUALCOMM CDMA handset licensee has several options with which to manufacture and bring a product to market.

Even the chipset vendors who compete directly with QUALCOMM have the ability to obtain certain non-exhaustive rights under QUALCOMM's patents.


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1. They can purchase chipsets and software directly from QUALCOMM

2. They can purchase chipsets from one of the ASIC suppliers that entered into a patent agreement with Qualcomm (an “Authorized ASIC Supplier”)

3. They can design and manufacture their own chipset solution

In all three cases, the handset licensee obtains no QUALCOMM patent rights as a result of the chipset acquisition (since both QUALCOMM and its Authorized ASIC Suppliers sell chipsets non exhaustively with respect to QUALCOMM patents, i.e. with no rights to QUALCOMM patents that flow through to its customers), but does have the right to use QUALCOMM’s patents in its products as a result of the grants in its individual subscriber unit license agreement with QUALCOMM. This is illustrated in figure 3 below. Licensees who purchase QUALCOMM’s chipsets and software also receive the right to use certain other third-party patents as part of the purchase of such chipsets/software through a mechanism known as patent exhaustion where such third parties have granted to QUALCOMM the right to make, use and sell its chipset and software solutions. Handset licensees who use chipsets purchased from another chipset manufacturer or manufacture their own chipsets may have to separately negotiate to obtain those third-party patent rights directly from the third party if they are not provided by its chipset supplier.

Options for QUALCOMM Subscriber Unit Licensees

Figure 3. Options for QUALCOMM Licensees

QUALCOMM is confident that its licensing philosophy and approach – supported by its continuously expanding R&D investments – assures a competitive and expansive industry.


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QUALCOMM is confident that its licensing philosophy and approach – supported by its continuously expanding R&D investments – assures a competitive and expansive industry. This has been clearly demonstrated in both the CDMA2000 and WCDMA technology segments by falling handset prices, enhanced functionality, and rapid technology adoption, all to the benefit of chip suppliers, equipment vendors, network operators and end users.

[5] Third-Party Rights Incorporated into QUALCOMM’s Chipsets From the beginning of its licensing program, QUALCOMM has spent and continues to spend substantial effort and revenue to obtain cross-licenses for its chipsets and software, thereby benefiting its customers by reducing the aggregate royalties that they might be required to pay for third-party patents. In some instances, QUALCOMM may proactively obtain patents from other third parties that it believes will benefit its licensees and end users and, thereby, expand the applications and feature sets of products for the WCDMA and CDMA2000 markets.

By securing these [third-party patent] rights for the chipsets and software it sells to its customers, QUALCOMM reduces the potential burden of “royalty stacking.” This is the theoretical accumulation of royalty payments that could be paid to multiple patent holders, each charging a separate royalty.

An example is QUALCOMM’s patent license agreement under France Telecom's Turbo Code Licensing Program. Under this agreement, France Telecom granted QUALCOMM a worldwide license to France Telecom's Turbo Code patents for use in QUALCOMM's chipsets. These Turbo Code inventions enable a lower signal-to-noise ratio for long information bit block lengths which translates to a substantial increase in capacity for interference-limited systems such as those based on CDMA technology.

In addition, customers who buy QUALCOMM chipsets receive a product that has benefited from extensive interoperability testing for performance and functionality related to the CDMA2000 and WCDMA standards. Furthermore, the chipset solutions include, at the customer’s option, the appropriate codecs and applications software for multimedia applications such as video and music streaming. This provides additional savings to

By securing these [third-party patent] rights for the chipsets and software it sells to its customers, QUALCOMM reduces the potential burden of “royalty stacking.”


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QUALCOMM customers who buy chipsets because, as previously discussed, it reduces their development costs and accelerates time to market.

[6] Continuous Inclusion of New IPR In 1995, the only CDMA-based system deployments were implementations of the IS-95 standard (also known as cdmaOne). The cdmaOne handsets used on those systems supported voice capability and 14 kbps data rates. Today, the same vendors that made those initial cdmaOne devices are producing multi-mode CDMA2000/GSM/GPRS and GSM/GPRS/WCDMA/HSDPA handsets with greater and more efficient voice capability and multi-megabit data rates. These devices incorporate significantly more of QUALCOMM's patented technologies, yet QUALCOMM’s licensed vendors continue to pay the same royalty rate that they did more than a decade before. Furthermore, these new multi-mode handsets are far less expensive then the initial cdmaOne phones that were priced at more than $500, so the royalty paid per phone has decreased proportionally.

In most cases, QUALCOMM’s licensees have chosen to enter into license agreements which grant access to QUALCOMM’s patents essential to a standard for the life of the standard and for QUALCOMM's past and future non-essential patents through a provision in the agreement known as a “capture period.” This means that such licensees manufacturing and selling single-mode or multi-mode CDMA products (e.g., CDMA2000 or WCDMA alone or combined with other technologies such as OFDMA or GSM) have the right to all of QUALCOMM’s patented inventions essential to the relevant CDMA standard during the term of the license agreement regardless of the date on which the patents may have been filed.

Likewise, such licensees generally have the right to QUALCOMM’s filed non-essential patented inventions through the end of the capture period. In most cases, QUALCOMM provides access to these newly filed patents with no increase to its standard worldwide CDMA royalty rate, regardless of how groundbreaking or innovative they may be. This has benefited both QUALCOMM and its licensees. On the one hand, such licensees have received constant technology improvements with no additional increase in royalty rates. On the other hand, such improvements have provided greater end-user benefits and, therefore, stimulated greater sales to the market.

As part of QUALCOMM’s typical license agreement, the royalty rate structure applied by the licensee for royalties paid to QUALCOMM upon the sale of the licensee’s products is not increased over the term of the agreement, regardless of improvements in the licensed QUALCOMM patent portfolio.


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[7] Predictable Royalty Rate Structure As part of QUALCOMM’s typical license agreement, the royalty rate structure applied by the licensee for royalties paid to QUALCOMM upon the sale of the licensee’s products is not increased over the term of the agreement, regardless of improvements in the licensed QUALCOMM patent portfolio.

QUALCOMM exemplifies the shift of the intellectual property rights (IPR) business model from a focus on technology protection to technology proliferation. As previously referenced, in its fiscal year ended September 2007, QUALCOMM invested $1.8 billion in R&D or 20.6 percent of its total revenues. To develop a similar technological base, each of QUALCOMM's licensees would have to invest a similar amount of resources in core technology development, not including the specific designs of their individual products. These R&D expenditures are funds that QUALCOMM’s licensees do not always have to invest to gain the market advantages provided by QUALCOMM's licensed technologies.

QUALCOMM’s royalty structure is predictable for its licensees. The royalty rate structure freely negotiated by QUALCOMM and its licensee generally remains constant throughout the term of the license. It typically does not vary as the licensee becomes licensed to additional patents covered by the agreement. This allows licensees to plan more effectively and consequently make better long-term business decisions.

QUALCOMM’s royalty rate structure also means that as the selling prices of handsets decline, the dollar amount of royalties paid per handset sold declines as well. Thus, as prices inevitably decline (in fact, QUALCOMM has worked hard to enable declining prices through its low-cost chipset product development activities), QUALCOMM works in conjunction with its licensees to increase their sales and expand the market at all tiers. This is the driving force behind QUALCOMM’s increasing investment in R&D and its motivation to enable the success of all licensees.

QUALCOMM’s increasing R&D investment in the development of wireless technologies provides several advantages to its licensees. First, its increasing R&D investment is aimed towards lowering costs of the handsets. Lower-cost handsets enable QUALCOMM’s customers to enter new markets in the developing world where both incomes and phone penetration are typically lower. Second, advanced R&D provides greater features and functionality at mid- and high-tier price levels. This

QUALCOMM’s royalty rate structure also means that as the selling prices of handsets decline, the dollar amount of royalties paid per handset sold declines as well.


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enables licensees to maintain their average selling price (ASP) – and, thereby, revenues – by producing more fully featured handsets. Third, advanced R&D generates new, higher-capacity, higher-data-rate air interface technologies that enable operators to deliver a wider range of new services, driving new revenue streams at lower costs. All of this investment, in turn, allows operators to offer a broad choice to their customers of low-tier, mid-tier and high-tier products and services.

Figure 4 below tracks the actual impact. Based on the reports of QUALCOMM’s licensees, it tracks the least-expensive 10 percent and lowest-cost CDMA2000 handsets – the “lower-tier ASP” – from Q1 2004 to Q3 2007.

Between these periods, the ASP for the lowest 10 percent of CDMA2000 handsets sold declined from $82 to $23, or by 72 percent, while the ASP for the lowest-cost CDMA2000 handset dropped from $68 to $20, a 71 percent reduction. These declining ASPs show the results of QUALCOMM’s efforts to provide lower-cost chipsets to serve the low-tier market, especially in the developing world. In addition, QUALCOMM is enabling fully featured devices that allow handset vendors to differentiate their products at the higher tiers.

Lowering the Cost of CDMA2000 Handsets

Figure 4. Declining CDMA2000 Low End Wholesale Handset ASPs

The benefits of QUALCOMM’s business model are being seen very clearly in India, a competitive handset market with strong downward pricing pressure, where the low-tier CDMA2000 market is expanding rapidly.


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The benefits of QUALCOMM’s business model are being seen very clearly in India, a competitive handset market with strong downward pricing pressure, where the low-tier CDMA2000 market is expanding rapidly. According to handset vendor and Yankee Group data, there are currently more than 56 CDMA2000 handset models available from 14 suppliers for under US$50, as illustrated in figure 5 below. This includes 12 handsets available for less than $30 from 4 vendors. CDMA2000 low-tier phones are redefining the low-tier segment by providing data capabilities and effectively increasing teledensity and Internet penetration simultaneously.

WCDMA handset pricing is following a downward price trend similar to CDMA2000. As shown in figure 6 below, between Q1 2004 and Q3 2007, the ASP for the lowest 10 percent of WCDMA handsets sold declined from $407 to $176, or by 57 percent. The ASP for the lowest-cost WCDMA device witnessed an even sharper decline during this time

Competition and Economies-of-Scale are Driving CDMA2000 Prices Down

Notes:

Mobile devices that are sold at an ex-factory wholesale cost that is less than US$50 are considered low-end devices. Only devices shipped in volumes above 10,000 units are shown. Low end devices enabled with BREW offer additional functionality, such as downloading ringtones and wallpaper. Source: The Yankee Group and company information

Figure 5. Low-End Wireless Handsets (<$US50 Wholesale)

WCDMA handset pricing is following a downward price trend similar to CDMA2000.


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frame, dropping from $367 to $124, or by 66 percent. These values clearly confirm the outcome of QUALCOMM’s licensing policy: a relatively rapid decline in “low-tier ASP” as vendors compete to bring lower-priced models to market. During these three-plus years, shipments of WCDMA handsets increased from 22 million units to 182 million units worldwide (the latter represents an estimate for year-end 2007).

In sum, the handset prices charged by QUALCOMM’s licensees confirm QUALCOMM’s business philosophy and practice. By proactive licensing of all interested companies – competitors included – QUALCOMM stimulates competition, rapid price reductions, increased differentiation and an expanding market to the benefit of all participants throughout the value chain.

[8] Enabling an Industry The global market for CDMA2000 and WCDMA service and equipment revenues has doubled from 2002 to 2005. As illustrated in figure 7 below, QUALCOMM’s revenues in 2007 totaled $9 billion, compared to

Lowering the Cost of WCDMA (UMTS) Handsets

Figure 6. Declining WCDMA Low End Wholesale Handset ASPs

By proactive licensing of all interested companies – competitors included – QUALCOMM stimulates competition, rapid price reductions, increased differentiation and an expanding market to the benefit of all participants throughout the value chain.


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more than $350 billion for the industry. QUALCOMM’s’ revenues represented less than 3 percent of the total revenues while the rest of the equipment revenues were shared amongst the vendors licensing QUALCOMM’s technology. By 2011, industry revenues are forecast to grow to more $725 billion. CDMA2000 and WCDMA are thriving and sales are healthy and growing rapidly while QUALCOMM continues to innovate and bring new technologies to the market.

[9] Increased Competition in 3G WCDMA, CDMA2000 and GSM technologies have all employed royalty structures, yet they have experienced very different competitive results. The early GSM royalty structure was based on low-cost or free cross-licensing between the major patent holders, comprising a few large vertically integrated vendors, coupled with high royalties for suppliers with limited or non-existent patent portfolios. This structure left the market power in the hands of those few large vendors and reduced consumer choice by preventing the successful entry of new, usually smaller vendors.

QUALCOMM’s philosophy to enable as many vendors as possible (more than 145 licensees) at a predictable effective royalty rate of below 5

QUALCOMM Has Helped to Enable a $350+ Billion Industry

$64 $80$106

$143

$186

$248

$18$23

$33

$42

$56

$74

$15$16

$19

$23

$30

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2002 2003

$3

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$4

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Qualcomm Annual Revenues Industry – CDMA/WCDMA Infrastructure RevenuesIndustry – CDMA/WCDMA Handset RevenuesIndustry – CDMA/WCDMA Service Revenues

(Revenues in $Billions)

$5

$352

2005Sources :Qualcomm Revenues – Company reports

Handset, Infrastructure and Service Revenues – Strategy Analytics, 2007

2004

$208

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$158

$269

Figure 7. QUALCOMM Has Helped to Enable a $350+ Billion Industry

QUALCOMM’s philosophy to enable as many vendors as possible (more than 145 licensees) at a predictable effective royalty rate of below 5 percent of the wholesale price of a handset, has led to an unprecedented amount of competition in the CDMA2000 and WCDMA markets.


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percent of the wholesale price of a handset, has led to an unprecedented amount of competition in the CDMA2000 and WCDMA markets.

Figure 8 indicates the number of device vendors with 5 percent or more market share for major technologies over time. It shows that the advent of GSM, but even more so CDMA2000 and WCDMA, has brought new vendors and more competition to the market.

In 1999, AMPS handset sales were dominated by two vertically integrated vendors – Motorola and Nokia. During 2000, TDMA sales were dominated by three vendors – Nokia, Motorola and Ericsson. In 2001 and 2007, five vendors – Nokia, Motorola, SonyEricsson (Ericsson in 2001), Siemens and Samsung – led the GSM market with virtually no change to their market shares during that time period. During the first half of 2007, six companies led in handset market share for CDMA2000 and five led for WCDMA. These included Nokia, Samsung, and LG who led in CDMA2000 and WCDMA, along with Motorola, Sanyo and Kyocera for CDMA2000 and Sony Ericsson and Sharp for WCDMA.

Increasing Handset Competition in 3G

Figure 8. Increasing Handset Competition in 3G

CDMA2000 and WCDMA represent technology segments with thriving device competition.


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CDMA2000 and WCDMA represent technology segments with thriving device competition. Both of these technologies see new device entrants such as Huawei and ZTE and data card and module vendors such as Novatel and Sierra Wireless (ZTE also manufactures data cards). More competition results in more innovation and lower pricing which is better for operators and end users.

[10] QUALCOMM – Making a Difference QUALCOMM is first and foremost a technology innovator and enabler. It invests significant portions of its revenue in fundamental technology R&D and has made essentially all of its patented technologies available to its subscriber device and network equipment licensees, large and small. QUALCOMM's business model helps to enable these system and device manufacturers to launch products much faster and at substantially lower costs than if they were to conduct their own R&D and develop their own chipset and software solutions. In addition, QUALCOMM has offered licensees access to QUALCOMM’s growing pool of patents for use in their licensed CDMA products – for example, new technologies such as EV-DO Rev A, HSDPA/HSUPA, OFDM(A), etc. – without charging a royalty rate that is higher than QUALCOMM’s worldwide standard CDMA royalty rate.5 This provides a predictable model for QUALCOMM’s licensees.

QUALCOMM is building a foundation on which others can innovate and is creating an environment that lowers the costs of launching products. QUALCOMM’s license structure has helped enable new vendors develop and sell CDMA2000 and WCDMA products that had little or no presence in the GSM or even earlier analog mobile phone markets. These new vendors bring competition that lowers end-user prices and promotes innovation with expanded features, functionality and applications, ultimately benefiting consumers.

5 Subject to other standard terms and conditions

© 2008 QUALCOMM Incorporated. All rights reserved. Qualcomm is a registered trademark of QUALCOMM Incorporated. All other trademarks are property of their respective owners. Qualcomm asserts that all information is correct through January, 2008.

QUALCOMM’s license structure has helped enable new vendors develop and sell CDMA2000 and WCDMA products that had no presence in the GSM or even earlier analog mobile phone markets.

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