Qualcomm fends off accusations while posting record gains

For both the fourth quarter and its fiscal year, Qualcomm saw boosted revenues and profits off of record chipset sales. But those improved sales are also triggering alarms from GSM vendors, who claim that Qualcomm is using its wide portfolio of Wideband CDMA patents to strong arm its way into the UMTS, leading Qualcomm to spend much of its year-end earnings call refuting charges that it is squeezing the competition.

Qualcomm posted a net income of $538 million for the fourth quarter, up 37% year-over-year, and fiscal year profits year-over-year, are up 25% over 2004. Over the same periods, its fourth quarter revenue rose 40% to $1.56 billion, and yearly revenues climbed 16% to $5.67 billion, growth driven by both its chipset and technology licensing divisions. Qualcomm shipped 40 million chips in the fourth quarter and 151 million all year, both record figures for the company. In its licensing division, Qualcomm saw a huge boost in WCDMA patent royalties. Last year, WCDMA royalties accounted for 26% of its royalties, but this year's third quarter accounts for 41%, reflecting the increasing number of UMTS chipsets.

Those ballooning revenues are sure to add weight to the accusations of the consortium of carriers complaining to the European Commission about Qualcomm's licensing practices. Nokia, Ericsson, Panasonic, NEC, Broadcom and Texas Instruments last week filed a complaint against Qualcomm before the European regulatory body, claiming Qualcomm tried to use its near monopoly on essential WCDMA intellectual property to drive up licensing fees and force handset-makers to buy Qualcomm manufactured chipsets exclusively. The GSM Association joined the fray on Wednesday, saying that, while it was passing no judgment on the merits of the allegations, the commission should thoroughly investigate them due to their severity.

"It's to no one's benefit--including Qualcomm's--to have this uncertainty," said Rob Conway, CEO of the GSMA.

Qualcomm, however, used its annual earnings call after Wednesday's market close to fire back at its accusers, saying that the charges were completely unfounded and were merely examples of Qualcomm's competitors trying to use the San Diego vendor's success against it.

"As we have throughout history, Qualcomm remains committed to licensing on fair and reasonable terms," Qualcomm chairman and CEO Paul Jacobs said. "I want to assure you that Qualcomm will defend rigorously against any claim about unlawful conduct in its licensing or chipset sales practices"

At the heart of the GSM consortium's complaint is that Qualcomm broke promises to the commission and regulators when the 3G UMTS standard was originally negotiated. Qualcomm's technology contributed heavily to the standard, and after assurances that Qualcomm wouldn't use its intellectual property heft to gain an unfair advantage in the market or drive up prices, standards bodies settled on W-CDMA as the core cellular technology for the European 3G standard. The consortium, however, said Qualcomm has reneged on that promise, charging most vendors the same royalty rates for WCDMA handsets shipped as it does for CDMA 1X EV-DO, even though Qualcomm's technology is used much more heavily in the latter standard. But to vendors that buy their chipsets exclusively from Qualcomm, the consortium maintains, Qualcomm is offering a royalty discount, encouraging handset suppliers to shut out Qualcomm's licensees.

Qualcomm President Steven Altman said the charges are baseless, and in fact most of the vendors in the consortium knew exactly what Qualcomm's licensing terms would be long before they voted to include WCDMA in the 3G standard. Altman said both Panasonic and Ericsson had licensing agreements with Qualcomm in place before the standard was passed, and it was in negotiating with several other vendors including Nokia for licensing agreements when the standard came up to a vote.

"These companies not only knew what Qualcomm's terms were when they voted in favor of the documented standard, they had already agreed to them."

Furthermore, Altman asked, if Qualcomm is using its patent muscle to strong-arm vendors into buying its chipsets, why are there so many competitors in the UMTS chipset market? Nokia, TI and Ericsson all claim to have shipped more WCDMA chipsets than Qualcomm, Altman said, and the average price of a 3G handset is falling, cutting into the royalties Qualcomm takes in.

"This action appears to be nothing more than buyer's--in this case licensee's--remorse, an attempt by these licensees to renegotiate their licensing agreements by seeking government intervention."