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    Broadcom Bid for Qualcomm Carries Risks for Mobile Industry Innovation

    Written by

    Wayne Rash
    Published November 7, 2017
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      There’s little reason to wonder why Qualcomm might be worth $105 billion to Broadcom. That’s because there is no doubt that your smartphone is using technology from Qualcomm.

      You’ve probably heard about the company’s Snapdragon processors that power most of the Android phones out there. But Qualcomm also makes the chips that handle the communications for most manufacturers’ smartphones and it has patents that get license fees from the rest.

      This fact clearly was not lost on Broadcom, another networking company that’s deeply involved in mobile communications, notably in WiFi chips as well as mobile processors.

      The synergies are clear enough that Broadcom is proposing making Qualcomm its latest takeover target if antitrust regulators are willing to approve the deal. However, Qualcomm is reportedly not thrilled with Broadcom’s bid, saying that it undervalues the company.

      The $70 per share that Broadcom is offering is a significant premium over what Qualcomm is currently trading for, but it’s close to parity when compared with the stock price a year ago. Since then Qualcomm has been hammered by lawsuits, examined by regulators and is in the midst of losing Apple as a customer. These events are depressing Qualcomm’s stock price.

      Apple is a big worry for Qualcomm since the company has moved to Intel for the modems it needs to reach cellular networks. The company’s patents still apply to the Intel chips, but here Apple is fighting back, saying that Qualcomm’s licensing fees are unreasonable.

      Meanwhile, the mobile device industry in looking toward a future without an independent Qualcomm, which may or may not be good news. On one hand, if Broadcom’s buyout bid is successful, it’s not clear what the future course of Qualcomm and its products will be. On the other, there’s hope that Broadcom will be more reasonable when it comes to license fees.

      But for the mobile industry there’s a lot more going on than modem suppliers and license fees. Apple, for example, has already begun the process of leaving Qualcomm behind completely, although it’s unclear how it can buy or build the mobile processors it needs without paying license fees to Qualcomm.

      Apple is already suing about the size of the licensing fees. But it’s safe to assume that the move to Intel modems will put a crimp in Qualcomm’s license revenue. But it also appears to be likely that Apple will begin making its own communications chips fairly soon, and if possible it will find a way that doesn’t depend on Qualcomm’s licenses.

      Then there’s Samsung. Like Apple, Samsung can make its own chips even though it currently uses Qualcomm’s Snapdragon processors for phones it sells in the U.S. However, like Apple, Samsung also has its own line of processors, such as the Exynos systems that the company uses in its Galaxy S8 phones sold outside the U.S., where they don’t need to support CDMA networks.

      But there’s no reason why Samsung can’t build its own chips, especially those pesky modem chips, and there’s no reason the company can’t buy them from Intel.

      If the two major phone makers decide they don’t need Qualcomm, then the company is in a world of hurt. Worse, if Apple’s lawsuits fighting the Qualcomm license fees come out in Apple’s favor, this also helps every other device maker, because they will benefit from the findings as well, cutting Qualcomm’s revenue even further.

      Broadcom is in a position to make the legal troubles go away by improving the license fees so that manufacturers stop fighting them. This would have the long-term impact of ensuring a continued if somewhat lower revenue stream while Broadcom would be able to leverage its position into a near-monopoly.

      But it’s not clear that such a position is good for the long term growth of the industry, or of the technologies that the industry depends on. Qualcomm, after all, is a major innovator in mobile technologies and is currently working on the hardware to support the new 5G networks that will go into operation over the next five to eight years.

      Broadcom, on the other hand makes most of its money through buying companies, keeping the technologies it wants or the parts of companies it wants and selling the rest.

      The company, formerly known as Avago Technologies, is the end result of the Hewlett-Packard spin-off of Agilant Technologies in 1999. Avago bought Broadcom along with several other companies and took its name.

      The acquisitions, integration and sell-off of various unneeded corporate components is a core part of Broadcom’s business practices and there’s every reason to expect that to continue with a Qualcomm acquisition.

      While Broadcom is known for making money through mergers and acquisitions, but it’s not as well known for its engineering acumen or as a mobile technology innovator.

      While Broadcom does its own product development, it’s not on the scale that we’ve seen from Qualcomm. Problem is, Qualcomm has gotten greedy and that may ultimately bring its downfall as an independent company.

      If the Qualcomm deal is possible the level of greed it displayed in the mobile chip market will moderate, but perhaps so will the level of innovation. For the long term, this is not a good thing.

      Despite my overall annoyance with Qualcomm for the decision the company made years ago to kill off Eudora, which was probably the best email client ever developed, I think it’s still better for the industry for the proposed acquisition to fail, either because the numbers don’t work or because regulators oppose it, than for it to succeed and risk the extinction of its innovation-friendly culture.

      Wayne Rash
      Wayne Rash
      https://www.eweek.com/author/wayne-rash/
      Wayne Rash is a content writer and editor with a 35-year history covering technology. He’s a frequent speaker on business, technology issues and enterprise computing. He is the author of five books, including his most recent, "Politics on the Nets." Rash is a former Executive Editor of eWEEK and a former analyst in the eWEEK Test Center. He was also an analyst in the InfoWorld Test Center and editor of InternetWeek. He's a retired naval officer, a former principal at American Management Systems and a long-time columnist for Byte Magazine.

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