formerly of the tech company Linkabit, formed a company called Qualcomm,

short for Quality Communications. Today, a few decades later, Qualcomm is

valued at almost $70 billion. But the path it's taken to get there is not without controversy.

They charge exorbitant prices.

The FTC is really going after Qualcomm's bread and butter.

When I saw Qualcomm doing it, first I thought that's never gonna work.

The optics of it don't look particularly good.

So what does Qualcomm actually do? Because it's not exactly a household name.

Qualcomm, they do something with phones.

I think I've seen the name but I have no idea what they're doing.

No, I've never heard of Qualcomm.

Some sort of tech company.

Apple and Qualcomm have some kind of, there's like maybe some kind of patent infringement.

I think I have heard the name before but beyond that I couldn't tell you

anymore at all. And I haven't heard the name Qualcomm before.

Qualcomm is the company that has been over the years developing a lot of the

fundamental technologies that make cellphones work. And we license that

technology to a horizontal model that any company can come in. The other

part of the business is our semiconductor business and we produce chips

for phones and for everything that the mobile industry has been

transforming. You should assume that the absolute majority of the phones

today has a Qualcomm processor on it.

So fundamentally, Qualcomm invents and licenses technologies and designs

semiconductor chips. And as a result it has a massive amount of patents,

over 130,000 if you include patent applications, and today licensing those

patents accounts for more than half of its operating income. R&D has been

a big focus of the company since the beginning. Qualcomm's first big win

was pioneering a new wireless technology in the late 80s called cdmaONE,

which in 1995 became one of two industry standards for the way cellphone

networks work. Along with the competing GSM technology, it defined the 2G

area of cellphones. This, along with its growing portfolio of

telecommunications patents was what initially secured Qualcomm's position in the industry.

They really held a monopolistic position in 3G and 4G. They had the

patents, they were the first, they were the best. Every phone you will see

in the U.S., you know a few years ago, had Qualcomm modems in them.

In every single generation of wireless, Qualcomm had contributed the

fundamental technology that actually made that possible.

When it comes to chips, it's important to note that Qualcomm is a fabless

microchip company, which means it designs them but contracts out their

actual production. And it's most well known for a line of processors it calls "Snapdragon."

So what we do is we build the core processor that sits inside the cellphone.

Qualcomm's really known for something called an "SOC," which is a system on a

chip. That's really a computer on a chip.

So you can think of the system on a chip kind of like the human brain, the

system on a chip in a phone is very similar. So you have a lot of

disparate functions but they all work together cohesively with system

software and that's what the system on a chip does. If you look at the

communications portion of the chip itself, let's say back in 2012 is 100

megabits per second. Five years later it was a gigabit per second. So more

than a 10 fold increase over five years. And now as you move to the 5G

generation we're looking at another 10x improvement in speed that the

device and Snapdragon can offer.

And right now 5G is a huge deal to Qualcomm.

We started investing in 5G technology over 10 years ago, waiting for this

moment that would come in 2019 and now we're right on the cusp of that happening.

But what does 5G actually mean?

If you go back in time and you looked at 2G, what did 2G bring? It brought

digital voice, right? So your call was more clear. Then 3G and 4G emerged

and that was about more than voice, it was about connecting to the

internet. But 5G will expand much beyond that. 5G will enable machines to

talk to machines with high reliability. For example an automobile.

Automobiles, autonomous driving is emerging. So you want a very reliable,

high speed communication between automobiles. That's possible with 5G.

A lot of the connectivity features, the 4G and the 5G technology, and the

telematics modules that allow us to have Wi-Fi hotspots in the car and

leveraging content from the outside. Or even a lot of the cellular V2X

technology of getting time-to-green and light information as well as

safety features directly from other cars. You're going to start to see

that technology very soon in the coming years.

In the beginning it's going to be very mobile broadband centric. That means

we're going to have smartphones which are going to have, we can experience

much higher data rates and much lower latencies. And that is going to

change the way we do our own businesses.

So 5G is not just a marketing term. It's an actual set of new standards,

ultimately defined by the International Telecommunication Union, that will

lay out how the next generation of cellphones and other mobile devices

will work. But how soon we'll actually be able to buy those devices and

have the systems in place to make use of their 5G tech is yet to be seen.

A lot of times in the semiconductor industry our marketing outpaces our

engineering. So when people say "oh 5G's here," not so much. It'll be

years in the making. 3G and 4G Qualcomm dominated the industry. Some

people say they may have behaved badly as a result, they were very,

monopolistic behavior, and that's good for Qualcomm but that's not good

for the industry. 5G is gonna be much more open. Many more companies are

participating in it. There's no way Qualcomm is going to have the same

position that they've had in the past.

Another big focus for Qualcomm right now is artificial intelligence.

Qualcomm began our research on AI over a decade ago with Qualcomm AI

research. And in about 2015 we started integrating AI onto the chip. What

that means is we put special processing capability into our chips to

accelerate artificial intelligence.

When you combine fast communications with 5G with incredible computational

capability with AI then you really have a platform that'll change the

world.

But alongside Qualcomm's history of innovation is a complex legal history.

In March of 2018 the Trump administration blocked an attempted hostile

Qualcomm takeover by competitor Broadcom, citing national security

concerns. A few months later Qualcomm itself failed to acquire another

chip rival, NXP, when it couldn't get Chinese regulatory approval. But its

most high-profile cases involve a series of antitrust lawsuits. In 2009

Qualcomm was fined $208 million by South Korea's anti-trust agency the

Korea Fair Trade Commission. In 2015 it paid a $975 million fine in China

after an antitrust dispute. In 2016 it was again fined by South Korea,

this time for $865 million. It avoided a $778 million fine from Taiwan's

Fair Trade Commission by agreeing to invest $700 million in Taiwan over

the next five years. It was fined $1.2 billion by the European Union and

right now it's facing an anti-monopoly lawsuit from the FTC.

The U.S. FTC says Qualcomm maintains this monopoly over a key type of chip

used in cellphones called baseband processors and the government says it

does that by using these anti-competitive tactics. For example it says

Qualcomm only supplies those chips to cellphone manufacturers if those

manufacturers also agree to license patents from Qualcomm on its preferred

terms. So the government says that forces those customers to pay these

higher fees, these rates and violates competition law. Qualcomm is

fighting back very hard because Qualcomm denies any and all wrongdoing and

says at the end of the day the government just hasn't actually proven that

its business practices in any way harm consumers or the overall broader

competitive market.

When people sell chips, they just sell the chip. You know, you pay for the

chip, like going to the store. Qualcomm had a business model where if you

use their chip they got a percentage of the total cost of the device. So

this business model is something I've never experienced. When I saw

Qualcomm doing it, first I thought, that's never gonna work. But again,

they had a monopoly, you had no choice. If you wanted an SOC, if you

wanted a modem, if you want to be in the smartphone business you had to do

business with Qualcomm.

The FTC is really going after Qualcomm's bread and butter which is its

patent licensing business and that actually counted for more than 50

percent of its operating income in its last reported quarter.

The key point seems to be certainly the linking between selling a chip and

also asking for a royalty as well as the money for that chip. Why is that

something that you continue to pursue? When I buy a car I get all the IP

that comes along with that car. Why not when I buy a Qualcomm chip don't I

already get the IP that comes along with buying the chip?

Well there's a couple reasons. One is if you look at the agreements that we

have, we have two separate businesses. The licensing business is about

licensing the full portfolio of Qualcomm's patents. Some of them involve

the chip, some of them don't involve chip. In fact the vast majority of

them don't involve the chip. Then on the chip side we obviously compete in

a very, very competitive chip market. And I think when we look at the

market there's no way to conclude that that isn't the most competitive

semiconductor industry in the world. It is the who's who of people that

want to work in there.

And then there's Apple. The two companies worked together for years but

have now filed multiple lawsuits against each other.

We're really just trying to get somebody to pay on a contract that's been

in place for 10 years.

You have people who are naysayers. One of the naysayers is not an analyst,

it's Qualcomm. Qualcomm keeps telling me over and over again, you're going

to come to the table, you have to. Lost the suit in Germany, lost the suit

in China. Wait till you see them cave. Are you gonna cave?

No. The issue that we have a Qualcomm is that they have a policy of no

license, no chips. This is in our view illegal and so many regulators in

many different countries agree with us. And then secondly they have an

obligation to offer their patent portfolio on a fair, reasonable and

non-discriminatory basis and they don't do that. They charge exorbitant

prices and they have a lot of different tactics they use to do that.

So the very basics of these recent legal fights are that the FTC and Apple

think Qualcomm is behaving monopolistically. Apple thinks Qualcomm has

infringed on its IP and vice versa. And both Apple and Qualcomm think the

other owes them money.

Let's say somebody who is not as familiar with the company but sees the

headlines. Well, they settled with the Chinese after a dispute, it was a

billion dollars. Now the South Koreans came after them and it was a $750

million fine, they're challenging that. The FTC has come after them,

Apple's come after them. I mean the optics of it don't look particularly

good for this unique business model you talk about.

Well I think it's probably more the result of the industry structure and

how powerful some of the people that would like to attack that unique

business model are versus the business model itself.

And the Qualcomm model is being challenged in another way because companies

are increasingly deciding to just make their own chips.

Facebook is doing their own semiconductors. Google, Amazon, Tesla. These

people from Qualcomm are now everywhere. It doesn't take semiconductor

experts to make a chip anymore.

Look, there is no question the company has been through a lot, especially

in the past year. In one of the most difficult years that we had with a

number of legal activities plus a possible hostile acquisition of the

company. During that year, the team here at Qualcomm accelerated 5G by one

year and some of the products we deliver like the Snapdragon 845 has been

one of the best products in our history. And I think that speaks to the

resiliency and the capability of the Qualcomm employees. If anything I

will say all of the challenges that we have made us to be a much more

focused company, make us really understand our core competence and make

sure that we continue to do what we do best which is to move the

technology forward, drive the new transition to 5G and basically expand

mobile to other industries.