Qualcomm Could Win Big As the iPhone 3G Calls

BY THE TIME YOU READ THIS, the first wave of Apple (AAPL) enthusiasts will have their hands on the nifty new iPhone 3G. It has several key improvements over the original model, in particular its ability to use speedy 3G networks for accessing the Web. The phone's debut has implications for a host of other companies: It sets the stage for a dramatic increase in Apple's share of the handset market, thus raising the bar for players who wish to enter or stay competitive, and it provides a new software platform for application developers. It also turns 3G into a mainstream technology. And that is good news, indeed, for Qualcomm (QCOM).

Qualcomm has two main businesses. It makes chips for handsets; that business generated $5.8 billion in revenue last year. And it licenses technology to handset makers, a business that raked in $3.1 billion in '07. In a report launching coverage of the stock with a Buy rating, Citigroup's Glen Yeung noted last week that Qualcomm collects a royalty on almost every 3G phone sold (except Nokia phones; it is embroiled in a messy royalty dispute with Nokia (NOK)).

Yeung also observed that Qualcomm is a direct beneficiary of the growing market for smartphones. Apple is providing evidence that smartphones are an increasingly popular choice for consumers as well as corporate Crackberry users. And, Yeung notes, as buyers switch from older, cheaper "feature phones" to more capable — and more expensive — smartphones, Qualcomm benefits.

I sat down for a chat last week in San Francisco with Bill Davidson, Qualcomm's senior V.P. for global marketing and investor relations. Davidson confirmed Yeung's view that average selling prices for handsets are going up. At the start of the year, Qualcomm had forecast an ASP for the September 2008 fiscal year of $203; the company's most recent estimate is $217. Growing demand for smartphones partly explains the rise, says Davidson, as consumers now want more features in lower-end phones.

Davidson concedes that ASPs can't continue to increase forever; but he says "you can run scenarios" where the expanding market for smartphones has a positive effect on ASPs "for some time to come."

Meanwhile, Davidson sees huge potential for Qualcomm to expand beyond phones, due to its new Snapdragon processor. He imagines the Snapdragon powering two classes of devices: "pocketable computing devices," with four- to seven-inch screens, and "mobile computing devices" with seven- to 10-inch screens. Think oversized iPhones at one end and small laptops on the other.

Qualcomm isn't the only company targeting the uncharted turf between phones and laptops; Intel (INTC) also has zeroed in on the new MID (mobile intelligent device) market, with its new Atom processor. Qualcomm contends it has a power advantage over Intel's chip; Davidson says Atom requires four times the juice Snapdragon does. He also notes Qualcomm has announced three customers so far for its new chip: handset makers Samsung and HTC, and GPS-device maker Mio. Presumably, there are more to come.