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Breaking Up Qualcomm Will Solve Nothing

Qualcomm faces a bunch of challenges that it can address -- and is addressing. However, its combined might is an asset, not a liability in that fight.

Qualcomm

This week, Qualcomm is preparing to launch the biggest advertising campaign in its 30-year history with the tagline “Why wait?”

One opportunistic hedge fund has already asked Qualcomm the same. Jana Partners earlier this month urged the chipmaker behind many of the world’s smartphones including, until recently, most of Samsung’s mobiles, to break off its chipmaking business to focus on its lucrative licensing arm. Such a move, plus more share buybacks, more transparency and a refreshed board of directors would “restore investor confidence,” the fund appealed to Qualcomm.

At least on the breakup part, Jana could not be more wrong. Though Qualcomm faces a number of big obstacles in both its chip and licensing businesses, a split of the two would not solve any of them.

Indeed, Qualcomm has suffered a huge hit to its high-end chip business now that Samsung has decided to use its own chips in the flagship Samsung Galaxy S6 phone. The blow prompted the company to cut its earnings forecast twice this year. Meanwhile the low-end business continues to face pressure from Asian rivals such as MediaTek, Spreadtrum and Rockchip.

The licensing business has also faced pressure, largely from regulatory inquiries and customers balking at paying agreed-upon fees for all products. Qualcomm cautioned this week that, although it expects a settlement with the Chinese government to help matters, it also faces an antitrust probe in Korea and may have to go to court to get some of its licensees to pay up.

Despite these legal hassles, it is the complementary strength of Qualcomm’s two businesses that positions it best to fight them. Together, the two businesses give Qualcomm two ways to profit from its research dollars and allows it to invest more — and earlier — in new technologies than it could possibly do as a standalone chipmaker. Qualcomm starts investing in new networking technologies as much as a decade before it expects them to be commercially ready. A standalone chipmaker couldn’t afford to invest significant dollars that far ahead of the financial opportunity.

One need only look at the several-year near-monopoly Qualcomm had in the LTE chip market to see the benefits of this strategy. By investing early on the technology front, Qualcomm was years ahead of rivals with chips that could power LTE phones. That meant it was practically the only game in town until this year as Samsung went with its own processor and other chipmakers are starting to gain ground at the low end.

Regaining that lost ground in the chip business is a tactical, rather than structural, challenge. The biggest issue Qualcomm had to address is the fact that Samsung had a manufacturing advantage in this year’s chips. Because Samsung’s manufacturing plants were able to produce chips with finer wiring than those Qualcomm had in their chips, it opted to forgo Qualcomm’s Snapdragon 810 in favor of its homegrown Exynos processor.

As first reported by Re/code, Qualcomm is addressing this in a way almost certain to win favor with Samsung — building its next chip in Samsung’s own factories.

Meanwhile, owning the chip business allows Qualcomm to be more than just a patent troll seeking money for abstract technology. In China, where the company’s licensing business has faced the steepest hurdle, the benefits of working with Qualcomm’s chipmaking business has been among the advantages Qualcomm has been able to dangle in front of its licensing partners. Rather than fight Qualcomm’s pitch for licensing fees, it has tried to lure Chinese companies by saying that Qualcomm technology can bring them new opportunities in the global markets, where Qualcomm has shown that its chips are the most competitive.

As for the notion of a split, it is something Qualcomm has considered in the past. It first considered it 15 years ago and then again in the middle of the last decade, when other mobile companies were seeking to reduce Qualcomm’s licensing fees by asserting its own intellectual property against Qualcomm’s chip business. At the time, Qualcomm’s chip business was a potential liability for the licensing side of the business, which is no longer the case as Qualcomm has settled with most of the large patent holders in the industry.

These days, Qualcomm’s biggest challenges come from low-end chip rivals that compete on price, Samsung’s chip manufacturing advantage and regulators attacking Qualcomm’s licensing arm.

Well before Jana Partners’ salvo, Qualcomm had sought to address each challenge: It has settled with Chinese authorities, made plans to tap Samsung for manufacturing and is launching a marketing offensive designed to assert itself as a brand worth paying for.

After all, as the ads say, why wait?

This article originally appeared on Recode.net.

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