Qualcomm Begins To Look Like IBM

Qualcomm is beginning to look like IBM lately. At least when it comes to revenue, earnings growth, and stock performance, which have been heading south.

Does that mean that Qualcomm is heading the IBM way? It’s too early to say, but there’s one similarity between Qualcomm and IBM back in its old glory days, worth noticing — leadership complacency with core business.

Qualcomm’s And IBM’s Financials 7/19/2017

52-week change for Power Shares QQQ +27.21%

Source: Finance.yahoo.com

Once IBM was a great company, churning out one breakthrough product after another, like the PC back in the 1980s. But that's when its leaders grew complacent with success, and committed a series of strategic mistakes, like the outsourcing of software to Microsoft and hardware to Intel.

“Occasionally, enormous consequences flow from decisions that at the time do not seem strategic,” write Bruce Greenwald and Judo Kahn in Competition Demystified. “When IBM entered the personal computer business, it chose an open standards approach and made two build-or-buy decisions that probably seem inconsequential and merely tactical. Rather than developing the operating system itself, it licensed one from a tiny company no one have ever had heard of. It made a similar choice for the microprocessor, giving that business to another supplier.”

As a result, those two tiny companies -- Microsoft and Intel -- outgrew IBM to become two of the world’s most successful franchises.

“These companies, rather than IBM, became the beneficiaries of the boom in personal computing,” add Greenwald and Kahn. “In retrospect, these were clearly strategic decisions with enormous consequences.”

Simply put, corporate complacency and strategic mistakes can be dangerous, even for large companies with plenty of resources. As Greenwald and Kahn put it:  “For an elephant operating within the barriers, life is sweet and returns are high. But competitive advantages still have to be managed. Complacency can be fatal, as can ignoring or misunderstanding the sources of one’s strength. An elephant’s first priority is to sustain what it has, which requires that it recognize the sources and the limits of its competitive advantages.”

That’s what modern business strategists call innovator’s dilemma.

To be clear about it, IBM is still a great company. It still innovates. But it has yet to come up with the next “big thing,” the innovation, which will revive sales and earnings growth.

Qualcomm is a great company, too. For two decades, the company has been in the right business at the right time—wireless technologies -- riding one mobile communications trend after another, as its products became the industry standard.

Qualcomm is the leading maker of LTE chips, and has a long list of big customers, including Samsung Electronics and Apple.

That’s why it has been experiencing phenomenal revenue growth.

Qualcomm’s revenues come from the manufacture and sale of chips that go into much of the world’s smartphones, and from royalties from licensing this technology to other chip makers.

Simply put, Qualcomm has turned into a toll collector for almost every smartphone manufactured.

And as a sole collector it has been a price-maker, setting the price of the tolls. That could explain the company’ hefty operating margins and robust earnings growth over the last two decades.

The trouble is that, like IBM, Qualcomm got too complacent with this business model. That’s why it has failed to come up with the “next big thing,” with which to leave the competition in the dust, and set up new tollbooths for collecting royalties.

Anyhow, no new thing would be good enough to justify the commitment of resources that will be needed to compete effectively against the company’s core business, as has been the case with IBM in recent decades.

Meanwhile, Qualcomm faces a growing challenge from Apple and Samsung and MediaTek and others.

Will history repeat itself? It remains to be seen.