Is Qualcomm’s New Corporate Structure an Open Source Firewall?

Qualcomm Incorporated (NASDAQ: QCOM), a developer and innovator of advanced wireless technologies, products and services, announced last week that it plans to modify its corporate structure. The corporate structure changes are being implemented, among other reasons, in order to enhance Qualcomm’s ability to quickly deliver products to its customers, while further protecting and insulating its valuable patent portfolio from any claims resulting from actions and activities by portions of the company other than the Qualcomm Technology Licensing Division (QTL). According to the company this is not a restructuring in anticipate of spinning off either the QTL or QCT business, nor is this change in response to any third party actions or claims.

Qualcomm is indeed an innovator of note, as well as an aggressive filer of patent applications worldwide. For 2011, Qualcomm ranked as the 6th most prolific filer of international patent applications filed under the auspices of the Patent Cooperation Treaty (PCT). Qualcomm filed some 1,494 international patent applications in 2011. See International Patent & Trademark Filings Set New Record in 2011. For 2010, Qualcomm ranked 37th overall in terms of the number of U.S. patents obtained, receiving 772 according to the Intellectual Property Owners Association. See Top 300 Organizations Granted U.S. Patents in 2010 (page 2).

The new corporate structure for Qualcomm will reportedly feature the parent company, Qualcomm Incorporated, which includes QTL and corporate functions, as well as most of Qualcomm’s patent portfolio; and a new wholly owned subsidiary, Qualcomm Technologies, Inc. (QTI), which, along with its subsidiaries, will operate substantially all of Qualcomm’s research and development activities, as well as product and services businesses, including its semiconductor business, QCT.

In its last Quarterly Report filed with the Securities and Exchange Commission, filed for the period ending March 25, 2012, Qualcom explained that the company was organized on the basis of products and services. Four of its divisions are aggregated into the Qualcomm Wireless & Internet (QWI) segment and three of its divisions into the Qualcomm Strategic Initiatives (QSI) segment. The reportable segments were defined as:

Qualcomm Strategic Initiatives (QSI) — comprised of:

• Qualcomm CDMA Technologies (QCT) — develops and supplies integrated circuits and system software based on CDMA, OFDMA and other technologies for use in voice and data communications, networking, application processing, multimedia and global positioning system products;
• Qualcomm Technology Licensing (QTL) — grants licenses or otherwise provides rights to use portions of the Company’s intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA standards, and collects fixed license fees and royalties in partial consideration for such licenses;
• Qualcomm Strategic Initiatives (QSI) — comprised of the Company’s Qualcomm Ventures, Structured Finance & Strategic Investments and FLO TV divisions. QSI makes strategic investments that the Company believes will open new opportunities for its technologies, support the design and introduction of new products or services for voice and data communications or possess unique capabilities or technology. Many of these strategic investments are in early-stage companies. QSI also holds wireless spectrum.

Qualcomm Wireless & Internet (QWI) — comprised of:

• Qualcomm Internet Services (QIS) — provides content enablement services for the wireless industry and push-to-talk and other products and services for wireless network operators;
• Qualcomm Government Technologies (QGOV) — provides development, hardware, analytical expertise and services to United States government agencies involving wireless communications technologies;
• Qualcomm Enterprise Services (QES) — provides fleet management, satellite- and terrestrial-based two-way wireless information and position reporting and other services, software and hardware to transportation and logistics companies and
• Firethorn — builds and manages software applications that enable certain mobile commerce services.

The change in Qualcomm’s corporate is intended to formalizes the way the company has been operating, and will continue to operate moving forward. Notwithstanding, the company expects that QTI and its subsidiaries’ product and services businesses will increase their work with open source software in the future and this restructuring will, among other things, help ensure that QTI and its subsidiaries’ activities do not result in the licensing of any of Qualcomm Incorporated’s patents, including its 3G and 4G patents.

Under the new structure, QTI and its subsidiaries will own patents specifically developed for purposes of providing open source software contributions by QTI and its subsidiaries, whereas substantially all of the remainder of the company’s patent portfolio will continue to be owned by Qualcomm Incorporated. QTI and its subsidiaries will have no rights to grant licenses or other rights to patents held by Qualcomm Incorporated. There will be no changes to the intellectual property that is currently owned by Qualcomm Innovation Center, Inc., which works closely with the open source community to accelerate the advancement of the wireless industry as a whole.

Thus, it seems that at least one major component of the restructuring is being driven by the company’s attempts to move forward with open source, but doing so in such as way that insulates the vast majority of its patent portfolio.  Essentially, Qualcomm appears to be creating a corporate shield to make sure that there are not any claims, legitimate or frivolous, that its open source initiatives will come back to take a bite out of their propriety business build on an extensive patent portfolio.  If this is indeed what Qualcomm is doing it seems like an exceptionally smart move.  Once you open up to open source there can be many strings attached and if you take you allow others to take from you.

“Our internal reorganization will provide even greater protection for our industry-leading intellectual property portfolio as our products and services businesses seek to accelerate innovation and deliver our products to market quickly,” said Dr. Paul E. Jacobs, chairman and CEO. “We are confident that this change to our corporate structure will be accomplished with little to no disruption to employees and customers. As always, Qualcomm remains committed to being a company that creates, develops, sells and licenses state of the art technology through its products and services businesses, as well as its licensing business.”

Qualcomm anticipates that the new corporate structure will become effective during the first fiscal quarter of 2013 and does not expect any change to the way in which it defines its operating segments for financial reporting purposes as a result of this restructuring.