Over the past decade, Qualcomm (Nasdaq: QCOM) has been playing something of a Dr. Jekyll and Mr. Hyde act. As its latest earnings show, the company has a good, respectable side that has generated billions in cash flow annually through wireless chipset sales and royalties. And it also has a callous, destructive side that has squandered large sums of money on questionable business ventures.
Qualcomm's FLO TV mobile television business, which the company now appears ready to sell, has to rank among its most financially destructive boondoggles. Yet while the days of FLO TV burning through Qualcomm's cash pile might soon be over, it looks like Qualcomm is far from finished in wrecking shareholder value through bad investments in wireless service providers.
Money FLOs down the drain
Qualcomm launched FLO TV, which uses licensed spectrum to broadcast 16 channels of content to Verizon (NYSE: VZ) and AT&T (NYSE: T) subscribers for a monthly fee, with the goal of becoming a leader in mobile video distribution. Thus far, it has been anything but. Qualcomm's quarterly FLO TV revenues actually fell from $9 million a year ago to a mere $6 million last quarter. Meanwhile, the fact that the company's Qualcomm Strategic Initiatives division reported operating expenses of $118 million last quarter and attributed them "primarily" to FLO TV, suggests that FLO TV's losses ran into nine figures.
The biggest reason why FLO TV flopped is the fact that the service isn't supported by the most popular American smartphones – neither Apple's (Nasdaq: AAPL) iPhones nor Research In Motion's (Nasdaq: RIMM) BlackBerries nor Motorola's (NYSE: MOT) and HTC's Android phones possess the chipset needed to offer the service. But it also didn't help that Dish Network's (Nasdaq: DISH) Slingbox gave consumers a means of watching a far greater number of TV channels via their favorite smartphones, and without paying a separate service fee. Nor that YouTube, Netflix, and a slew of other content providers have helped satisfy consumer demand for mobile video.
Is India Qualcomm's next cash sinkhole?
In a nutshell, FLO TV became a disaster for Qualcomm because it was involved in a market where its services were largely unnecessary. And that has been a recurring pattern for the company's QSI investments. Prior to FLO TV, Qualcomm took large stakes in wireless carriers in Mexico (Pegaso Telecommunications), Brazil (Vesper), and Europe (Inquam Telecom), as well as satellite carrier Globalstar, in order to drive the use of its preferred wireless technologies. All of these investments turned into duds as the carriers either found limited demand for their services, or were squashed by incumbents with far greater resources.
And just as Qualcomm is finally cutting its losses with FLO TV, it's committing itself to yet another costly, high-risk attempt at being a service provider. Last month, the company spent more than $1 billion to purchase 4G spectrum licenses for a handful markets in India. Qualcomm intends to use the spectrum it arguably overpaid for to build out an Indian 4G network with the help of a local partner, before selling the stake. Only problem is that seven other carriers have also gotten their hands on 4G spectrum, including wireless leaders like Reliance's Infotel, Bharti, and Aircel. Should we really expect Qualcomm's attempt to bankroll a wireless network in India to end any better than its attempts to do so elsewhere?
It's hard not to be skeptical. Which is quite a shame. Because as long as you can't rely on Qualcomm to either hold onto the billions in cash flow it produces through its chipset and licensing businesses, or to return that money to shareholders, it's hard to get excited about it as a long-term investment.
