While the rest of the world was glued to Prince William's wedding over in England this week, my attention of late has been riveted not on royalty but on royalties.

Qualcomm (Nasdaq: QCOM) is spinning royalties into market-beating returns as it continues basking in the glow of its surprisingly strong second fiscal quarter report from last Wednesday. Earnings show a company that's firing on all cylinders and -- with apologies to the royal family -- looks increasingly set to emerge as the king of the next wave of computing.

The best kind of royalty
The headline figure in Qualcomm's recent earnings is the average selling prices, or ASPs, of smartphones and other 3G-capable devices. In spite of fears that commoditization from the spread of free operating systems (namely, Android) and growth in emerging markets will cripple selling prices, ASPs remain stubbornly high. Qualcomm raised the ASP estimate of CDMA phones from a midpoint of $195 to $204 in fiscal 2011. The upward revision allowed Qualcomm to raise its yearly guidance; higher phone prices mean greater royalty-bearing license fees flowing Qualcomm's way.

Hey, Microsoft. The fruit basket is in the mail.
Industry dynamics continue to shift in Qualcomm's favor. CEO Paul Jacobs kicked off the earnings call by saying how "pleased" Qualcomm is to see Nokia (NYSE: NOK) transitioning to Microsoft's (Nasdaq: MSFT) Windows Phone 7 operating system. When Qualcomm's Snapdragon became the de facto standard for WP7 releases last holiday season, the news didn't meet with much fanfare. After all, it was expected that launch sales for the platform would be tepid. However, now that Nokia -- which has traditionally used Texas Instruments processors -- is switching to WP7, Qualcomm's central position on the platform looks to be a nice needle-moving event.

Another key industry dynamic that's benefitting Qualcomm and doesn't get enough love is the increasing migration to HSPA+ -- a winning technology for Qualcomm because it's a relatively simple upgrade that can significantly increase the speed of 3G networks. The more HSPA+ is deployed, the longer 3G networks stay up as a necessary complement to newer LTE deployments, ensuring that phones continue shipping with 3G capabilities that give Qualcomm higher royalty rates.  Qualcomm emphasized that deployments are up 136% over last year.

Playing the chip game
A more ominous cloud surrounding Qualcomm's earnings was the news of declining selling prices in its semiconductor unit, as well as chipset guidance for next quarter that was historically underwhelming. The company emphasized that it's aggressively pricing chipsets to gain share, but the semiconductor side of earnings still might have scared investors at first. However, after rival Broadcom (Nasdaq: BRCM) reported weak cellular performance in its last quarter, Qualcomm's "struggles" all of a sudden didn't look too bad.

In other news, although Qualcomm has a built-in near-monopoly on EV-DO chipsets for networks such as Verizon's, the competition ramps up with the far-larger WCDMA, used by networks such as AT&T. Qualcomm's WCDMA market share is estimated at around 50%, and it looks as if the company will be willing to sacrifice some margins for a growing slice of the pie in the coming quarters. For my $0.02, I'll take the short-term hit to clear out more competition in a segment that should continue growing for years to come.

Do tablets matter?
Another area Qualcomm loves highlighting is the emergence of a broad group of connected devices, the poster child of which is tablets. I'm not as bullish on Qualcomm's prospects of dominating the tablet application processor market the way it dominated smartphones in the short run. Simply put, NVIDIA (Nasdaq: NVDA) has a timing advantage. The company swept most of the important Android designs in the first half of this year, and its next-generation Kal-El processor once again looks ready to beat Qualcomm's newer designs to the market this coming holiday season.

However, this isn't an area Qualcomm investors should be overly concerned about, for three key reasons:

  • The Android tablet market is small. Probably in the range of 15 million to 30 million units will be shipped this year. Compare that with the smartphone market that Snapdragon dominates and is already larger in size than the PC market.
  • Athough Qualcomm doesn't supply the application processor, its baseband processor is now featured in the Verizon version of Apple's iPad and iPhone. It's likely that future models will consolidate around a "world version" that Qualcomm designs.
  • The more important theme is cellular connectivity. Even if Qualcomm doesn't always win the application processor, greater use of devices with embedded connectivity means greater royalties to Qualcomm.

Meet the new king, nothing like the old king
Add it all up, and it appears that Qualcomm is hitting its stride as connected devices become more and more ubiquitous in everyday life. The post-earnings gain was enough to shoot Qualcomm past Cisco (Nasdaq: CSCO) as the largest company in the communication-equipment industry.

The two companies share little in common, both in terms of target customers and technology, but their fortunes are tied to the same idea: Qualcomm is benefitting from the sea change of consumers regarding the direction of IT. As people demand better smartphones and newer portable devices such as tablets, Qualcomm's prospects only grow.

However, as the old guard of wired networking, Cisco has struggled to keep pace in this brave new IT world. The company is used to dictating how technology changes, but its attempts to move ahead of consumer tastes have proved disastrous. As the company focused in the wrong areas, it let numerous high-growth opportunities within networking pass it by.

Not to say that Cisco can't right the ship, but recent examples show the dangers of being a market leader and losing focus. Qualcomm's last quarter was a winner, but it has lots of distractions in areas such as mobile TV, carrier investments, and mobile software, which have too often proved to be money-losing boondoggles. But thanks to its licensing grip and best-in-class integrated approach to mobile-device components, Qualcomm is finally at a place where the market is nearly perfectly aligned with its own strategic strengths; its grip on the mobile fiefdom has never looked stronger.

To stay updated on all things Qualcomm, make sure to add the company to your free watchlist service to monitor the mobile trends driving its business.

Eric Bleeker owns shares of NVIDIA and Cisco. Microsoft and AT&T are Motley Fool Inside Value picks. Apple and NVIDIA are Motley Fool Stock Advisor selections. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Options has recommended writing puts on NVIDIA and has also recommended a bull call spread position on Apple and a diagonal call position on Microsoft. The Fool owns shares of Apple, Microsoft, Qualcomm, and Texas Instruments. Alpha Newsletter Account, LLC, owns shares of Cisco Systems and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.