Thursday, April 26, 2007

Qualcomm and Nokia in binding arbitration

OK, so I guessed right — in this case no great accomplishment. As Qualcomm CEO Paul Jacobs said Wednesday:
Regarding Nokia, there is really nothing new to discuss. As you know, we commenced arbitration a few weeks ago to resolve certain issues under our existing agreement.
Qualcomm’s CFO Bill Keitel made it clear:
David Wong - A.G. Edwards. Thank you very much. On the subject of the arbitration you have with Nokia. Is this mutually agreed to binding arbitration or not?

Bill Keitel. Yes, it is. It's an arbitration relating to the existing agreement and that agreement specifies that any disputes about the agreement have to be arbitrated in a particular place under the rules of the American Arbitration Association.
In other words, the Nokia-Qualcomm agreement has one of the very standard arbitration clauses. Here is one that we used to use in our contracts:
Any, dispute, controversy or claim arising out of or related to this agreement, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules in effect on the date of this agreement. The appointing authority shall be the American Arbitration Association. … The prevailing party in any such action will be entitled to reasonable attorney fees. The award thereof shall be final and binding upon the parties hereto.
The right for one party to unilaterally request arbitration is no great surprise, since unless one side can unilaterally demand arbitration, the side with the weaker hand can bluff and stall and threaten to drag the case out in court in hopes of convincing the other side to settle.

The website 24/7 Wall Street (which I never heard of before) has a great summary of the he-said, he-said account of the two sides being forced to answer analysts’ questions.

I don’t think the accounts tell us who’s going to win, but I think it will provide a record we can check in a few months to say which account was more accurate.

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Saturday, April 21, 2007

MetroPCS takes a giant Leap

Metro PCS (NYSE: PCS) had a successful IPO Thursday, selling 50 million shares at $23 each — gaining 19% on its first day of trading, and less than 1% on Friday. It was one of the few successful telecom IPOs in years, unlike (say) last month’s Clearwire IPO.

[Metro PCS]Metro PCS is a niche CDMA carrier whose gimmick is “all-you-can-eat” wireless voice and (now) text messaging for about $40/month. It offers phones from Motorola, Nokia, and Chinese manufacturer UTStarcom, among others. The reason no one has heard of it is because it serves only six major markets:

  • Northern California (Monterey-Santa Cruz, Bay Area, Sacramento)
  • South Florida (Miami-Ft. Lauderdale-Naples)
  • Central Florida (Tampa-St.Petersburg-Orlando)
  • Atlanta
  • Detroit
  • Dallas-Ft. Worth
At the end of 2006, it claimed 2.9 million subscribers. Seeking Alpha remains bullish on the company.

Metro PCS began service in 2002. If this story sounds familiar, it’s because this is a sequel (some would say a copycat) to San Diego-based Leap Wireless (NASDAQ: LEAP), which was created as a Qualcomm spinoff in 1998. Certainly Leap considers itself to be the pioneer in this unlimited-use model, to the point that last summer Leap sued Metro PCS for patent infringement. While Leap (brand name Cricket) got a four year head start, its growth stalled for many years. It reported 1 million customers in 2001, but only 2.2 million subscribers at the end of 2006.

[LWIN stock]What happened? As Leap’s founding CEO (and former Qualcomm COO) Harvey White explained in an interview last September, Leap suffered from terrible timing. It launched planning for vendor equipment financing, and then hit the perfect storm of the NASDAQ collapse in addition to the multibillion dollar vendor financing losses of Lucent, Nortel and others. As a result, Leap went into Chapter 11 in 2003. The company filed a reorganization plan rendering its original shares (NASDAQ: LWIN) worthless, eventually emerging from bankruptcy in the summer of 2004.

With the recent re-capitalization, Leap has begun expanding again to now have operations in 22 states, including its long-awaited entry last December into its home San Diego market.

[Cricket Logo]Of course, one threat facing both companies (as noted by author David Mock) is that the big boys will match their prices. Given the disincentives for cannibalization, I can’t see Verizon or Cingular(AT&T) doing it, but certainly T-Mobile and Sprint are potentially desperate enough.

The Wall Street Journal article (paid site) speculated:
Some analysts said Metro may eventually try to acquire Leap, creating an even more formidable competitor to the top-tier cellphone giants.
Leap has a market cap of $5.4 billion, while MarketWatch estimates the Metro PCS market cap at $7.9 billion. Assuming they can get past the animosity, it sounds like a merger of equals to me. At least they have compatible technologies, unlike Sprint Nextel or the McCaw/Cingular/AT&T migration from D-AMPS to GSM.

Graphic: San Diego Union-Tribune, Nov. 19, 2004

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Saturday, April 14, 2007

Qualcomm’s #1 cheerleader

Because of its large patent portfolio and its aggressive assertion of its patent portfolio, Qualcomm has long been a controversial firm in the telecom industry. To some, it’s no better than Rambus. To others, it’s another successful example of an open innovation business model.

Given this controversy, who is Qualcomm’s #1 cheerleader? That is to say, who is the most biased, one-sided, unrealistic in covering Qualcomm — a mouthpiece for Qualcomm’s positions? I write this both as someone who had limited training in journalistic ethics (during my brief stint as a wanna-be and then small-town reporter), as someone who tries to teach business students to do a complete and balanced analysis, and of course as someone who’s been studying Qualcomm for more than a decade.

Let me rule out some possibilities. First, I want to disqualify the CDMA Development Group on a technicality. Just as the Association for Competitive Technology has been decried as a Microsoft front group, the Open Group was an auxiliary to Sun Microsystems, and the USB Implementors Forum is effectively a subsidiary of Intel, so we expect CDG to usually do the bidding of the main firm in the CDMA ecosystem. No surprise or deception there.

Second, I don’t think the Union-Tribune fits either. Bruce Bigelow, Jennifer Davies, then (since early 2004) Kathryn Balint seem to have consistently sought to get both sides of the major Qualcomm stories. Certainly they show less bias than the hometown papers of some of Qualcomm’s enemies in its IPR fights, such as the OC Register (when it covers Broadcom) or some of the European press (covering Nokia, Ericsson or in particular the EU antitrust case). There’s a difference between having easy access to one side and convincing readers that there is only one side to a controversy. (Still, none of these compare to the drumbeat of biased and often inaccurate reports on Qualcomm royalties from the Korea Times.)

Here the nominees are:
Of course, readers of the blog will know who I vote as the least biased. The balloting is rigged, because I declare a unilateral right (on my own blog) to pick my own favorite.
Still, based on my unbiased assessment of bias, the winner (by a landslide) is George Gilder. Not for his seven-month old Forbes column “Qualcomm Still Rules Wireless Roost,” but for his column Friday in the Wall Street Journal.

In his column (registration required), Gilder writes:
The 10-year war mounted by EU bureaucrats and Europe's communications giants against America's leading wireless technology innovator, Qualcomm, is now reaching a climax. …

A decade ago, with its single, unifying cellphone standard known as GSM, Europe led the world in mobile communications. But threatened by Qualcomm's CDMA breakthrough, the Europeans launched a ferocious political and PR offensive, hoping to scare off potential customers of the young American firm. The technology was all hype, they said; it "violated the laws of physics."

When Qualcomm proved them wrong and its mobile technology deployed across the U.S. and Korea, Europe went to plan B. They excluded the Americans from the standards process for third-generation, or 3G, technology, battled in the courts, and mandated their "new" system for all of Europe. But in fact, the new European and Japanese standard, called Wideband CDMA, was essentially a copy of the American CDMA system.
And it goes on from there.

Gilder’s hyperbolic EU-bashing has an element of truth. Certainly, there are elements of European industrial policy that resemble (as always) French industrial policy, the kind that brought us Compagnie des Machines Bull, Alcatel and Sanofi-Aventis. But there are aspects of Qualcomm’s IPR business model that resemble Microsoft or Rambus (as well as less controversial examples like Dolby).

Nokia is offering Qualcomm 20¢ on the dollar because it claims Qualcomm is “unfair,” as do many other companies writing Qualcomm large royalty checks (whether in Europe, Korea, Texas or Irvine). Even if one dismisses Nokia’s claims outright and assumes Qualcomm is blameless on all charges (which seems unrealistic), there would still be an important policy question to be answered: if Rambus is illegal conduct, and Qualcomm is legal, what’s the line in between? IP law here butts up against “unfair competition” of antitrust law.

This is hardly unique to Qualcomm, as (the Mickey Mouse copyright extension act notwithstanding) case law is how the American system typically answers such policy dilemmas. If copying is legal in Sony v. Universal Studios, but illegal and MGM v. Grokster, that leaves a lot of specifics to be resolved in reconciling the protection rights of copyright holders and the fair use rights of buyers.

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Friday, April 13, 2007

Qualcomm says “no” to 20 cents on the dollar

Kathryn Balint of the U-T had an interesting day two (three? twenty?) story this morning (C3 in the dead tree edition) on the Nokia-Qualcomm negotiations over W-CDMA patents.

This time last week, reporters breathlessly reported Nokia’s PR that it had “paid” Qualcomm $20 million for rights to use Qualcomm’s patents. When I was a business owner, being “paid” meant that I had money in hand, in my bank account or a check I could cash.

What Balint’s story today makes clear (even if she doesn’t say so directly) is that Nokia made a conditional offer of payment. Not surprisingly, the proposed payment came with a set of legal conditions:
Qualcomm also said it rejected “the accompanying multiple pages of terms upon which Nokia conditioned its payment.” The exact terms proposed by Nokia remain confidential.
Nokia has known about this deadline for more than a year, and is clearly mounting a PR campaign to both lower people’s expectations as to the value of Qualcomm’s portfolio, and insulate itself from the public perception that it’s a wanton patent infringer (like, say, Vonage). Nokia corporate has been issuing an ongoing stream of press releases.

This morning’s release says Qualcomm is a big user of Nokia patents and thus (presumably) should offer Nokia a reduce royalty or royalty-free cross-license. Of course, if Qualcomm got in the habit of doing that, its whole IP business model would be in jeopardy.

Balint had one other tidbit — the $20 million Nokia offered is what is “fair and reasonable” for the entire quarter. If (as reported) Nokia is paying $450-500 million annually in royalties, then this is less than 20¢ on the dollar from the previously agreed-upon terms. No wonder Qualcomm dismissed the offer as unrealistic.

Somewhere (can’t find the link) I saw speculation that Nokia hoped for a 50% royalty reduction (which if granted everywhere would reduce Qualcomm’s annual net income by one-third). If they offered less than 20%, then clearly that was not “fair and reasonable” but a negotiating ploy.

Of course, outsiders have no idea what’s going on behind closed doors, which makes it doubly important to ignore the PR war.

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Wednesday, April 11, 2007

Ericsson cheers from the sidelines

Ericsson’s CEO wants to see a quick resolution to the Nokia-Qualcomm battle:
HELSINKI (Reuters) - Ericsson hopes to see a quick solution in a technology licence dispute between Qualcomm and Nokia before it hurts the whole wireless industry, Ericsson's chief executive was quoted as saying on Wednesday.

A major cross-licensing agreement over technology patents between U.S. chip maker Qualcomm and Nokia expired partly on Monday, and their increasingly bitter battle is worrying investors and the industry on both sides of the Atlantic.

"I hope that the parties can reach some kind of agreement as soon as possible, patent fees cannot become an obstacle for the development of this industry," Ericsson Chief Executive Carl-Henric Svanberg was quoted as saying to Finnish news agency Startel.
Does Svanberg fear uncertainty? Does he want peace? Apparently not:
”Patent payments in the industry are split in a wrong way. Traditional and larger players, like Qualcomm, can demand too high payments while others don't get even what they deserve,” Svanberg was quoted as saying.
My translation: “We want Nokia to win, and hope it’s soon, but aren’t willing to help.” I wonder if the story of the Little Red Hen has been translated into Swedish?

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Tuesday, April 10, 2007

All Quiet on the Western Front

For nearly century (ca. 1840-1920), the dominant form of warfare between major powers was massed armies, supported by artillery. Long-distance barrages of cannon, mortar and artillery would “soften up” the opponent, particularly during the U.S. Civil War and the Western Front during the Great War (the war to end all wars). In such a context, an unexpected nighttime pause in shelling (I’m told) could be an unnerving event — suggesting either the opponent was either reloading for a major barrage, or moving forces forward for a full frontal attack.

Today (Tuesday), the lack of news on the bitter Nokia-Qualcomm IPR fight is eerie. By most calculations, April 9 (yesterday) was the last day that Nokia’s 2001 CDMA patent license with Qualcomm was valid, and thus any Nokia W-CDMA product shipments today would potentially be in violation of Qualcomm’s patents.

The stakes are high. Based on numbers given by Qualcomm CEO Paul Jacobs at the annual meeting, I estimated that the annualized (post-tax) value of Nokia royalties to Qualcomm’s bottom line was $250-400 million/year, consistent with the $450 million to $500 million (pretax) annual top line estimate made by stock analysts. However, since Nokia is still shipping some GSM phones without UMTS, the proportion is only going to increase as UMTS (W-CDMA) becomes dominant in Europe and starts to be deployed in the US.

This is really the second battle of a war that began nearly 10 years ago. In 1998, Qualcomm held the dominant IPR in the 2G IS-95 (later cdmaOne) but essentially none in GSM (from the EU) or IS-54/IS-136 (the Western Hemisphere D-AMPS). The GSM group (led by Nokia and Ericsson) and the Japanese had agreed to combine a GSM network with a Japanese W-CDMA air interface to create a 3G standard before the Americans could get their act together. The hope of the group (by then called 3GPP) was that they would not need a license to Qualcomm’s CDMA technology, or that Qualcomm could be forced to cross-license its patents (and thus cancel out royalties) as the EU manufacturer cartel had done with GSM. (These patents formed an entry barrier well-documented by the research of my colleague Rudi Bekkers.)

The last battle was when Ericsson gambled that it could ship UMTS phones without a Qualcomm license. The IPR fight threatened to become a EU-US trade war, until in March 1999 the two sides announced a deal. Qualcomm dumped its money-losing infrastructure business and got Ericsson to sign a patent license: despite hand-wringing at the time, it was a clear victory for Qualcomm. Ericsson has since closed the CDMA infrastructure division in San Diego (for which it paid a reported $250 million), leaving that market to Lucent and Nortel.

The speculation now is rampant: both sides must dig in, and both sides must settle. The world’s largest cell phone maker has a business model based on selling phones. Thus, they have been pushing for years to change the rules for UMTS royalties in two ways. First, they want value to be determined by their patent counting proposal (rejected by Qualcomm) that argues that Qualcomm’s patent royalties should be proportionate to its share of the UMTS IPR. Second, they want total royalties should be capped at 5% so more buyer money ends up in the hands of cell phone makers. (Nokia claims its total UMTS IPR costs are less than 3%, but — as with all cell phone IPR royalties — the real figures are not public).

The world’s largest cell phone IPR holder has sought to stick to a business model that says “use one patent, use them all, the price is the same” — a price that (with the notable exception of a one-time deal in China) is around 4-5%. If Qualcomm cuts royalties for Nokia, it will have to cut royalties for almost everyone else, and its IPR royalties (1/3 of revenues but 2/3 of profits) will fall across the board. So this is a pile of money to Nokia but Qualcomm’s entire future.

Conversely, both sides have weaknesses. Nokia’s offer of a token $20 million royalty payment has been suggested to be an attempt to avoid treble damages if they lose the patent lawsuit they plan on winning. Meanwhile, this is the first real test of leadership for Jacobs fils, while Jacobs père in his long career has created two companies, fought the long uphill war to establish CDMA, and of course won the aforementioned skirmish with Ericsson.

To me, the most unremarked development last week was Qualcomm’s demand for arbitration. Unremarked, perhaps, because journalists (Bob Metcalfe aside) haven’t run a business. In normal circumstances, arbitration is a win-win — get a quicker, cheaper resolution without spending piles of money on lawyers. While I don’t know the specific clause in the agreement, Qualcomm’s move implies that they think they have a stronger hand before a neutral third party — absent some new legal theories of IPR royalties of the sort Nokia is trying to establish. In 2003, Nokia requested binding arbitration with InterDigital in 2003 and lost, so perhaps they don’t want to try that route again soon.

But the reality is that (as elsewhere in the U.S.) the only short-term winners are the lawyers. As the UT’s Kathryn Balint reported in an nugget-filled story Monday, Qualcomm’s legal spending has ballooned from $50 million to $200 million a year. Of course, Qualcomm is waging a war on many fronts as its rivals seek to rein in (or end) its business model. Still, Nokia’s lawyers aren’t working for free (and it still has litigation with InterDigital) so its legal spending has also ballooned recently (I’m guessing to approach $100 million/years).

Even if Qualcomm were to win this battle, its legal fights are far from over. As Rob Black of Seeking Alpha blog notes, the next major decision is due May 8 in the ongoing fight with Broadcom.

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