Saturday, August 18, 2007

The forthcoming Qualcomm blog

Qualcomm is running a survey about its website on its website. What was most interesting were the last two questions:
Do you see a need for a message board or a blog on
     ( ) Yes
     ( ) No

If did offer a blog, what type of information would you like to see? (check all that apply)
     [ ] Executive blog
     [ ] QUALCOMM media updates
     [ ] QUALCOMM technology news
     [ ] General technology news
My question is: why? Is Qualcomm working on a blogging policy? Is CEO Paul Jacobs going to start blogging like Sun Microsystems’ CEO, Jonathan Schwartz? What benefit would such a blog bring?

The only executive blog that I find plausible is that of Bob Sutor, the IBM VP for standards and open source. How many employees are in his chain of command? 10? 100?

Conversely, does anyone believe that a CEO writes his own blog? Would this be the best use of time for the CEO of a Fortune 500 company with billions in revenues and 8,500 employees?

Is this hypocritical? I’m a tenured faculty member, managing 0 people, trying to flog a book. Given Paul’s total compensation (not counting stock options) was $2.7 million last year, my opportunity cost must be less than 5% of his.

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Tuesday, August 14, 2007

Throw Lou under the bus

How is Qualcomm going to deal with investor dissatisfaction over its recent legal troubles? Monday its general counsel, Lou Lupin, resigned for unspecified personal reasons.

A graduate of Stanford law, Lupin had been with the company since 1995 and general counsel since October 2000. But after last week’s terrible legal news — not only the final ITC decision but a stringing rebuke over misleading a Federal court — it was clear something had to happen. As the LA Times reported:
“It’s not a big stretch to guess that Lou took the hit,” said Mark McKechnie, a telecommunications equipment analyst with American Technology Research. “Qualcomm was a bit embarrassed the court held against them essentially for misconduct.”
Whether he fell on his sword or was pushed, Lupin’s action gives Qualcomm’s CEO some badly-needed breathing room.

As an added bonus, Qualcomm named a famous interim counsel from its bench: Carol Lam, the famous (and somewhat controversial) former U.S. Attorney for the Southern District of California. Fortunately for Qualcomm, Lam today is best known for being fired by the Bush administration (thus winning sympathy with Bush-hating judges) and not for anything she did or did not do as U.S. Attorney. Every U.S. news story seemed to mention this, as in the UT account:
Carl Tobias, a professor of law at the University of Richmond, said Lam, 48, will be a benefit to Qualcomm because she is well-respected in the legal community. He said many see Lam's ouster as U.S. attorney – part of the Bush administration's controversial firing of eight U.S. attorneys – as a “raw deal.”

“Mostly she enjoys a really good reputation,” he said. “That fact could help improve the confidence of the judges.”
Judicial sentiment notwithstanding, the change of counsel is not going to change Qualcomm’s dependence on enforcement of patents and patent royalties as the cornerstone of its IP-based business model, nor the determination of its various major rivals — Broadcom, Ericsson, Nokia or TI — to reduce or eliminate paying such royalties.

In particular, nothing in the change of counsel (whether with Lam is the interim or permanent replacement) will make Nokia any more willing to negotiate an end to the current standoff, in which it has been shipping CDMA phones without paying Qualcomm royalties for the past 4 months.

While a change in counsel is not a change in management or a change in Qualcomm’s business model, it could change three things: Qualcomm’s legal strategy, how well that strategy is executed, and the advice that the top executives are getting. While Lam isn’t a patent attorney, perhaps she will end the rash of miscalculations (or poorly executed courtroom strategies) that brought the company to this point.

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Sunday, August 12, 2007

Unable to escape the shadow

Qualcomm CEO Paul Jacobs has had a really bad year. The company’s biggest customer, Nokia, stopped paying royalties until it gets a better deal. It keeps losing course cases to Broadcom. And there are rumblings among some investors who say he must go.

In a CNN interview published Friday, Jacobs admitted that he may never escape the shadow of industry legend and Qualcomm co-founder Irwin Jacobs:
Q: You joined the company established by your father in 1990, in your late 20s. Was there ever an issue for you, do you think, about whether or not to join the family firm?

Jacobs: Oh sure. I was trying to make a decision about whether I wanted to be a professor and go into academia or actually go into industry but you know that I decided I loved having the ability to see my ideas turn into products that other people were using, so that led me to go into industry and I figured that, if I was going to do that, Qualcomm was the best place to go.

Q: As you say, your father's an icon, he is a bit of a legend really in the industry, which makes it all the more difficult for you. How or when do you remember that you thought to yourself I am out of his shadow, I am my own person running this company now?

Jacobs: Oh I don't think that I will ever feel that way. I think he will always cast some shadow. I mean he is the person who built the foundation for the business and it is really up to me to take that platform and take it to the next level.
The last line of Moses’ stone tablets notwithstanding, I have been known to envy the successful tech executive who was in the right place at the right time. Perhaps here’s the cure.

Paul JacobsIt’s hard to see how one could envy Paul Jacobs, who will always be compared to Irwin Jacobs, an impossible act to follow. Yes, it’s tough for the children to measure up (think Ford or Motorola). But even without the nepotism charge, successors to a larger-than-life founder are but a pale imitation (think Apple or HP).

Jacobs fils can’t win. If he does “take it to the next level,” everyone will take Qualcomm’s continuing growth for granted or credit its initial trajectory. If it falters on his watch — whether the problem is maturation or incipient problems not visible at the time of the 2005 handover — shareholders and employees (and perhaps family) will say it was his fault.

On the other hand, Paul Jacobs doesn’t really have an alternative. This is the job he’s been training for for 20 years, and it’s been in the works since mid-2000 (with employees pointing to the (aborted) split between QCT and QTL as a plan to make Jacobs a CEO). There is no graceful way to give up reins of the company, unlike say the founder CEO who decides to become CTO. As Jacobs notes, this is really the only company he can work for in industry: he certainly can’t quit and go work for a competitor. Meanwhile, his older brother Gary been toiling since 1999 as a social entrepreneur, so even that domain would invite comparison.

It’s clear that the only thing Jacobs can do is to tough it out. Since most of the problems seem to be legal, the key thing would be to hire the best patent attorney around, both to retaliate against rivals and to give advice as to how to change the business decisions.

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Monday, August 6, 2007

Strike three for Qualcomm

Qualcomm Monday lost its longshot appeal to overturn the ITC ban on importing QCOM chips that infringe a Broadcom power saving patent. Basically the USTR said she wasn’t going to overturn a decision reached through the normal administrative process, no matter how big the impact.

There’s no way to spin this. Qualcomm lost, it’s bad for Qualcomm, it’s bad for Qualcomm’s future market share, it’s bad for Qualcomm’s patent-based business model, and it’s bad for Qualcomm’s customers. Sure Qualcomm still hopes to appeal the patent validity but that seems even less likely to succeed.

Qualcomm pulled out all the stops, commissioning bigshot economists (The Brattle Group) to say that the ban will cost consumers billions. Now it will be interesting to see if that proves to be true (since both Brattle and Qualcomm will lose credibility if it doesn’t).

About the only good news for the home team is that (after more than a year) Qualcomm finally has a workaround to avoid infringing the patent.

Despite their huge win, it’s hard to believe much in the Broadcom press release, which seems more about threatening Qualcomm’s shareholders and customers (to increase pressure for a settlement) than actually commenting on the legal ruling. Quoting General Counsel David A. Dull, the press release proclaims:
“According to the IEEE Spectrum, Broadcom possesses one of the world’s most powerful semiconductor patent portfolios,” Mr. Dull said.
Let’s see. Since when is a magazine article an authoritative source of how important is a company’s patent portfolio? “One of” could refer to top 20. Even if it was “top 1,” what proportion of the patents relate to mobile phones? And how does this relate to the relevance of Broadcom’s portfolio to Qualcomm’s products, or the relative importance of the Broadcom and Qualcomm 3G patent portfolios?

I could go on. Broadcom still thinks it will get $6/chip from Qualcomm until patent 6,714,983 expires. Qualcomm obviously has no intention of paying — perhaps hoping to find some outside entity to put a reasonable value on the patent.

As best I can tell, the patent in question was invented by employees of Intermec Technologies of Cedar Rapids Iowa more than 12 years ago, and the patents were acquired by Broadcom as part of 150 patents it bought for $24 million from Unova in 2002. (Apparently the Wall Street Journal reported this in June, as did the Seattle Times. It took me longer to write this paragraph than it took me with Google to identify the Cedar Rapids inventor of the patent as working for Intermec and tie those patents to the Broadcom/Unova deal). Buying patents makes Broadcom a savvy investor and a clever patent troll, not an innovative company.

Still, Broadcom is winning under the current rules. Qualcomm was first sued by Broadcom in May 2005, and seems to have consistently underestimated the business consequences ever since. If I were a large institutional shareholder (or a customer like Verizon, Sprint or AT&T), I would ask what Qualcomm has been doing for the past two years. A smart lawyer, R&D manager (or CEO) would have ordered a full re-examination of all Qualcomm products to see if they might infringe any of the Broadcom patents claimed, to make sure that a work-around was forthcoming.

Six months ago, Qualcomm appointed a recently retired U.S. Attorney to be VP and legal counsel. If she can’t change their luck, it would seem as though some more significant management change would be due.

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InterDigital entering the product business

David Mock — author of The Qualcomm Equation — on Tuesday summarized the stock analyst recommendations on InterDigital Communications. InterDigital is one of the larger WCMDA patent holders — along with Qualcomm one of the few companies whose WCDMA business model is about patent royalties.

The difference is that Qualcomm decided not to spin off the chip-making business (after it settled its last patent dispute with Nokia 5 years ago) and thus it has two major divisions: QTL (technology licensing) and QCT (fabless chips for CDMA, cdma2000 and WCDMA).

I had not realized that IDCC’s business model is based on large one-time settlements. Here’s how Mock explains it:
Revenue. On average, analysts look for InterDigital to report $52 million in revenue this quarter, way below the $297 million last year, but that number was inflated with a one-time gain.

Earnings. The average analyst expectations vary wildly but average out to a $0.01-per-share loss for the quarter. …

Significant one-time settlements have anchored the bulk of InterDigital's past revenue.
What was really really fascinating was the S&P summary of IDCC’s financials:





























I do not give stock advice — especially (after riding Iridium all the way down) to myself. So I don’t offer any opinion about the IDCC prospects, only the observation as someone who studies the telecom industry (and mobile phone patents) that the IDCC revenues and profits are among the most variable (some would say erratic) in the industry.

Motley Fool’s readers are very bullish on the stock. But from what I’ve seen, the stock has a cult following like a lot of other thinly traded stocks. IDCC is tiny compared to other 3G telecom suppliers. Qualcomm is #317 on the Fortune 500, with Motorola #61; Samsung is #63, Nokia #135 and Motorola #152 on the Forbes Global 2000).

Now IDCC wants to get into the baseband ASIC business for 2G and 3G phones — making IDCC’s business model an exact copy of Qualcomm’s. (I suppose the Qualcomm loyalists would say “a pale imitation of Qualcomm’s.”) While depressing margins, this should smooth out revenues and give somewhat of an insurance policy against patent problems going forward.

But, as Mock points out, that will put them into direct competition with Qualcomm, TI and Broadcom. Even with foundries, I would imagine such chip design is complex, and its three major rivals have a big headstart. As the newcomer, it will be interesting what sort of competitive advantage IDCC will have to offer.

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