Tuesday, March 20, 2007

How much will Qualcomm make from TD-SCDMA?

Qualcomm had partial success selling CDMA to China, as I recounted in a teaching case called “Qualcomm in China” (that later was used to flesh out the China portion of Dave Mock’s Qualcomm book). Alas, for Qualcomm, cutting the royalty rate in China for Chinese manufacturers has brought a nonstop round of threats (and bluster) from Korean manufacturers and their allies in the press and the government.

For years, Chinese telecommunications officials have been vowing to introduce its own 3G technology that has a different set of patents than the Qualcomm’s cdma2000 or the Euro-Japanese W-CDMA. Now the goal is to have a live network in time for the Beijing Olympics. On Tuesday, unstrung reported that the country’s largest carrier, China Mobile, plans to let a $3 billion contract for TD-SCDMA equipment, with European firms hoping that local partnerships will give them a slice of the business. For most carriers, not having a license would be an impediment, but I guess being a state-owned enterprise means never having to say you’re sorry.

The idea that China could design a CDMA technology that doesn’t overlap Qualcomm’s hundreds of CDMA patents seems implausible. On the other hand, as with any other question of foreign IPR in China, it’s not clear how many patents have been granted in China and how (or if) they would be enforced by the courts.

Western firms have agreed to pay Qualcomm royalties on TD-SCDMA, but the intentions of Chinese firms are far less certain. One possibility is that Chinese firms will pay a lower rate domestically but close to a standard rate for export. This would be consistent with Qualcomm’s 2G policy. I don’t think it really matters whether it’s because Qualcomm has less patents granted or whether its patents are less enforceable. I would rule out two other motivations: that vendors have their own patents has not swayed Qualcomm in the ongoing W-CDMA disputes, and a claimed lower ability to pay has not led it to cut royalties in India below its standard 5% rate. (I never quite understood the “ability to pay” argument for a percentage royalty, since cheaper phones pay lower royalties).

Qualcomm doesn’t seem to be saying much about TD-SCDMA royalties, and I’m sorry to say I didn’t think to ask about it at last week’s annual meeting. I wrote the earlier “Qualcomm in China” cases because the twists and turns of Qualcomm’s 2G efforts in China struck me as an ideal illustration of the concept of political risk. Given the impact that uncertainty had on Qualcomm’s stock price nearly a decade ago, my surmise is that they’re waiting until things are resolved before commenting.

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Sunday, March 18, 2007

Broadcom 2, Qualcomm 0

In January, Qualcomm lost a key patent infringement case to Broadcom. Last Friday — seven weeks later — most of the outstanding U.S. lawsuits between the two companies were settled out. Broadcom seems a lot more excited about the outcome than is Qualcomm, and two Broadcom complaints have not been dismissed.

As the UT’s Kathryn Balint notes, at one point the two companies were reasonably friendly. For that matter, the four major engineering schools in Southern California — at USC, UCSD, UCLA and UCI — are respectively named for Qualcomm founders Andrew Viterbi and Irwin Jacobs and Broadcom founder Henry Samueli (and Samueli). But then Broadcom went from being a Qualcomm licensee to a direct Qualcomm competitor.

The main thing is Broadcom is one of many companies that don’t want to pay Qualcomm’s royalties — one of six who asked the EU to cut the royalties they have to pay. This action remains unaffected.

There is no question that Broadcom’s 2007 successes will embolden other competitors to contest both the validity and price of Qualcomm’s IPR. Broadcom is less than a quarter the size of Qualcomm, but enemies (and legal warchests) like those of Nokia and Matsushita are more daunting. Qualcomm needs to win a major case or the rate of litigation will only increase.

Update: On Monday, Nokia filed a pre-emptive strike against Qualcomm’s European royalties, arguing that it shouldn’t have to pay royalties on phones with TI chips due to the 2000 cross-license between Qualcomm and TI.

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Tuesday, March 13, 2007

Qualcomm 2007 Annual Meeting

[Outside sh meeting]
I left my house before 6:30 Tuesday to catch the commuter flight to San Diego, Copley Symphony Hall, and the 2007 Qualcomm shareholders’ meeting. (Stockholder meeting in Qualcomm parlance). This was my first Qualcomm annual meeting since 2001 and 2002 — when I was researching my Qualcomm teaching cases — and my first since Paul Jacobs became CEO in 2005.

The news coverage is pretty cursory, with only one reporter filing an in-person report, and everyone else keying off the press release. Of course, the big news for most is that Qualcomm raised their quarterly guidance and their dividend (from 12¢ to 14¢/quarter).

As I saw it, the major news from Jacobs (slides are online here) was:
  1. the aforementioned financial results;
  2. the big news for 2007 is MediaFLO USA deployment with Verizon (as of March 1) and the planned Cingular launch later this year. Jacobs was very candid about not knowing how quickly the service will be adopted until they have some real customer decisions;
  3. a strategy to no longer concede developing markets to competitors, as evidenced by the LG “3G for All” design win using Qualcomm chips, and its Wireless Reach PR campaign.
But the elephant in the room is the looming game of chicken over Nokia’s announced intention not to renew its CDMA license with Qualcomm, which expires after April 9. Barring some last-minute agreement, Nokia plans to ship cell phones without paying royalties and (as lead in-house attorney Steven Altman acknowledged) the two parties are likely to start suing. Right now, Qualcom is quoting Q4 revenue forecasts (July-Sept) assuming Nokia will settle, but at some point will take them out of forecasts. (I hope to say more on this later).

[Welcome screen]Finally, some personal impressions. It was only Paul Jacobs’ 2nd meeting as CEO, and the 3rd time in the past two years that I’d seen him make a speech in San Diego. For me, it still seemed odd to see founder Irwin Jacobs — the company’s public face for 20 years — relegated to a corner of the Qualcomm section, virtually unnoticed except for 11 minutes chairing the formal part of the meeting. But the symbolic message was clear — Paul’s management team is now in charge — reinforced by the retirement of four directors from the Irwin Jacobs era, including one of his co-founders (Dee Coffman), his onetime heir apparent (Rich Sulpizio), and “a personal friend of many years,” former University of California president (and longtime UCSD chancellor) Richard Atkinson.

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This Blog

This is a new web log I’ve started to share musings in progress as we work on our planned book on the San Diego telecom industry.

The book, tentatively entitled Digitizing Communications: From MIT to Qualcomm, is the culmination of more than a decade of research that I’ve been doing on the mobile phone industry, including nearly five years of joint research with Caroline Simard of Stanford.

Eventually, I hope to make a repository for information about the industry at the domain SanDiegoTelecom.org. But first I want to get the blog started.

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