Friday, September 14, 2007

Qualcomm’s temporary reprieve

Qualcomm has succeeded in re-opening the pending International Trade Commission ban on imports of Qualcomm chips that the ITC found impinged on Broadcom’s patent. It had seemingly lost the fight for good when the US trade representative refused to override the ITC on August 6.

As reported, the US Court of Appeals for the Federal Circuit agreed to hear Qualcomm’s appeal of the ITC order, and on Tuesday stayed enforcement of the ITC ban on handsets containing Qualcomm’s chips (but not the ban on Qualcomm’s chips). The surprise victory — in time for the Christmas selling season — is the first Qualcomm success since they changed legal counsel a month ago.

Reading the appeals brief (graciously provided by the UT), there were some interesting points:
  • Qualcomm was joined in its appeal by five handset makers (Motorola, Samsung, LG, Kyocera, Sanyo) and two carriers (AT&T and T-Mobile). Verizon was absent because they cut a side deal, but Sprint was conspicuously absent; AFAIK most of the Sanyo phones imported into the US are sold by Sprint. That the GSM carriers are the ones supporting Qualcomm suggests how well they have done in cracking the W-CDMA market.
  • The appeals court’s ruling suggests that they are leaning towards reinstating the Administrative Law Judge’s finding that banned import of Qualcomm’s chips but not phones containing those chips — since the phone makers were not parties to those proceedings and thus not found to have infringed Broadcom’s patent. Broadcom had asked that phones also be banned, and the ITC (unlike the ALJ) agreed with Broadcom.
The one thing that’s not clear from the findings is the status of the Qualcomm work-around to avoid infringing the patent that Broadcom bought in 2002. If Qualcomm were manufacturing chips today that did not infringe on the Broadcom patent, presumably it could import them. So is the work-around not yet ready to ship because (as they reportedly testified) it’s taking 18 months to develop? Or, under the exclusion order, does Qualcomm have the burden of proof to show that their new product is non-infringing?

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Saturday, September 8, 2007

InterDigital sells Apple a 3G license

Apple has licensed InterDigital’s patent portfolio for a rumored $20 million plus royalties. One estimate (reported by Reuters) estimates the deal being worth $56 million ($2 million/quarter) over 7 years.

Of course, Apple’s US iPhone is limited by the Cingular’s 2G (aka “2.5G”) slow EDGE network, so even at the new cheaper price many US buyers are hoping for a HSDPA version. But analysts agree that a European iPhone will require a 3G phone.

Presumably Apple will need a license from Qualcomm’s larger patent portfolio. One way would be to use Qualcomm’s 3G chipset. The existing iPhone has an Infineon GSM/EDGE chip, but thus far Infineon has not been a factor in HSDPA/USDPA RF chips. Other than Qualcomm, thus far the main suppliers of WCDMA chips are Nokia and Ericsson — but it’s not clear how either side of the deal would feel about selling using such chips for a competing product.

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Tuesday, September 4, 2007

Cricket-eating MetroPCS

As rumored at the time of their April IPO, MetroPCS is today offering to buy San Diego-based Leap Wireless, operator of the Cricket mobile phone service.

Both are “all you can eat” CDMA carriers, and both are adding subscribers at far above the national rate (45% and Leap — a 1998 Qualcomm spinoff — got their first, but its growth was long stalled due to poor timing of buying expensive equipment (with expensive vendor financing) near the peak of the bubble, eventually resulting in recapitalization through bankruptcy. MetroPCS came along in 2002 and has had an uninterrupted run of success over the past five years.

With its concentration on major metro markets, MetroPCS is slightly bigger overall, while Leap has more licenses in more cities. Both have roaming problems — lacking the coverage of a Verizon or even a T-Mobile. But the Leap has partially addressed that by clustering nearby markets (like Albuquerque, Santa Fe, Las Cruces and El Paso or Phoenix-Tuscon), to solve the most likely roaming needs of a subset of customers.

The MetroPCS investor presentation shows the combined markets covered by the two firms, including a strong cluster of licenses in California. Together the two firms would have licenses (if not coverage) in nearly all of the top 25 and top 200 markets.

The two are obviously stronger together, and MetroPCS (ticker: PCS) is bigger than its prey, with a $10 billion market cap vs. $5.5 billion for Leap (ticker: PCS). Other than prior bad blood over alleged patent infringement, executive egos and layoffs at Leap’s San Diego headquarters, it seems like all that’s left is haggling over the price. Red Herring notes that investors bid prices above the offering price in anticipation of a better offer, despite the efforts by Metro’s CEO Robert Linquist to convince the market that the Leap stock price has included an acquisition premium since April.

The only thing that went beyond the normal range of hyperbole is that the merger creates “a fifth national wireless carrier.” As of June 2007, the combined companies would have barely been the sixth largest carrier in the US with 6.2 million subscribers, versus 12.2 million for Alltel and 6.0 million for U.S. Cellular. (Both CDMA carriers). So while MetroLeap might have more licenses, it would have rather thin penetration.

If they pull it off, the more important question may be: what’s the endgame? The one thing protecting MetroLeap from being squashed like a bug is that the big boys can only compete on price by cannibalizing existing revenues, something they are loathe to do. So who would be the next MetroLeap merger? Would either Alltel or U.S. Cellular be willing to shift to a flat-rate model to enable a nationwide attack on the big four? And since the national market has consolidated from six to four carriers (or perhaps 5½ to 3½), can the market really support another national carrier?

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