Wednesday, December 10, 2008

The San Diego-Israel mobile nexus

This month, Levi Shapiro writes about the mobile phone startup industry in Israel. It calls back to mind the links between San Diego and Israel’s mobile phone industries.

Yes, CommNexus has run events involving Israeli companies. Yes, Andy Viterbi has an honorary degree from Technion and Irwin (and Joan) Jacobs have named the graduate school.

But as Levi notes, many young Israeli men learn about radios during their mandatory military service. Our interviews included a few examples:
  • One example was Bar-Giora Goldberg, who did his bachelor’s and master’s at Technion and spent a decade with the Israeli military doing spread spectrum, before taking a 1977-1978 sabbatical at Linkabit and coming back for good in 1980. He founded the first Linkabit spinoff (Sciteq), and worked with other local startups (including Peregrine Semiconductor) before cofounding Avaak.
  • Then there is Itzhak Gurantz, who also did his bachelor’s and master’s at Technion applying to the Berkeley PhD program while on reserve duty in the Army. He went from Berkeley (via a friend of Viterbi’s) to join Linkabit, and then on to start ComStream and Entropic, among other positions in the local telecom industry.
  • On our list — but not yet interviewed — is Eric Paneth, another Technion & Linkabit alumnus who is founding CEO of Orckit.
When I met Levi at the USC conference in August, he obviously had some mobile colleagues in San Diego, so I’m surprised he didn’t think these (or some other) connections worth mentioning. I guess I’m the historian and he’s consulting to firms trying to make a buck today.

Tuesday, November 18, 2008

Latest Broadcom/Qualcomm Skirmish

This morning, the IP SIG of the telecom council had one of its occasional meetings to review major developments in IP law. IP is obviously very important to the local industry, whether it be Qualcomm’s patent licensing business model or Ron Katznelson’s current efforts to promote patent reform.

I couldn’t make the IP SIG, but on the agenda were three cases. One case was Broadcom v. Qualcomm. Which one? you ask — after all, there are so many. In this case, the lawyers talked about the case that brought findings of legal misconduct and forced Lou Lupin to fall on his sword. Another case scheduled for the IP SIG meeting was the ruling in Quanta v. LG, where the SCOTUS set new standards for doctrine of “patent exhaustion.”

As it turns out, the Quanta ruling plays a prominent role in Broadcom’s latest lawsuit against Qualcomm, filed October 8 in federal court. This filing is just the latest in itsongoing series of litigation intended to force Qualcomm to license its patents on terms that Broadcom finds acceptable: a royalty-free cross license.

When I saw the latest Broadcom v.Qualcomm case, I asked one of San Diego’s leading IP lawyers, USD professor David McGowan, if he would be willing to comment for this blog. I thought of David because he had analyzed the Quanta case for the leading patent blog. I already knew him because we’d met at an open source research conference, and we share a common interest (particularly in IP law) at the intersection of law and economics.

As a special guest commentary, here is Prof. McGowan’s analysis of the original Broadcom complaint. Paragraph numbers refer to the original complaint as filed in the Pacer database system.


Inexhaustible: The Latest Broadcom / Qualcomm Skirmish
By David McGowan
Lyle L. Jones Professor of Competition and Innovation Law
University of San Diego School of Law


Broadcom recently sued Qualcomm for a declaration that certain of Qualcomm’s alleged licensing practices misuse Qualcomm’s patents. The suit is both predictable and plausible in light of the Supreme Court’s recent Quanta opinion.

Based on Qualcomm’s description of its licensing practices, the district court’s decision will likely turn on how it resolves a question left open in Quanta. From an economic point of view I hope the court reads Quanta narrowly. Such a reading would tend to favor Qualcomm. There is a plausible formal case for Broadcom’s claims, however, so the case must be taken seriously.

The complaint alleges Qualcomm double-dips by charging handset manufacturers a royalty on both chipsets and handsets. Qualcomm may earn chipset royalties through sales to handset manufacturers or from licenses to competing chipset manufacturers such as Broadcom. It also charges a royalty directly on handsets.

Broadcom claims the Quanta case holds that a patentee may not charge downstream royalties beyond the first sale of its technology. This claim implies Qualcomm may either charge handset manufacturers a royalty for the handset or for a chipset (directly from Qualcomm or indirectly from Broadcom) but not both. Broadcom is asking the court to declare that it need not pay royalties to Qualcomm when Broadcom sells chipsets to handset manufacturers who pay Qualcomm royalties on handsets. (¶5)

McgowandBroadcom alleges Qualcomm’s double dipping drains from the industry money that could be used to foster innovation and competition. I find this claim implausible. Qualcomm innovates and there is no general reason to favor innovation by Broadcom or handset manufacturers over innovation by Qualcomm. This complaint raises distributional issues, not questions of dynamic efficiency.

Broadcom also alleges Qualcomm’s licenses reduce competition. It offers two theories in support of this claim. The first is that Broadcom must either take Qualcomm licenses or risk infringement action. That theory is doubly flawed. It confuses an effect on a competitor, Broadcom, with an effect on competition generally and it has nothing to do with the double dipping claim, which is the only one to which the Quanta holding might apply. If Broadcom operates under a cloud of infringement that is because Qualcomm has exclusive rights in its inventions not because of its licensing model. Only the serendipitous fact that the licenses were negotiated before Quanta was decided offers Broadcom any maneuvering room here, and that is a legal not an economic point.

The same points hold for the allegation that Qualcomm’s practices deter entry and increase costs. (¶29) That charge would be no different if Qualcomm suppressed all manufacturing other than its own and took all its royalties in chips. It seems to me a charge against the patent system rather than tiered licensing.

The second theory is that Qualcomm licenses favor its products over competitors’ products. Little is said about this claim so it is hard to know what to make of it. At one level it is not clear why Qualcomm would want to do this. Its patents mean it can obtain revenue by royalty from Broadcom or sale to handset manufacturers. Economically it should be indifferent between the two revenues streams. Indeed, if Broadcom is a lower-cost producer than Qualcomm, the latter would maximize profits by charging a high royalty rather than producing itself.

The complaint also refers to Qualcomm using its patents to leverage royalties, and leverage may be what the second theory has in mind. (¶24) It is not clear what Broadcom means by this reference. The facts alleged do not support the typical leverage claim, which is that a firm with market power in one market will use it to extend the duration of power in that market or to extend its power to another market. Rather, this appears to be a case in which single monopoly rent theory has a lot of force.

If handset manufacturers must practice Qualcomm inventions they must deal with Qualcomm, which implies some royalty. It does not imply an infinite royalty, however (Qualcomm wants handset sales so it is in its interest to set a royalty that allows handset manufacturers competitive returns on their investments). Still less does it imply that Qualcomm would earn less charging a single handset royalty than charging a royalty on both handsets and chipsets.

Chipsets and phones are close complements used in a fixed ratio. Basic rational actor assumptions imply Qualcomm will get as much money as it can; they also imply Qualcomm can get that amount at any level of production (either chips or handsets) and cannot get more by charging x at one level and y at another.

Here is a simplified illustration supporting the latter point. Suppose it is the dominant strategy for handset manufacturers to set prices at the average reservation price consumers place on the handset (given the cost of a contract with a carrier). Let’s say the average reservation price is $10, handset manufacturers need to earn $6 per handset, and the only input cost is chipset royalties. In theory QC could charge $4 as a handset royalty or charge $3 for a chipset and $1 as a handset royalty (or $2 and $2, of course). What it could not do is charge $3 for a handset royalty and $2 for a chipset royalty. (There are various qualifications to this logic in the antitrust literature but BC’s complaint does not seem to implicate any of them.)

No doubt this analysis is too crude to capture all the facts of the case. One would need to know the deal structures better than I do to offer more precise analysis. The analysis does raise significant questions, however, which the complaint does not answer.

It is hard to say what is likely to happen. Quanta dealt with an unconditional license and Qualcomm has said its licenses are expressly conditional. The Court did not rule on such licenses. The district court therefore is not bound to rule for Broadcom. If one read the Supreme Court as sending the signal that patentees should only be able to engage in one transaction per product, though, one could extend Quanta to reach the result Broadcom seeks.

As I mentioned I favor the narrow reading. I approach the problem this way. First, as a default matter, do we expect parties or courts reach more socially efficient bargains for the exploitation of inventions? In my view, both economic theory and experience favor parties as the default bargainers. Living markets as they do, they have much better information and much keener incentives to get things right than a generalist judge faced with unfamiliar information spun vigorously by competing advocates.

Second, should courts deviate from that default? The answer may be yes but only if there is a good reason. Absent such a reason the arguments favoring the default rule carry through. In some cases (price fixing for example) there will be an economic reason to abandon the default but there seem to be no such reason here. In other cases precedent might compel a court to abandon a default. Here it does not because the licenses at issue seem to be materially different from those at issue in Quanta. (Nothing in Quanta calls the default itself into question.)

Third, if there is no substantive reason to abandon a sensible default position and precedent does not require abandonment should a court abandon it? To me the question answers itself. Once you get the default right, in my view, you need a reason to move away from it, and there is no such reason here.

Saturday, November 15, 2008

Admitting the obvious: Qualcomm knifes UMB

Admitting the obvious, CEO Paul Jacobs told analysts Thursday that Qualcomm is giving up on UMB. The Reuters story (referenced by Unstrung) is the only account I could find:
NEW YORK (Reuters) - Qualcomm Inc, seeking to cut costs in the face of slowing demand for cell phones, has stopped developing a next-generation wireless technology called Ultra Mobile Broadband.

The wireless chip maker will put its resources into a rival high-speed technology called Long Term Evolution, which some of its major customers, such as Verizon Wireless, have backed, said Qualcomm Chief Executive Paul Jacobs.
As I noted in April, Qualcomm’s hope of getting its UMB adopted died when one of its two major cdma2000 customers in the US, Verizon Wireless, went with LTE.

It’s funny how Qualcomm chose to announce this. The only 2008 press release mentioning UMB is a February announcement of their planned UMB/LTE chipsets (presumably now LTE only). In a (Qualcomm-enabled) search for UMB on the Qualcomm website, 6 of the first 15 links went to missing documents (presumably pro-UMB marketing materials that have now been removed). I grabbed the various UMB white papers (still there) for posterity.

The 2006 annual report (from December 2006) predicted UMB would be commercialized in 2009. In March 2007, Qualcomm announced a “complete solution” for UMB in time for CTIA.

With UMB dead, tweaks to EVDO will not be enough to justify keeping 3GPP2 alive forever; given their overlapping membership, perhaps they can negotiate a friendly takeover by 3GPP. At some point, the raison d’ĂȘtre for CDMA Development Group will also disappear.

As I also noted in April, early cdmaOne (then IS-95) fan (then Vodafone CEO) Arun Sarun urged the industry to favor LTE over WiMax. Qualcomm is in the odd position — for the first time in more than 15 years — of not having its own horse in the mobile standards race, but instead watching its previous rivals duke it out.

Still, Qualcomm’s new alliance is clear. With HSDPA/USDPA, Qualcomm has been contributing to improvements in W-CDMA and getting closer to the 3GPP telecom crowd, and now with the Nokia patent dispute settled, Qualcomm is a respected (and perhaps even respectable) figure in Sophia-Antipolis.

Meanwhile, Qualcomm is like Nokia in that it would just like Intel and WiMax to go away or find a tiny niche (like small-town last-mile distribution). Most of the world’s carriers are in the same camp. The one obvious exception is Qualcomm’s other major CDMA carrier, Sprint, with a huge bet on WiMax (bankrolled by Intel). I wonder if we will see other evidence of increasing distance between Qualcomm and Sprint.

Conversely, Qualcomm is proudly providing the chip for T-Mobile’s new gPhone. Perhaps Qualcomm will gain enough WCDMA/LTE share to make up for the shrinking CDMA market.

The Reuters story also said Qualcomm hopes to use its (ARM core) Snapdragon CPU to expand revenues beyond cellphones to pocket computers or laptops. This seems like a tough slog, as PC sales are also expected to decline and many firms (beyond Intel) will be trying to gain market share in anything that needs a CPU.

Monday, November 10, 2008

Valuing the Nokia settlement

On TheStreet, Marerk Fuchs dissects Qualcomm’s quarterly results released Thursday — specifically the higher than expected Q4 and the lower than expected predicted earnings for Q1.

His conclusion? Analysts are overlooking the boost from a onetime $560m payment by Nokia (as part of their patent settlement) and that without it, Qualcomm’s revenues have already started to decline.

According to its Q3 filings, Nokia is paying Qualcomm $2.3b (or $2.5b) in back and prepaid royalties.

In its earnings call transcript (as reported by Seeking Alpha), CEO Paul Jacobs said that Qualcomm received a $2.5b payment in October. He explained the profits as follows:
The agreement includes among other things, the non-refundable upfront payment of $2.50 billion received in early October. Ongoing royalties and the assignment of patents valued at $1. 8 billion and recorded in intangible assets.

At the end of fiscal 2008, unearned revenue attributable to the upfront consideration of the Nokia agreement was $3.9 billion, which will be recognized over the approximately remaining 14 year term of the license agreement. The value of the patents assigned to us last month will be amortized on a straight line basis to licensing cost of sales over their estimated useful life of approximately 15 years. The fourth quarter of fiscal 2008 includes six quarters of revenue amortization and the resumption of royalties for the second half of fiscal 2008.'
I have not seen anyone do a model of this to see how it compares to what Qualcomm would have received at list price. Nokia clearly bought down its royalties by assigning patents to Qualcomm, and also by its promise of non-assertion of its patents against Qualcomm. (In the rest of the world, we call that a cross-license).

I haven’t seen anyone analyze the value of the patents Nokia assigned (or won’t assert) to Qualcomm. Nokia and Qualcomm were spending lots of money on economic and IP experts, so perhaps with their current truce, there aren’t many expert left interested in studying this — or maybe just no one left being paid to study this.

Saturday, November 8, 2008

MetroPCS, Leap finally form alliance

A year ago, San Diego-based Leap Wireless rebuffed the attempt by its younger rival MetroPCS to buy it. The two firms together are still smaller than the #5 carrier, Alltel, although they would technically leap to #5 with 8+ million subs if they merged because Alltel is becoming part of Verizon Wireless.

It seemed like the decision not to merge was driven by Leap’s pride. It is possible that they were worried about the disruption and risks of a merger, but both firms’ need for economies of scale was compelling.

However, with the Big 4 offering unlimited service plans earlier this year — directly competing with the Cricket/MetroPCS raison d’etre — their need for scale is even greater. Both companies need buying and operating efficiencies, plus the ability to offer roaming to their customers.

Although we’ve been an all-CDMA household for nearly 10 years, roaming is the main reason our household has not switched to Metro or Cricket. We split our time between San JosĂ© (where Metro has been prominent for years) and San Diego (where Leap finally began offering service in December 2006).

The roaming issue is now solved. In September, the two firms agreed to settle their litigation, swapped spectrum and also agreed to a 10 year roaming deal. The two firms lack the scale to get decent terms from Alltel, Sprint or Verizon.

The other shoe dropped this week. On Thursday, the two firms announced that customers with all but their lowest priced plans can roam for free to the other’s network. The deal covers 300 markets.

However, the two carriers lack a national footprint, without New York, Boston, Chicago or Washington, DC. (No subscribers from the new Obama administration). MetroPCS does plan to enter Boston and NYC next year.

The roaming deal is a good mid-term expedient for both carriers. They are particularly well positioned to sell to sell to college students (or low income types) who lack a landline and thus need an unlimited use wireless plan for the lowest possible price.

Monday, October 20, 2008

Motorola Android phone?

Business Week reports that Motorola is showing its prototype Android-based phone to carriers, but it’s not due until at least April. The project is staffed in the Bay Area by employees of Good Technology, the push e-mail company acquired by Moto in January 2007.

GigaOM notes that incoming Moto handset CEO Sanjay Jha has good ties to Google from his time as COO of Qualcomm. (Qualcomm chips are in the first gPhone from ATC).

While the timing would support Motorola’s planned jettisoning spinoff of its handset division, Forbes speculates that due to the financial crisis, Motorola may have to push back the date.

Hat tip: Kevin Maney in Conde Nast Portfolio.

Thursday, October 9, 2008

Verizon picks BlackBerry over gPhone

Beyond merely selling various commodity Korean phones, Verizon Wireless needed a phone to compete with the iPhone and the recent T-Mobile G1 (aka gPhone). They went with the new BlackBerry 9530, which many see as an iPhone killer.

Many have said that the BlackBerry (“Storm”) has Qualcomm inside, but strangely, there is no Qualcomm press release this week to correspond to the one it issued two weeks ago with the G1 intro.

The 9530 supports the widest available range of 3G networks: EV-DO on two bands of cdma2000 networks, as well HSDPA/HSUPA or EDGE on five different bands of GSM or W-CDMA service. Those specs exactly match the Qualcomm MSM7210A, a new chip at the heart of more than a dozen new phones released this year.

At least one site claims the phone uses a Marvel PXA930, but Marvell doesn’t claim the phone either. The PXA930 is in the BlackBerry Bold, but since it doesn’t support cdma2000, the association is implausible.

Interestingly, the Verizon Wireless parent Vodafone will not be carrying the 9530, but the non-CDMA BlackBerry 9500. That means that Verizon subscribers can roam to Vodafone in Europe (as with the BlackBerry 8830), but Vodafone subscribers have to roam to one of Verizon’s competitors when they come to the US.

Sunday, October 5, 2008

The LG-Samsung store

Once upon a time, Verizon Wireless was America’s largest cellphone carrier. Today it remains a close second to AT&T — 26.2% vs. 27.5% of America’s 265 million subscribers.

Wandering by the mall Saturday, it struck me that Verizon has become the country’s largest sales agent for two Korean cellphone makers — Samsung and LG.

A decade ago, CDMA phones (then with Sprint PCS or AirTouch), were mostly made by Qualcomm. Soon Motorola started making CDMA phones, and were joined by a number of Japanese makers like Sharp and Kyocera (after it bought out Qualcomm’s handset business in 1999) who adapted the designs they made for the two Japanese CDMA carriers, KDD and IDO (who later merged to form KDDI).

At two Verizon booths on Saturday, there were a handful of smartphones from Palm, Motorola and some Windows Mobile clients. But almost everything else was either from Samsung (#2 in the world) or LG (#5).

Of course, the reason that these two Korean makers are dominating CDMA phone sales is the 1991 decision of Korean industry to adopt CDMA, later ratified by the Korean government. Korean carriers went live with CDMA in 1996, at almost exactly the same time as Hong Kong and the U.S. were also rolling out their first 2G CDMA systems.

Of the top 5 handset makers, Nokia once gave up on CDMA and has recently made a token effort to renter the market. #3 Motorola has all sorts of problems with its mobile phone operations, and its weakness in CDMA phones is just a reflection of its larger problems. #4 Sony Ericsson — with only a minimal presence in the US — gave up on the North American CDMA market five years ago, but still sells CDMA phones in its home market of Japan.

Statistics say that Motorola retains its lead at 35% of the US market — the combined share of #2 and #3 Samsung (18%) and LG (17%). The Q1 2008 stats showed Nokia in 4th at 8%, RIM (North America’s leading smartphone maker) at 5th, just ahead of Sanyo (Sprint’s major handset supplier).

However, I’m curious who’s buying all those Motorola phones, because I don’t see many on sale at the mall. Around here, I do see the Motorola Razr with teens and adults alike, but with adults I more often see smartphones like the iPhone, Treo or Blackberry.

Teenagers and college students seem to favor texting phones with the slide-out keyboard like the T-Mobile Sidekick; here the LG VX9800 and Samsung Glyde help Verizon stay competitive for these customers. That Verizon uses BREW for its downloadable apps means that these LG and Samsung phones have Qualcomm inside.

Andy gets his medal

Last week, Andrew Viterbi got his National Medal of Science. The USC Viterbi School marks the event with a press release and a video.

UCLA issued a press release for another Linkabit founder, Len Kleinrock, who also get his medal the same day. It doesn’t mention Viterbi, who was a UCLA professor before leaving to run Linkabit.

At least MIT — where both men got their master’s degree in EE — mentions both men equally, as does the White House press release.

Saturday, September 27, 2008

Paul loves his gPhone

Qualcomm was one of the major cosponsors of Google’s Open Handset Alliance when it was announced last November. Qualcomm had not previously joined other mobile phone Linux efforts, such as LiMo (driven by Vodafone) and LiPS (once driven by France’s Orange).

This week, CEO Paul Jacobs was all smiles with the announcement of the T-Mobile G1, with Google’s Android OS and a Qualcomm MSM7201A processor. Of course, Taiwanese maker HTC has been a longtime and loyal buyer of Qualcomm chips. HTC exactly fits Qualcomm’s business model, which allows new (and presumably less capable) entrants to compete with large vertically integrated incumbents.

Google leverages the same market entry process. HTC doesn’t have the ability to design its own smartphone architecture to compete with the iPhone or Blackberry or various Nokia smartphones. Instead, it has produced probably the widest range of Windows Mobile devices. With the long-rumored G1, HTC is demonstrating its commitment to an open innovation sourcing of technology rather than to Microsoft per se.

Both firms thus have an interest in empowering new entrants, thus increasing handset competition and reducing the power of incumbents. Otherwise, their business objectives are quite divergent.

Google wants its software component to be a commodity so it can make money on another part of the ecosystem, i.e. ad-supported web applications. Qualcomm (like Microsoft) has spent billions on component R&D so it can make money selling those components.

And, in fact, Google has made sure that Qualcomm will not have an exclusive role in supplying Android hardware components. Google wants to commoditize the entire mobile Internet stack, except of course for its near-monopoly on key web applications. So Android adoption is a clear win for Google but has risks for Qualcomm.

One interesting opportunity, not yet tapped, is when will there be a CDMA phone enabled by Android. RIM is selling its Blackberry to all carriers, but otherwise the most exciting smartphones are GSM only: iPhone with AT&T, the G1 (so far) with T-Mobile, and Nokia (perhaps someday) selling to both.

The OHA was launched last November with the two weakest US carriers — T-mobile and Sprint, with the two major US carriers holding out. A month later Verizon also joined in, so three of the four Big Four (and both of the CDMA carriers) are in OHA.

Whatever the Android platform’s pizzaz relative to the iPhone, in the CDMA world it would be a dramatic step forward except for the most hardened Crackberry addict. A quick Google search suggest that all has been quiet since last December on what Verizon plans, although there’s been considerable speculation about Sprint’s needs and hopes to ship an Android phone.

As a loyal Sprint customer going back to more than a decade (and Sprint's cooperation with Cox to deploy CDMA in San Diego), there’s a huge pent-up demand for a good smartphone on their network Will it make it in time for Christmas? I guess we’ll find out soon.

Monday, September 8, 2008

Changing the nature of sound

Through an odd set of coincidences, in the last 12 hours I read about two US tech companies that appear to have used digital communications technology to differentiate themselves. The common thread is their use of digital signal processing in portable handheld device to make sound better — possibly better than the original. Although neither of these is a San Diego firm, they both fit the broad brushes of the digitalization of communications that I’ve been studying in our planned book.

Since I bought my first audio cassette deck as a college student, the goal was to find a recording device that minimized the damage done in the recording process, i.e. the new noise that was allowed to intrude into the analog signal. I owned three cassette decks connected to my stereo from 1975 until I had enough CDs to give up on cassettes during the early 1990s.

While DAT and minidiscs were around since the 1980s, I bought my first digital recorder to record interviews replacing a series of portable cassette recorders the size of a paperback book. The Olympus DM-1 was among the earliest of the Olympus digital recorders, whose main attraction (at least for me) the ability to electronically back up research interviews.

But this morning I saw a link to the Zoom H2, a well-reviewed digital recorder from 26-year-old Samson Technologies. The H2 is a low-cost, miniature version of its earlier Zoom H4 portable digital recording studio.

What I thought was clever about the H2 was not the four-track recording for garage bands, but the use of the DSP and the four mics to electronically create different microphone response patterns — two different simulated stereo cardioid patterns, plus a symmetric omnidirectional patterns. Once upon a time we would buy different mics for different goals, but now (as with synthesized guitar amps) this can all be done electronically.

For my use in interviews (as opposed to recording my “band”), what surprised me was that they didn’t simulate a highly directional mic pattern, but maybe that’s a firmware upgrade. Still, with a street price of $170 it’s far more recorder at less money than what I bought five years ago from Olympus.

The earlier notice was one of those obscure, self-promoting trade magazine articles, in this case in IEEE Computer. The article by Lloyd Watts, founder/CTO of Audience Inc., talked about the challenges of reducing three different types of background noise you hear from cellphone callers. As with the H2, the solution combines multiple mics, a DSP and clever algorithms.

While Audience is interested in selling a specific chip (the Audience Voice Processor), the broader implication is that the ITU’s P.835 standard for noise reduction now accurately tests for the challenges of stationary, quasistationary and nonstationary noise sources. Cellphones reflecting this improved sound fidelity are shipping in Japan and Korea, and presumably will spread more broadly over the next few years.

Saturday, September 6, 2008

Nokia re-enters CDMA market

After settling its licensing dispute with Qualcomm, Nokia has re-entered the North American CDMA market with its new phone, the Nokia 6205 being sold by Verizon. The phone was actually introduced in June as a Batman movie tie in.

Because Nokia doesn’t know how to make CDMA phones any more, it outsourced design of the Nokia 6205 to an offshore ODM. PhoneNews.com speculates the phone was made by TechFaith, a Qualcomm- and Intel-backed startup that also makes phones for Kyocera and NEC.

It seems like a small scale entry by Nokia, which forecast declining market share in 2008 as it seeks to preserve margins in the face of brutal price cutting by rivals. The risk is that Nokia — which is a premium brand in Europe — will signify a low-quality, low-end product in the US, as it did 20 years ago when it was the Radio Schak house brand.

Tuesday, September 2, 2008

All Linkabit founders get their National Medal


Later this month, two-thirds of the Linkabit founders will receive a National Medal of Science. With an earlier award, this means all three founders will have received one of the National Medals for lifetime achievement.

Andrew Viterbi will be among eight honorees scheduled to receive the award Sept. 29 in a White House ceremony with President Bush. Viterbi, the former JPL researcher and UCLA and UCSD professor, is of course the inventor of the Viterbi algorithm, widely used in all digital cellphones. He also advanced digital satellite communications as a co-founder and CTO of Linkabit and Qualcomm. He retired from Qualcomm in 2000, and since then has invested in startup companies through The Viterbi Group.

Also receiving a medal will be Leonard Kleinrock, the UCLA professor who was a cofounder and associated with Linkabit for several months when it was founded in 1968. Instead, he went back to working on his packet switching MIT doctoral thesis to ARPA secure routing requirements. This included getting the UCLA interface message processor (IMP) up and running, and using it to send the first e-mail message in October 1969.

The two men join the best known Linkabit (and Qualcomm) founder, who received the National Medal of Technology from President Clinton in 1994.

Although the award nominations are administered by the National Science Foundation, sometimes there are political overtones to presidential awards in the sciences and arts. Irwin and Joan Jacobs have been major contributors to Democrat candidates and causes at the national level (including Bill Clinton), even if their San Diego political involvement was aligned against teachers and pro-reform education candidates aligned with then-SDUSD superintendent (and certified Friend of Bill) Alan Bersin.

Viterbi’s honor by Bush is certainly not for his fundraising prowess. Campaign reports as of Sept. 1 show that since 2000, Viterbi has given slightly more than $100,000 to Democrat (mainly Senate) candidates and associated committees. The notable exception of Senator Norm Coleman (R-Minn.), who’s facing a GOP primary challenge prior to his general election challenge by comedian Al Franken. Kleinrock has only one $500 contribution to the 2006 Democratic Congressional Campaign Committee.

Certainly all three men had already proven that they deserve this national recognition, including being named Fellows of the IEEE and elected members of the National Academy of Engineering. Viterbi and Kleinrock in particular have received numerous awards for technical achievement in communications engineering, including the Marconi Prize.

Thursday, July 24, 2008

Qualcomm cuts Nokia a deal

Qualcomm and Nokia were due to go to trial Wednesday on their longstanding dispute of how much Nokia will pay Qualcomm for CDMA (mostly W-CDMA) patent royalties. The dispute began in April 2007 when their 2001 patent license agreement expired: Nokia stopped paying royalties, Qualcomm filed for binding arbitration, the two sides started negotiation, and when that failed they prepare for trial. While Nokia’s previous royalty rate was not disclosed, Qualcomm’s standard royalty rate is normally estimated at 4-5% of product cost.

Last night I heard on the radio that Nokia and Qualcomm had settled their dispute. Sure enough, last night (early Thursday in Espoo) they issued a joint press release:
Nokia and Qualcomm today announced that they have entered into a new agreement covering various standards including GSM, EDGE, CDMA, WCDMA, HSDPA, OFDM, WiMAX, LTE and other technologies. The agreement will result in settlement of all litigation between the companies, including the withdrawal by Nokia of its complaint to the European Commission.

Under the terms of the new 15-year agreement, Nokia has been granted a license under all Qualcomm's patents for use in Nokia mobile devices and Nokia Siemens Networks infrastructure equipment. Further, Nokia has agreed not to use any of its patents directly against Qualcomm, enabling Qualcomm to integrate Nokia's technology into Qualcomm's chipsets. The financial structure of the settlement includes an up-front payment and on-going royalties payable to Qualcomm. Nokia has agreed to assign ownership of a number of patents to Qualcomm, including patents declared as essential to WCDMA, GSM and OFDMA. The specific terms are confidential.
The timing of the settlement was forced by both the trial (which was scheduled to be webcast) and Qualcomm’s scheduled Q3 earnings release and conference call.

I’ve been looking for something — anything — that provided specifics on the deal, but there was almost nothing. The earnings call was rescheduled to 5am PDT today (not that I would have gone), but neither the WSJ nor Seeking Alpha has posted a transcript. Thus, I’ve attempted to make my own estimates of the numbers.

The WSJ quoted a Lehman analyst as saying that Nokia would have paid $600 million in royalties in 2008 under the old deal. The 2007 royalties were estimated at $400-500 million (alternately, $250-400 million net after). At one point, Nokia offered 20% of their prior royalty rate, part of their goal to cap total WCDMA handset royalties at $5/unit.

Translating from euros, Nokia sold $36.6 billion in mobile devices in calendar year 2007. Due to plummeting handset prices, handset revenue growth in 2007 was only 1.3%, but sales of 437 million units meant unit growth of 26%.

I only saw two pieces of hard information: QCOM CFO William Keitel said (in his slides) that the settlement would be worth 7-13¢/share in FY 2008 (ending Sept 28) and 20-28¢/share in FY 2009. Based on 1.62 billion shares outstanding, that’s $113-211 million (net after) this year and $324-454 million next year.

Since there’s an “up front” payment — plus all the missing royalties from Q3 and Q4 of 2007 — it’s not clear why the 2007 payment is lower than the 2008 payment. The only two explanations I can think of are a) payments have been deferred past Sept. 30 or b) the value of the patents assigned are large enough to materially reduce payments. (Keitel said some of the improved net income was due to reduced legal costs, but my guess is that the savings are no more than $50m/year pretax out of an an annual legal bill of $200m/year).

While Nokia’s payments translate to revenues for Qualcomm Technology Licensing, and presumably to pretax income. After tax income is going to be less: the average (not marginal) tax rate for 9 months of FY2007 was 19.4%, while the marginal tax rate for California corporations is 43.84%(35% fed + 8.84% state). The 2007 10-K (with a 26% marginal tax rate) makes it clear that the marginal tax rate is mainly lower due to foreign earnings tax treatment. (I would expect payments from Finland would thus have a tax rate lower than 26%).

At a 26% marginal tax rate, then Keitel’s numbers would translate to payments of $438-614 million in FY2008. Those numbers sound comparable to the 2007 estimates — suggesting that Qualcomm got most of what it wants. However, other numbers suggest a different tale.

This morning, Qualcomm noted that WCDMA sales continue to explode, with 173 million devices in 2007 now estimated to be 274 million in 2008. (IDC quoted 1,150 million handsets sold in 2007). Qualcomm reports the rate of growth for WCDMA devices is 58% worldwide, 49% in Europe (where Nokia is strongest), 45% in Asia (outside of China, and 114% in the rest of world (mostly Americas, where Nokia is losing share).

Nokia doesn’t break down what % of its handsets sold in 2007 are WCDMA, but even if we assume Nokia’s handset revenues are flat in 2008, the shift from GSM to WCDMA handsets should increase the number of Nokia units paying Qualcomm royalties by at least 40%.

Qualcomm’s major licenses undoubtably have a most-favored-nation clause, and so Qualcomm would do anything in its power to avoid setting a precedent. Both companies have made it impossible to do an apples vs. apples comparison, and so the actual terms (probably visible through Qualcomm’s FY2009 10-K) won’t be known for years.
The bottom line? Even with a strong hand, Qualcomm offered Nokia something to settle. If the reported numbers are accurate, my hunch is that (avoid setting a precedent) the valuation of the IP licensed and transferred by Nokia was used to implement a 15-35% reduction in the near- term royalty payments. The financial impacts in the out years would depend on assumptions that even the two parties don’t fully understand.

Because of Qualcomm’s eagerness to go to arbitration — and what I know from studying their business model for almost a decade — I do not believe the (unsubstantiated) claim that Qualcomm cut its rate to 2%. With MFN, Qualcomm won’t be making a dramatic cut to its royalty rate, but we don’t know if (or how much) of a royalty Qualcomm pays to use Nokia patents in its chipsets.

With its concessions, Qualcomm got a 15 year revenue stream from 40% of the world’s handset market. It also won an important precedent: Nokia will pay royalties on two 4G technologies (LTE and WiMax) where Qualcomm royalty position is far less certain than for WCDMA. The rest of the industry (with the possible exception of China) will eventually follow/.

Both stocks rose on the resolution of the uncertainty. RCR Wireless News notes that the settlement will allow Nokia to re-enter the US CDMA market. A Citigroup analyst speculates that Nokia may buy Qualcomm (instead of TI) chips.

I have met a number of Nokia and Qualcomm people in my research. In some ways they are fairly similar, and (other than the money) they seem like they should be able to work together (which makes it like Qualcomm & Broadcom, but unlike Nokia and InterDigital). So when Paul Jacobs says he expects the two companies to work together, I think that’s both realistic, and will also be very good for the future of the wireless industry.

Friday, July 4, 2008

Best deal in town

This is off-topic but is something I wanted to share with my only San Diego audience of my four blogs.

One of the best kept secrets for North County parents is the City of Oceanside summer surf camp. It follows the normal day camp model — a few adults, mostly teen camp counselors — except that the kids spend all day at the beach surfing.

The program runs from 8-3 every day (except July 4th) north of the Oceanside Pier. At the end of the week the kids have a surfing contest at three levels (beginning, intermediate, advanced) judged by the counselors, who award small prizes and consolation prizes donated by local surf shops (e.g. a surfing poster).

This week was the third year in a row that our daughter did the camp, and she’s always had a great time. We encouraged some of her friends from San Pasqual to do it and the two kids also had a great time this week. Our neighbor in Oceanside can’t get his teenager to do it, but his nephews spend two weeks every year in the program. The program is open to residents and non-residents ages 8-16 who can pass a rudimentary swim test.

The best thing of all his the price — $135/week for a 7-hour camp — cheaper than daycare and a heck of a lot more fun. Unlike Carlsbad, Oceanside does not surcharge out of town participants in its recreation programs. The city has a pretty terrible website — with only last year’s brochure up as a PDF — but the Aquatics Department will mail out a form if you call them (760-435-5235).



Photo: winner of the Oceanside swim camp July 3rd intermediate competition.

Tuesday, July 1, 2008

Broadcom to Qualcomm: say uncle

This week I’m at the meeting of the University-Industry Development Partnership, a two-day conference up at UCI that’s trying to focus on university-industry collaboration. Because of our location, there has been some local color (besides the weather).

Interestingly, UCSD Connect is prominent here — everyone acknowledging (at least in its heyday) it as the global model of university-industry cooperation for tech startups. For example, one of the sessions was a discussion of how UCI is making a two-day conferencea second attempt to replicate Connect: this second attempt appears both to be more successful, and also to have improved on the Connect model in a couple of ways.

Another local speaker was Dr. Henry Samueli, a former UCLA and UCI engineering professor who co-founded Orange County’s largest and most successful electronics company: Broadcom. From his Broadcom billions, Samueli donated money to name the UCLA and UCI engineering schools and buy the Anaheim Ducks.

Samueli was chairman of the board of Broadcom until he stepped down May 15 due to accusations of stock option backdating. (He resolved the accusations last week with a plea bargain leading to a fine and probation).

Samueli talked about the company’s growth from its founding in 1991, its IPO in 1998 and its current run rate of nearly $4 billion/year. The engineering professor described an attitude towards corporate culture and engineers sounded very similar to that of Jacob and Viterbi’s two companies:
Hiring the best and brightest engineers is what it’s all about. If I had to pick one thing about being a successful technological innovator, it’s hiring the best and brightest technologists.
His discussion of an open communication, achievement-motivating culture also sounds exactly what we heard about Linkabit.

Its R&D intensity is about 20%, or $800 million year in R&D. As I speculated earlier, it’s far more D than R:
It’s almost all product development in the near to mid term. Almost no basic research can be afforded in that budget — only a tiny bit.
Despite this focus on development rather than research, Broadcom has aggressively patented its technologies. The number of granted patents rose from 456 in 2003, to 824, 1627, 2625 and now 3300 in 2007. He proudly pointed to an IEEE Spectrum article on patent impact using statistics compiled by the consulting firm 1790 Analytics.

For San Diego readers, the biggest interest in Broadcom is its patent infringement suit against Qualcomm that it won 18 months ago. Frankly, I thought inappropriate (and off topic) to ask about the lawsuit, but someone else did.

When asked about the issue of patent cross-licensing, Samueli said that it had many cross-license agreements. Earlier, he had noted that Broadcom would prefer to have a situation where patents were not a factor — that Broadcom could race to be first without regards to patents.

Cross-licenses thus fit Broadcom’s goal: as Samueli said, “You go do your thing and we go do our thing and leave each other alone — and rely on innovation to keep you ahead in the marketplace.”

Cross-licensing does not (of course) include Qualcomm: “We’re having these issues with Qualcomm — we’re trying to get to that point.” Obviously, Qualcomm issuing a royalty-free cross license would destroy their business model, so there is no way to reconcile to fully satisfy both sides.

Photo credit: 2006 photo of Samueli from the Los Angeles Times.

Friday, June 27, 2008

TI and Qualcomm in rare agreement

As part of its push to take over the mobile phone world, Intel has its sights set firmly on Qualcomm and TI. Despite their fierce rivalry for device market share — and a bitter fight over CDMA and W-CDMA patents — this is one place where (to a limited degree) the enemy of my enemy is my friend.

Bloomberg quotes Intel CEO Paul Otellini as recognizing the growth potential of mobile devices. Intel is trying to create a brand new segment distinct from smartphones — which it calls mobile Internet devices — where it hopes its Taiwanese OEM partners can enter without major competition from Nokia et al.

As Bloomberg reports:
“I'm skeptical -- that business is tough,” said analyst Bill Gorman at Pittsburgh-based PNC Institutional Investments, which owns 10.8 million Intel shares, according to data compiled by Bloomberg. “There is very difficult entrenched competition. Qualcomm continues to push state of the art; TI is going to remain a major player.”

Intel, the Santa Clara, California-based company whose products are the brains in more than 75 percent of the world's PCs, says only devices with chips based on those complex processors can run the Internet properly because the software at the backbone of the Web was written for computers.

Otellini predicts PC makers will buy Intel chips for new handheld computers, a market Texas Instruments and Qualcomm say their handset customers are exploring. Once he's won over mini- computer buyers with the new product, called Atom, Otellini plans to court phone makers as Intel creates less power-hungry models.
Somehow, I don’t quite see it. Even though Nokia and Intel are de facto cooperating on a Linux variant for these mobile internet devices, this is a frontal assault on Nokia’s 40+% market share for mobile phones based on ARM microprocessors.

Also, the claim that web browsers require an x86 processor to surf the web is silly. Communications bandwidth is going to be the limiting factor — unless you’re teaming up with Adobe to populate the mobile Internet with millions of compute-inefficient, Flash-infested web pages.

Next, there is the assumption that TI and Qualcomm will sit still. As the article notes, both are making more powerful cellphone processors — respectively with their OMAP and Snapdragon processor families. I suspect Otellini’s braggadocio will cause them to redouble their efforts.

If you're think you've heard this song before, you have. As the article notes, to enter the mobile phone market last time Intel spent $5 billion from 2000-2006 and only got about 10% of its money back. Thus far, Intel’s efforts to diversify away from the PC have been unsuccessful.

Given these obstacles — including the fierce opposition — I’d bet against Intel reaching $5 billion in mobile phone revenues by 2015. But I wouldn’t bet the house on it, and would only offer about 3:2 odds against Intel.

Monday, June 16, 2008

British standards for essential 3G patents

As decided last December, the ruling by the High Court of Justice for England and Wales on Nokia v Interdigital Technology Corp (2007) will have a major impact on how patents are licensed (and enforced) in mobile phone standards. Although the ruling is technically only binding in the UK, I believe the findings will impact the various patent lawsuits involving InterDigital (IDCC), Qualcomm (QCOM), Nokia (NOK), Broadcom (BCOM) and others holding (or seeking to avoid paying royalties on) mobile phone patents.

InterDigital declared to ETSI that various patents were essential for implementing the W-CDMA standard, but (as with all ETSI declarations) this self-determined essentiality was not independently verified. My interest here is not the SD telecom book, but a series of papers I’m doing with Rudi Bekkers on W-CDMA (aka UMTS) patents.

In this case, Nokia sued to have 29 InterDigital patents declared not-essential to W-CDMA. Nokia had previously won in English courts in an earlier case involving InterDigital’s GSM patents. This is all part of a larger strategy by Nokia to get out of paying any royalties to InterDigital.

Of the 29 “essential” patents, Nokia dropped its challenge to one patent, InterDigital conceded that 21 were not essential, did not defend three more, leaving four patents contested at trial. The judge, Sir Nicholas Pumfrey, ultimately ruled that only one patent was partially essential.

When the ruling by Sir Nicholas Pumfrey was released Dec. 21, 2007, InterDigital spun the ruling as a victory, but clearly InterDigital ended up telling the world (including current and potential licensees) that 27 of 28 patents patents declared essential to W-CDMA actually aren’t.

The findings are all covered in the ruling by Lord Justice Pumfrey, but I learned what it really meant from a forthcoming law review article:
Myles Jelf and Michael Stevenson, “Nokia v IDC: an essentially English judgment,” Journal of Intellectual Property Law & Practice, 2008, Vol. 3, No. 7, pp. 457-460. doi: 10.1093/jiplp/jpn084
The authors are not a party to the case, but attorneys at Bristows in London; they do a commendable job of explaining the findings in a style accessible to an IP-knowledgeable engineer or businessperson. A preprint copy of their article was posted May 21 to the journal website.

The article notes the contribution of the decision in deciding essentiality, providing a process for its evaluation, and even procedural precedents about to run such litigation. To quote the authors:
The overall approach adopted by the Courts appears to be as follows:
  • Start out with the patent in one hand and the relevant standards in the other.
  • Consider the correct construction of the patent, entirely independently of the standards, through the eyes of the skilled person.
  • ...
  • Consider to what extent the claim construction put forward corresponds with what is specified in the standards ...
  • ...[D]ecide whether what is properly required by the standards falls within the language of the claim, as understood by the skilled person.
But (the authors argue) the contribution of the ruling goes beyond the process of determining essentiality to setting a standard for essentiality and providing procedural precedents about to run such litigation. I defer to the article for a more complete discussion of the ruling’s interpretation and implications.

[Lord Pumfrey]Before he was promoted to become Lord Justice of Appeal last November, Pumfrey gained a reputation for handling complex patent cases. He drew from degrees in both physics and law that he earned before becoming a barrister in 1975, as well as three years as junior counsel in the UK patent office. But he was known more broadly for his expertise in IP law, ruling (for example) last year on a trademark case involving a transvestite beauty pageant.

Tragically, Pumfrey died three days after the ruling was published of a massive stroke he suffered on Christmas Eve. The judge, aged 56, apparently had a weight problem. Pumfrey was well-regarded for his specialized expertise and will be missed by his peers.

Photo credit: Sir Nicholas Pumfrey, from the Times of London January 3, 2008 obituary.

Wednesday, June 11, 2008

Viterbi's honorable mention

Andrew Viterbi, co-founder of Linkabit and Qualcomm, was one of four finalists for the biennual Millennium Technology Prize, which is awarded
to inspire and recognize innovations that can provide answers to the challenges of our time, promoting both the quality of human life and sustainable development.
The two previous winners of the prize invented the blue LED (which makes DVDs possible) and the world wide web (which makes reading this blog possible).

Brad Smith in Wireless Week explained how Viterbi’s 1967 publication of the Viterbi algorithm (allowing maximal signal/noise ratio on convolutionally encoded signals) changed the telecommunications world.

This morning in Helsinki, the Technology Academy of Finland. awarded the prize of €800,000 to another finalist, Robert Langer of MIT. Here’s the citation
Professor Robert Langer's innovations have had a significant impact on fighting cancer, heart disease, and numerous other diseases. His work has also brought about significant advances in tissue engineering, including synthetic replacement for biological tissues such as artificial skin. Over 100 million people a year are already using advanced drug delivery systems and this number is rising rapidly. In the future, tissue engineering may revolutionize medical treatment that could affect millions of other individuals. "Tissue engineering holds the promise of creating virtually any new tissue or organ," said Professor Langer.
Viterbi and the other finalists were awarded €115,000, which Viterbi previously said he’d donate to charity. Obviously this is still a high honor, crossing over from an industry-specific award to one recognized more broadly by society.

Vaudeville performers had a maxim: Never follow an animal act or a child act. So I guess I’d say that you don’t want to be a finalist against someone who’s curing cancer.

Monday, June 9, 2008

Swimming in the empty WiMax pool

The news is all abuzz with the announcement of a planned patent pool for WiMax to be called the Open Patent Alliance. (The announcement is coming at the WiMax Forum in Amsterdam). I still see nothing to recant my earlier observation that WiMax is likely to have little or no impact on mobile wireless in the US or most of the rest of the world.

Part of the problem is that there are few new faces. The alliance is anchored by Clearwire and Sprint (who are building a US WiMax network) and Intel, the main funder of WiMax for the past five years. It also includes Alcatel-Lucent, Cisco and Samsung.

Noticeably absent are the three largest 3G IPR holders: Nokia, Ericsson and Qualcomm, as well as Motorola. The ComputerWorld coverage was breathlessly foolish:
Motorola and Qualcomm would still be allowed to join, even though they are not expected to attend on Monday, said one person familiar with the discussions. He said the principal function of the group will be to open up WiMax patents held by various vendors to make licensing of future products for networks a cleaner and faster process. Most of the major patent holders have already signed on, he noted.
But the Wall Street Journal article reported a flat rejection by Qualcomm, which has never joined any patent pool: "Qualcomm has consistently preferred to negotiate license agreements bilaterally.” That’s also been Motorola’s policy in the past, too.

The WSJ tries to be optimistic about the development:
A group called MPEG LA, for example, offers standard royalty rates for licensing patents associated with video compression. Patent pools are "tremendously important," said David Balto, a Washington, D.C., lawyer who handles patent and antitrust issues.
MPEG LA is one of the rare examples where all the major parties got together beforehand and formed the pool. Due to conflicting interests of licensing IP and selling hardware, this rarely happens in telecom. For 3G, the patent pool includes the nearly irrelevant players, which (except for Intel) is true of the WiMax proposal.

Another optimistic WSJ expert quote:
Larry Goldstein, a patent lawyer who wrote a book on patent pools, said the WiMax group could reduce the number of licensing deals to be negotiated even if some patent holders don't join. "It can cut down on the onerous negotiations and cut down on the overall royalty rate," he said.
Notice “can” and not “will.”

The claim that the patent pool covers “most” of the patent holders might reduce transaction costs, but if it doesn’t have “most” of the patents, it will have negligible effect on the overall royalty rate, unless the small patent holders pass on the transaction cost savings to licensees.

What % of the WiMax patents are owned by Intel (the main patent holder in the alliance) vs. the four major holdouts? And since the latter are moving aggressively to migrate 3G cellular carriers to WiMax’s main competitor, LTE, what incentive do they have to cooperate with Intel to reduce licensing costs?

The WSJ article quoted an analyst predicting similar patent rates for both LTE and WiMax. That seems pretty plausible, since there is a heavy overlap in the patent holders between both technologies. Someone like Qualcomm will say “we’re charging 5% for use of our technology, whether for LTE or WiMax.”

There is only one scenario that I could see the pool significantly cutting WiMax royalty rates: if Intel successfully uses it as a club to force cross-licensing by the holdouts on more favorable terms. Motorola might be loathe to give up on Sprint — one of its larger customers — but neither Nokia nor Ericsson has sold many phones through the struggling carrier. Qualcomm also has yet to announce WiMax support in its planned LTE chipsets.

Last week, an Intel executive floated the idea that WiMax and LTE should be merged into a unified OFDM-based standard. I guess that’s what you say if you can hear the stamped bearing down on you.

(BTW, the WiMax proponents are now calling it WiMAX. I guess they didn’t call it WIMAX because they know that reporters would ignore the request, as they do for QUALCOMM.)

Thursday, June 5, 2008

Schadenfreude

Last month, the SEC sued Broadcom’s two founders, Henry Samueli and Henry Nicholas, alleging phony accounting in connection with incentive stock options. Today, the feds unsealed an indictment of Nicholas — charging stock price manipulation, using and distributing drugs and hiring prostitutes for his employees and customers. (Of course, Nicholas denies the charges).

The stock option accusations are not unusual for tech executives, and there are even a few that seriously argue that this is mostly an accounting issue not worthy of felony prosecution. But the sex-and-drugs accusations (stemming from a disgruntled ex-employee’s complaint) are just plain weird, more suitable for a pro athlete than a tech executive. This is complete with the report that (since April) Nicholas has been at a celebrity rehab center in Malibu. No such accusations have been leveled at Dr. Samueli, Nicholas’ former UCI professor who used his Broadcom wealth to endow two engineering schools, UCI and UCLA.

Clearly the course cases will be a major distraction for the company’s founders if not its management. Given all the problems Broadcom has created for Qualcomm, such a distraction would be welcomed by at least some Qualcomm employees and shareholders.

The German word for this is Shadenfreude, although I think the original Qualcomm executive team would have too much class to even hint at it in private. As for the current CEO, I’ve had no direct contact from which to judge; perhaps the best indicator would be how many elbows he throws in his notoriously competitive basketball games.

Sunday, June 1, 2008

China will/won't allow cdma2000

Back in November 2000, I needed a case to teach political risk. So I wrote one about Qualcomm's on-again, off-again relationship with the Chinese government and state-owned carrier China Unicom — the one that eventually allowed Unicom to offer cdmaOne 2G mobile phone service in China. (My teaching case “Qualcomm in China” was used to flesh out the China portion of Dave Mock’s Qualcomm book).

Last month, the Chinese government unveiled a master reorg of telecommunications carriers is realigning six companies to three, each of which will have a wireline and mobile operation. China Unicom will be broken up, and its CDMA operations sold to China Telecom (the dominant wireline carrier) while its GSM network will be sold to China Netcom. One estimate places the value of the CDMA network at $13-15 billion.

But after that, nobody can agree on what’s happen — which exactly makes the point of the original case that a lack of policy transparency creates high risk and uncertainty for Western firms operating in China.

Among the disputed predictions that are the source of so much speculation:
  • Will it create real competition for China Mobile, which with nearly 400 million subscribers is the world’s largest cell phone operator? An expert interviewed by the FT said “There will be no way to create a real three-way fight – China Mobile will still be the big one standing alone” but the market pummeled China Mobile shares on the assumption that it will have real competition.
  • Supposedly having three carriers means three 3G licenses will be issued, solving a long-standing problem in Chinese telecom policies. Some say (as has been long predicted) it will happen in time to showcase Chinese wireless technology for the 2008 Olympics, but others say it won’t happen until 2009.
  • Many say it clears the way for every carrier to deploy TD-SCDMA, but TheStreet speculates that all three types of 3G will be deployed: TD-SCDMA with China Mobile, W-CDMA with China Netcom and cdma2000 with China Telecom. With this plan, CT would have a huge time to market advantage because the cdma2000 upgrade is faster and cheaper, while China Mobile would deploy the least proven technology (one it has been trailing for several years).
  • Reportedly one expert claims that China will skip 3G to 4G (see the comments on this post). It would certainly make sense technologically — allowing China to skip a generation of infrastructure development and giving its manufacturers a huge leg up on 4G equipment deployment. The problem is that the comment is attributed to Willie Lu, a prolific wireless researcher who is well connected and well trained (although a lousy webmaster), but a 4G promoter based in America who speaks for himself and not the Chinese government.
So will there be a TD-SCDMA? Will Qualcomm make any money from it? As with a year ago, everything is still up in the air.

Qualcomm is notoriously secretive in disclosing its royalty terms, which makes it difficult for researchers like me but also leaves it vulnerable to accusations of violating the non-discriminatory part of RAND patent licensing terms. One report I thought curious was an account Friday that claimed that China Telecom signed a deal with Qualcomm to pay CDMA royalties at 4%.

Reviewing my notes from the Qualcomm in China case, it’s clear that report is wrong. The list price for QCOM’s patents is known to be in the 4-5% range. I reported back in 2001 that on behalf of Unicom and its suppliers, the Ministry of Information Industry (MII) negotiated Irwin Jacobs down to 2.65% for handsets and 1% for infrastructure. So there’s no way the MII-led reorg will cause China Telecom to pay 4% royalties for Unicom’s existing 2G network.

Saturday, May 17, 2008

Leap: pride before the fall?

Last September, Leap rebuffed MetroPCS’s proposed merger, in which the younger rival proposed exchanging 2.75 shares of PCS for every 1 of LEAP. In one sense, Leap’s decision seems smart, because its shares are still worth more than Metro’s offer — at Friday‘s close, the offer would have been worth $59.76 but the stock ended at $61.09.

However, both shares are down (PCS down 24%, LEAP down 27%) since the deal was announced last Sept. 4. The relative market caps remain the same, but now Metro is worth $7.6b vs. $4.2b for Leap.

But the more serious problem is that the four major carriers have gone to unlimited service plans — which was the whole point of Leap’s Cricket service (later copied by MetroPCS). Yes, the Big Four want $100/month while Metro wants $40/month (unlimited voice, text messaging and voicemail). But they’ve been forced to respond with a family plan promo: two lines for $35, three for $30, or four for $25 ($100 total — get it?). Cricket is about $5/monh cheaper for comparable plans, and its roaming minutes are less than half the price of those for Metro (but only sold in bundles).

Still, the big boys are heading towards unlimited minutes. If Leap and Metro don’t build a national footprint soon, they’ll be toast. They need to move before the industry shifts from voice to data (since their customers and equipment are not well suited for data). Sprint is in too much trouble to buy either one, leaving only Verizon as a potential buyer

Leap and Metro are as compatible as two carriers could be (other than the bad blood between them, and the fact that Metro is based in Texas). In addition to similar business models and demographics, they also use Qualcomm’s CDMA networks (unlike the Sprint-Nextel nightmare) in 1900 MHz and soon 700 MHz.

The foot prints are nicely complementary, as the original MetroPCS offer made clear. From a personal standpoint, both carriers individually are useless, but together my wife and daughter (and maybe I) would jump for their California coverage. MetroPCS has the Bay Area, Sacramento Bakersfield, LA and. and Las Vegas; Cricket has San Diego and central California (Fresno to Modesto) as well as Reno and (soon) Las Vegas.

The two are starting to build out redundant coverage, so the savings from the combination are going down. Now that the 700 MHz auctions are over, speculation is that negotiations will resume. But then speculation about merger talks was spreading in December and October, too.

Asked twice during the analyst call earlier this month, MetroPCS Roger Lindquist neither confirmed nor denied an interest in resuming merger talks. He didn’t deny it, because it would have no credibility; but he didn’t confirm it, to avoid raising expectations of any near term solution.

At the beginning of the year, FierceWireless predicted that the merger will take place in 2008. So far, two other predictions are bearing out (spinout of the MOT handset division, and merger of Sprint and Clearwire WiMax properties), and the year is not quite half over.

Tuesday, April 15, 2008

Qualcomm inside ... personal navigation devices

Nikkei Electronics Asia compares the push of both TI and Qualcomm to go beyond cellular phones to personal navigation devices (the rest of us call them GPS receivers). What's different from cell phones is that GPS is mandatory but cellular reception is not.

In competing with Marvel, Frescale and others, NEA concludes that Qualcomm is better suited for those PNDs that require cellular capabilities. However, TI offers a higher performance solution for the vast majority that do not require cellular connectivity.

Still, Qualcomm’s entry with the QST1000, QST1100 and QST1105 suggest a growth path forward for Qualcomm. The challenge will be to offer competitive products that are not strictly tied to its knowledge of cellular radios.

Thursday, April 3, 2008

Qualcomm on 4G sidelines

As if we needed any more evidence, this week’s CTIA has made it official: the 4G race is down to LTE vs. WiMax, the 4G solutions respectively chosen by Verizon and Sprint, Qualcomm’s two largest US customers.

The CTIA pavilions were emphasizing the two technologies. LTE (the successor to GSM to W-CDMA) is racing to catch up with WiMax, and might even be available next year.

Beating the drum for LTE at CTIA was Arun Sarin, who at Pacific Telesis (then AirTouch) was one of the earliest CDMA backers. Now CEO of Vodafone (and part-owner of Verizon), as a CTIA keynoter he asked the industry to line up behind 3GPP’s LTE and not Intel’s WiMax.

No longer in the running is Qualcomm’s UMB, which was more or less marked for dead after losing Verizon and Sprint. It’s technically possible that Japan’s KDDI could choose UMB, but I don’t know why.

With UMB gone, after dissing WiMax, Qualcomm is clearly in the LTE camp. The MDM9xxx series chips announced in February all support LTE; the CDMA chips also support UMB, but now it’s not clear who will use it.

UMB is the 4G technology based on Flarion’s OFDMA. If UMB fails, it’s not clear what Qualcomm got for its $800 million purchase of Flarion. But then it depends on how many Flarion patents are required to implement the OFDMA LTE.

Tuesday, January 29, 2008

Exit strategies by San Diego firms

I was quoted heavily in Sunday’s story in the UT on the origins of the San Diego telecom industry. The interview was done last July with Kathryn Balint, who apparently left the UT in August.

Despite the lag, I still stand by what I said then. The only problem is that the book on the local telecom industry, Digitizing Communications, is moving forward but running behind schedule.

One of the points I made (also made by Martha Dennis) is that local firms are being acquired rather than seeking an IPO as has happened with so many famous Silicon Valley companies. The companies need liquidity — or must have it to fulfill promises made to VCs — and thus take the best route available.

For the book, I sat down this afternoon and tried to update our record of public San Diego-based telecom companies. (The definition of “telecom” here is as loose as possible, including defense electronics and computer networks).


CompanyExchangeTicker
Market Cap†
Remarks
QualcommNasdaqQCOM
$64.5b
S&P 500 stock
Leap WirelessNasdaqLEAP
$2.7b

ViaSatNasdaqVSAT
$624m
S&P 600 Small Cap stock
Novatel WirelessNasdaqNVTL
$507m
S&P 600 Small Cap stock
Maxwell TechnologiesNasdaqMXWL
$173m

Dot Hill SystemsNasdaqHILL
$159m

EntropicNasdaqENTR
$82m

One VoiceOTCBBONEV
?
Quoted 0-1¢/share by various sites
† Market cap at 4pm EST Monday, according to WSJ.com

This does not include companies that were acquired after IPO (like Applied Digital and Copper Mountain) or moved to SIlicon Valley after a local IPO (both AMCC and Copper Mountain). Remec IPO'd but eventually liquidated itself. I gave up on making sense of the Woody Norris companies (American Technology Corp., Norris Communications/e.Digital, Jabra).

As it turns out, the use of acquisition (rather than IPOs) as an exit strategy seems to be becoming more the norm, even in Silicon Valley. As I remarked this morning after Nokia bought Trolltech, IPOs are becoming more scarce in software. It may turn out that the roaring 90s was the last rush of startup-to-IPO miracles; very few San Diego companies made it before the 2001 NASDAQ crash, fueled by the end of FCC’s policy fantasy known as the CLEC.

I remember when Charlie Jackson sold Silicon Beach to Aldus back in 1990. Charlie told me he’d been planning on doing an IPO, but the markets weren’t favorable. Charlie did it again later with FutureWave and Macromedia — although the FutureWave sale was an opportunistic exit with the invention of Flash.

Of course, Linkabit also exited via acquisition (by M/A-COM), but after the new owners mucked it up, Irwin Jacobs and Andy Viterbi didn’t make that mistake a second time.

Thursday, January 17, 2008

EV-DO live and kicking

Several years ago, Mac users wanting to use EV-DO modems had rely on third parties to provide support and drives. But this week’s Macworld Expo suggests that the demand for the Mac has gone mainstream enough to earn direct support from the two major US CDMA carriers.

Verizon Wireless was demonstrating three Novatel Wireless EV-DO (Rev A) modems: the USB720, the USB727 (which takes a microSD memory card), and ExpressCard V740. Sprint has the 727 (which it calls the "Ovation U727”) and a Sierra Wirless AirCard 595U. As the names suggest, all but the V740 are USB devices — which is good since the MacBook (and new MacBook Air) don’t have ExpressCard slots.

Sprint was demonst the PHS300S Wi-Fi hotspot by CradlePoint Technology. You stick one of their USB EV-DO cards into its port, and then you have a Wi-Fi device that supports 4 CPUs. The obvious application is a construction work site — or perhaps a trade show or street fair where you need credit card clearing. I could also see it used at a vacatio home, if you had a wired family that couldn’t get by without Internet coverage.

EVDOInfo.com — the original Mac third party support for such products — seems to be still acting as a reseller of these products, even if it’s no longer the only source. (Its website seems to be finicky, but its sister site 3Gstore is still alive).