Tuesday, December 21, 2010

End of Qualcomm's TV career

On Monday, Qualcomm announced it had sold its FLO TV 700 MHz spectrum to AT&T for $1.9b. Most of the articles focused on how AT&T will have enough spectrum to roll out LTE after the PR disaster of its 3G network congestion, post-iPhone.

By one estimate, Qualcomm spent $683 million for the former UHF Channel 55, whose national rollout to AT&T and Verizon customers was delayed when Congress (and the administration) delayed the DTV switchover in a futile attempt to prevent any inconvenience to analog TV owners.

The concept of FLO was twofold. First, broadcasting is a more efficient way to deliver spectrum-intensive video; second, Qualcomm had the money, connections and chutzpah to create a nationwide multichannel TV network.

FLO has been in critical condition much of the year. After an upbeat assessment for the NYT in May, a month later later CEO Paul Jacobs admitted problems but ruled out any closing:
“We are not shutting down MediFlo. … We’ve always said to our investors that we’re going to either sell it or spin it someday. It’s been that way from the very beginning so the question is to just find the right partners to work with and what’s the possibility to get more usage of it.”
Seven weeks later, Jacobs said that the company was looking to sell the service.

What happened to FLO? In July, Eric Zeman of Information Week said it was the price ($10/month), lack of devices and delayed release. For consistency’s sake, Zeeman said three years earlier that it was overpriced with no real market.

I think price is part of it. A related issue is that consumers were paying $10/month for increased spectral capacity that helped carriers, not necessarily something they would see or directly value. (Of course, if it’s a carrier pain point, perhaps they should have charged less).

But I also think the Internet has created a generation of instant-gratification, asynchronous entertainment consumers. Gone is the decade when the whole country tuned to watch Ed Sullivan on Sunday night (or I Love Lucy or All in the Family or Who Shot JR?) Today YouTube and Hulu (and iTunes and Amazon and Netflix) promise Generations Y and Z instant video gratification, whenever and wherever they want it. I think there’s no going back, at any price.

With the end of FLO, Elizabeth Woyke of Forbes suggested that it pointed to a pattern of failure for Qualcomm, after a 2005 Forbes checklist that also included Wireless Knowledge and Digital Cinema. (The earlier story noted that the latter failures were initiatives championed by Jacobs the younger before ascending to CEO, a point Woyke politely left out of her story).

In one of his earliest executive positions, Jacobs ran the QCP handset division for Qualcomm — which was a product failure but a strategic success. On the one hand, Qualcomm never learned how to make handsets and eventually both it and its Sony JV partner gave up (Sony later joining with Ericsson to learn its secrets). On the other hand, the exit came after the 2G IS-95 (later known as cdmaOne) was well established with multiple handset suppliers.

What are the consequences of failure. I recall a Sept 2006 telecom council event when Gina Lombardi, then-president of the FLO TV subsidiary, was prominent at the QCOM annual meeting and part of Paul’s inner circle. In January 2009 she was pushed aside, and left the company that fall (after 19 years there). So far her successor, former Handango CEO Bill Stone, remains a top Qualcomm executive.

So what is the lesson going forward? Certainly Qualcomm is a lot like Intel: it’s good at technology, its original franchise was a license to print money, but it has a mixed record creating products consumers want to buy.

It has done an excellent job of expanding its semiconductor business from radio modems to smartphone processors, particularly with Android smartphones.

But I think the reality is that the US wireless industry is bigger and messier and less malleable than in the early 90s when Irwin Jacobs pushed through CDMA and brought it to market. It’s also more linked to international standards, with lead cdmaOne and CDMA-2000 customer Verizon, forcing Qualcomm to kill its own 4G option two years ago and support LTE.

Fortunately, one other legacy strategy from Jacobs père remains crucial for Qualcomm’s success today. Cofounder Irwin Jacobs pushed aggressively to invest in rapidly growing overseas markets, most notably China but also Korea and India. Jacobs fils is continuing these efforts, even if all three countries (and Southeast Asia and South America and other developing countries) continue to be challenging places to do business for a heavily regulated industry like telecom.

Monday, November 29, 2010

A tale of two commodities: Android and discount CDMA carriers

It’s no secret that Qualcomm has played a major role in getting Android off the ground — going back to the public launch of Android in 2007 — and has been rewarded handsomely for its aggressive bet.

The goal of Android is to make smartphones a commodity, and in the US it’s been quite successful. By supporting Android, carriers hoped that it would spur adoption of wireless data plans, even at the risk of making them a commodity.

Thus it was surprising to discover this weekend that two of the US cellular carriers most responsible for commoditizing voice service — Leap (Cricket) and MetroPCS — have very different Android strategies. The two are so similar in strategies (including their use of CDMA) that there have been repeated calls for them to merge despite Leap’s repeated rejection of the MetroPCS advances.

Like other San Diego companies with ties to Qualcomm, Leap has been aggressive in supporting and promoting Android. In March it became the first discount carrier to announce an Android handset, the Kyocera Zio. Its website is promoting its second Android handset from Huawei, and it even has billboards around San Diego announcing $55 for its Android smartphone unlimited voice/text/data plan.

Meanwhile, MetroPCS launched its first Android phone last Wednesday, from LG. However, you wouldn’t know it from visiting the website unless you tried hard to find the (one) Android phone among its offerings.

Still, MetroPCS is a little more aggressive on the pricing: $50/month (vs. $55 + fees for Cricket and $80 + fees for Sprint). MetroPCS has often started price wars in the cellphone industry, so this may put pressure on the other carriers to cut their prices. Also, as one of the top five global carriers, LG has a better brand than Kyocera or Huawei (even if it doesn’t quite match Samsung or Motorola in the US).

Interestingly, when I was researching this blog posting, MetroPCS asked me to take a survey about future purchases, which focused on smartphones but also asked about tablets and WiFi hotspots (like MiFi). They even asked about the iPhone, even though the availability of a premium iPhone on a discount carrier seems a long way off.

Friday, November 26, 2010

Starting up without VC: the old and new normal?

In my entrepreneurship research, one of the clearest trends of the last few years is how financing for startups has dried up. Banks have tightened capital requirements, pension funds and angels lost millions or billions in the market crash, and many of the former VCs are gone.

Last week, the WSJ had a great article on the national trend that was illustrated by problems of local San Diego firm. The national statistics were grim, with new firm creation peaking in 2005, and the past three years seeing net job losses.

The article illustrates the national trend by looking at the San Diego tech industry. notes the history of tech startups in San Diego dating back to Linkabit and Hybritech

It focused on serial entrepreneur Derek Smith, founder of wireless startup Tesla Controls. It also mentioned would-be entrepreneur (and UCSD assistant professor) Deli Wang and the director of UCSD’s Von Liebig Center.

From my study of the SD telecom industry going back to Linkabit, what was striking was what was not mentioned: the new normal is the old normal. Linkabit was started by three college professors who put in $500 each (and then later got a round of angel funding to expand.) Qualcomm also started with modest funding, as did most of the 1st generation Linkabit spinoffs from 1980 to 1993 or 1994.
The VC-funded model allows for faster growth, at the risk of losing control and the company. The other alternative is is bootstrapping, which certainly require patience (and send the firm towards self-funding niches), but also allows the founders more say over the firm’s direction. Bootstrapping is also the normal mode for most startups, including most of the SD telecom startups.
Other than Enterprise Partners, San Diego has never had a sizable local VC firm. Money was readily available from local (or Silicon Valley) VCs in the late 1990s, but not really before or since. Given so few SD telecom firms reached an IPO — 11 by my last count — it makes sense that VCs would shy away from funding startups with limited options for liquidity.

The software startups will probably do fine without VC. Those that want to make something will have to bootstrap using consulting work — the way that Linkabit, Qualcomm, ViaSat and others did. Rather than chasing VC that has gone away, perhaps Connect should go back to helping firms get started — as they did when I attended my first Connect event back in 1985 or 1986, soon after Bill Otterson had founded the group.

Sunday, November 14, 2010

Qualcomm's next monopoly

Qualcomm was among the first Fortune-500 backers of the Android alliance when it was announced by Google three years ago this month. Qualcomm won a design win for the first Android phone, and has aggressively invested to leverage its local ecosystem to develop and port technologies to Android.

Paul Jacobs seems to understand embedded software more than most cellphone CEOs — which is why his former COO rationalized Motorola’s platform strategy and seems to be turning the once-great US maker.

Qualcomm’s early efforts seem to be paying great dividends. A report by PRTM in Forbes found that of 57 Android-based handsets they studied, 77% used Qualcomm chipsets.

The PRTM analysts provided specific evidence of the long-predicted commoditization of handset makers by the Google OS. There are lots of handsets running the same software, making it nearly impossible for any handset maker to use software to achieve differentiation (as Apple has).

However, they go further in predicting Qualcomm-Google monopoly rents:
[M]ost of the handsets–77% of the sample–are based on Qualcomm chip sets. Seasoned observers may find this ominous. Over the years, Microsoft and Intel have captured far more value than the makers of the PCs. Will “Quadroid” become the new Wintel?
This is not just Android: Qualcomm has enjoyed increasing market share in smartphones.This part of a broader shift of revenues and profits from patent licensing to an increasing dependence on chip sales.

However, unlike Microsoft or Intel, Qualcomm has always faced competition in its chip business (if not patent licensing). If Apple can get into the smartphone/tablet CPU business, then Qualcomm will have other firms offering ARM cores — not to mention yet another effort by its arch-rival Intel to enter the mobile business.

So the recent trend is positive for Qualcomm’s chip business — and even if it loses some share points, revenues will grow along with Android’s explosive unit share growth. At the same time, its enviable margins will invite further entry, whether by chip makers or handset makers.

Tuesday, September 21, 2010

Metro leapfrogs 3G to LTE

Dow Jones, PC Mag and others report that CDMA discount carrier MetroPCS is the first US carrier to offer LTE. (That effectively means 2nd for 4G, after Sprint’s WiMax, and ahead of Verizon’s planned LTE launch before the end of the year.)

It launched the service in Las Vegas, but plans 3 other cities by the end of the year.

PC Mag says that the new Samsung Craft is “the world’s first LTE phone,” a dual 2G/4G phone. DJ notes that Samsung supplied the LTE infrastructure for Las Vegas, as well.

This is a rare example in the cellphone industry of “the last shall be first.” Metro skipped 3G altogether, saving a significant investment. Also, roaming for 3G in the US seems to be a lot less common than for 1G or 2G, so the company doesn’t lose anything by not having 3G hardware.

Normally, companies that are low-cost providers don’t lead technological innovation — it’s contradictory to their basis of competitive advantage.

In this case, MetroPCS hopes to gain cost savings by migrating voice off onto LTE-enabled VoIP.

Thursday, September 9, 2010

So much for smartbooks

Qualcomm's effort to create a “smartbook” are officially dead. While a major strategic push in 2009 was creating a mobile communications device that’s in between a smartphone and a laptop, Paul Jacobs admitted Wednesday that the plan is dead.

Instead, Jacobs reportedly admitted that the iPad has filled that niche, in his talk at the IQ2010 event in London. (I say reportedly, because there are no transcripts, videorecordings, or press releases of his talk, and few if any direct quotations).

I never quite got the “smartbook” concept, because it was always somewhat like a netbook or a laptop. The advantage the iPad has is that it‘s a device that can be used in a different way than a laptop — standing up, in a restaurant, on a Southwest flight, etc. — but with some of the screen real estate and computing power of a laptop.

Even if smartbooks have lost to tablets, all is not lost. Unless WiFi coverage gets dramatically better than today, there will be a demand for 3G (or 4G) chips for these tablets as well as ARM-enabled processors like the QCT Snapdragon. And except for HP's (webOS) and Apple’s (iPhone OS) tablets, most will be running Android, which Qualcomm and its ecosystem are well-equipped to support.

Wednesday, March 24, 2010

Qualcomm progeny are Android partners

Qualcomm has very close ties to the Open Handset Alliance and its Android operating system. Thus, it’s not surprising that its Leap Wireless spinoff is winning the first Android handset for a discount carrier.

Leap’s discount brand, Cricket, is believed to be the first carrier for the new Kyocera Zio. Along with Metro PCS, Cricket has been promoting price competition in the handset business through its flat-rate pricing.

Leap was created as a 1998 spinoff of Qualcomm’s cellphone licenses. In the final irony, Kyocera got into the CDMA handset business when it bought Qualcomm’s handset business in 2000.

Monday, February 15, 2010

Qualcomm in bed with everyone, including the Borg

Qualcomm has committed itself to supporting all possible smartphone platforms: Android, BlackBerry, Symbian, Windows Mobile and someday it hopes the iPhone.

At Mobile World Congress on Monday, Microsoft CEO Steve Ballmer announced the latest Windows Phone, Windows Phone 7 (née Windows Mobile). Perhaps inspired by the iPhone — or perhaps Windows PCs — Microsoft will be dictating all aspects of the new devices, including the Zune-inspired user interface. (Right now, I’m watching the first “Star Trek” episode involving the Borg — an eerie coincidence?)

In conjunction with the Microsoft announcement, Quacomm announced it will be the first to support WP7 with its Snapdragon chips in the first batch of WP7 devices, in time for the Christmas selling season. The 1 GHz Snapdragon — used in the Nexus One — was welcomed as the fastest CPU available today for the new Microsoft platform.

Of its supported platforms, in the short term clearly Android and BlackBerry will be the highest volume for Qualcomm. But perhaps Qualcomm will someday displace TI and ST Micro as the main chip suppliers for Symbian handsets from Nokia, which are still the world’s market leader.

Wednesday, February 3, 2010

Predicting the past is easy

CNBC yelling head Jim Cramer trashed Qualcomm’s stock on Tuesday night, after last week’s disappointing earnings guidance for the current quarter. (This is by someone who earlier this month owned the shares).

Qualcomm attributed the problem to delayed 3G demand in developing countries while smartphone prices are falling in the developed countries. Both hurt the company’s royalties. One analyst suggests that the company also faces increased 3G chipset competition, particularly selling to Samsung.

Shares fell 14% Thursday on the news — it largest drop in almost 10 years. Most of the fall came in after hours trading Wednesday after the earning announcement.

So on Tuesday night, Cramer talked about Qualcomm using various technical analysis tools, concluding that most of the selloff was over:
Cramer said this doesn’t mean that Qualcomm is done going down, even as it has some 2010 catalysts such as share gains in Nokia, the increased adoption of 3G and 4G smartphones, new design wins, and expanding markets like netbooks, iPads and eReaders that use QCOM’s technology.

The bottom line: Qualcomm is guilty before its proven innocent, Cramer said. On Wall Street that means investors need not one but two quarters before anyone can ever “fall in love with Qualcomm again.”
To this, one of CNBC’s readers replied [links added by me]:
OK, let me get this straight. Cramer tells us on January 7th of this year that Qualcomm is one of the 10 players of his "mobile Internet tsunami". On that day Qualcomm was trading at $49.15. Now, when it is south of $40.00, he's suggesting that we bail. Hummmmmm. Better yet, if you put 10K on all of the mobile internet plays outlined by Mr Kramer and posted by CNBC on Jan 7th, you would be down about $18K. Not bad for 3 weeks work!
In other words, predicting the past is always easier than predicting the future.

This reminds me a little bit of the Apple shares that I owned in the 1980s — the shares would go up on good news and down on bad news. When Steve Jobs came back, few anticipated his ability to deliver a decade of sustained economic growth.

After the shares collapsed at the end of the telecom bubble, Qualcomm had a good run from 2002 to 2006, but has been going sideways every since. The drivers of its income growth have been are industry growth and diversification into new markets, with most of the bottom line coming from the former. However, as markets mature, competition increases. The commoditization facing its main customers (handset makers) is not going to end any time soon.

Disclosure: Several years ago, I sold all my Qualcomm shares, because I decided that writing about Qualcomm and other San Diego telecom companies was more uniquely important to my career than owning shares was to my portfolio.

Sunday, January 17, 2010

Past time for Leap and Metro PCS to merge

San Diego-based Leap Wireless has been rebuffing efforts by its frenemy MetroPCS to buy it since 2007. With the latest price cuts by the Big Four carriers, it is past time for the two firms to merge, gain economies of scale and attempt to go national before their market window closes.

Despite the bad blood between them — fueled by Leap’s belief that Metro PCS copied its CDMA-based Cricket Wireless business plan — the two companies finally formed a roaming alliance in late 2008.

Without a merger, each firm is presumably seeking its own exit strategy. Since Sprint is in no shape to buy either one, I’m guessing both Leap and Metro are hanging on in hopes of being bought by Verizon Wireless the way that Alltel was. However, this now seems an unrealistic hope. The Obama administration has signaled a much more hostile attitudes towards mergers by market-leading oligopolists than was ever true under the laissez-faire Bush administration.

Meanwhile, the Big Four are now responding to the pressure that Leap and Metro have helped place on their business models.

In the second half of 2009, the Big Four instituted drastic price cuts in their unlimited voice plans — first with their prepaid brands of the major carriers and then by #4 carrier T-Mobile. On Friday, the pressure on the two firms increased when both Verizon and AT&T cut unlimited voice service from $100 monthly to $70. This puts pressure on both carriers to justify why subscribers should pay $40-50/month for their smaller and less reliable networks.

Last summer, I predicted further commoditization, arguing that a Leap-Metro PC merger was long overdue:
The price wars in prepaid are only going to get more brutal, as MetroPCS and Leap both fuel the wars and respond to efforts by TracFone, Boost (Sprint), Virgin (Sprint) and GoPhone (ATT). Combining the two wouldn’t guarantee success, but it would expand and smooth their footprint while nearly doubling their respective scale for buying and other efficiencies.
Even if they combine their 11 million subscribers, building out a quasi-national network will take time: it took VoiceStream (now T-Mobile) more than a decade. As they build out their networks, the quality gap in voice will diminish, although the demand for a comparable 3G (and then LTE) footprint will only increase.

As smart phone prices companies will also need to add ever-cheaper smartphones as BlackBerry prices continue to fall and the two Korean CDMA manufacturers roll out more Android models.

Friday, January 15, 2010

Len Lauer surfaces at Memjet

Last month, Len Lauer stepped down as COO of Qualcomm to be CEO of an unnamed company. It turns out it’s Memjet of San Diego.

Given the big risks I see with the Memjet strategy, I’m not sure I understand his decision. Is it a great opportunity? Is it a chance to become CEO when getting the top job at Qualcomm is not in the cards? Was it looking for the best opportunity available in San Diego?

Only time will tell, I guess.

Wednesday, January 6, 2010

Symbolic Snapdragon success

The new Google Nexus One incorporates a 1 GHz QSD 8250 “Snapdragon” processor, part of a series of design wins that includes the Google G1.

I think there are two aspects to this announcement.

First, Snapdragon has been recently promoted as the heart of the Qualcomm-promoted “smartbook” and its push beyond the cellphone, and indeed Lenovo announced a Snapdragon-powered smartbook on Tuesday.

In other words, the Snapdragon is a new, market-creating processor but its most important sale in 2010 could be in QCT’s traditional core market, high-end cellphones.

Second, the announcement validates Qualcomm’s strategic commitment to Android, and perhaps suggests that its Android bet may displace its bets on various other operating systems.