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.