Wednesday, December 28, 2011

The end of Snapdragon Stadium

Tonight was the 11th and final day of “Snapdragon Stadium,” a temporary moniker rented by Qualcomm for its smartphone processor. San Diego’s largest company has held the naming rights for the former Jack Murphy stadium since buying them in 1997 in a deal that set the trend for the rest of US pro sports (including Nokia Theatre in Los Angeles and the onetime Ericsson Stadium in Charlotte).

Qualcomm paid an unspecified amount for the temporary renaming to capture three nationally televised games over 11 days, December 18 to 28. This included a Sunday Night Football game by the Chargers (where the Bolts cruelly raised the hopes of their long-suffering fans), the Dec. 21 Poinsettia Bowl (where TCU defeated Lousiana Tech) and tonight’s Holiday Bowl between the UC Berkeley Golden Bears and the Texas Longhorns.

Inside the stadium, they showed a brief snapdragon promo in the same screaming red color scheme as the signs. They also bought the Google adword for “snapdragon” (pointing back to their standard website) to make sure no TV viewer would miss the message. The website also allowed you to pick an Android, Blackberry or Windows Phone OS device with Snapdragon inside. (iPhone lovers need not apply).

As noted by others, this was all reminiscent of (if not blatantly copied form) the “Intel Inside” campaign of the 1990s.
I took some pictures of the signage both outside and inside the stadium on its final night. While I(as a researcher) I was excited to see the signs during their brief tenure, I was depressed to see the Bears to meet the same fate as during my last trip to the Q, when they lost in the 2004 Holiday Bowl to Texas Tech. (Since Cal finished 2011 with a 7-6 record, it should be noted they would not been bowl material back before every town added a bowl or two.)
Presumably tomorrow the signs will start coming down and the stadium will revert to “Qualcomm Stadium.” The next football game at the Q won’t be until next summer, so they have plenty of time to get the stadium ready for the monster truck rally in three weeks.

Saturday, December 24, 2011

Qualcomm gets its $1.9b

Now that AT&T has abandoned its proposed acquisition of T-Mobile, on Thursday the FCC approved its $1.925b purchase of Qualcomm’s 700 MHz spectrum. This came almost exactly one year after the sale was announced, and a little more than four months after the FCC blocked the sale pending disposition of the T-Mobile acquisition.

AT&T desperately needed spectrum for LTE service, particularly after the fiasco of its iPhone network crashes and the recent (successful) efforts of Verizon to acquire new spectrum. In fact, spectrum was the nominal reason for buying T-Mobile. However, merger of the operators of the #2 and #4 largest US cellular networks always had serious antitrust concerns, which were realized when the Obama administration sued to block the sale.

AT&T's small market rivals had hoped to use both the Qualcomm spectrum sale and the T-Mobile acquisition to win favorable roaming agreements. Indeed, FCC commissioner Michael Copps dissented from Thursday’s 3-1 decision in favor of Qualcommm and AT&T, siding with the rural carriers:
This license transfer takes a pre-existing competitive problem—the lack of interoperability in the Lower 700MHz—and aggravates it by giving one of the two dominant carriers enhanced ability to ensure that interoperability doesn't happen without a regulatory requirement. I am encouraged there will be a rulemaking on interoperability, but such proceedings take precious time. Even assuming the Commission can propose rules early next year, we would be unlikely to see the benefits of such rules for quite a while after that.
The main issue is that we don’t know the endgame on the consolidation of US cellular carriers down to 3, where it is going for other countries and where the US will eventually end up.
  • A merger of the #5 and #7 largest networks, MetroPCS and Leap, is inevitable, but has been fought for more than four years by the smaller Leap. Their roaming agreement and convergence of their 4G strategies may eventually accomplish integration in pieces rather than through a big acquisition. Metro at least is further along on LTE deployment than any carrier other than perhaps Verizon.
  • Both MetroPCS and Leap once hoped to exit by being bought by Verizon (as Alltel was) but after the denial of AT&T, such an outcome seems next to impossible due to antitrust concerns.
  • Sprint wouldn't have antitrust barriers to buy T-Mobile, but their incompatible networks make it unlikely to happen before at least 2015 (when presumably Sprint will have switched from WiMax and T-Mobile will eventually offer real 4G service)
  • Both Metro and Leap are technologically compatible with Sprint, but the sickly #3 carrier hasn't been ready to buy anyone after losing more than $8.5 billion from 2008-2010.

Qualcomm is quite happy to finally get its $1.9b for the unused spectrum, as their press release made clear
"We are very pleased that the FCC has approved the sale of our spectrum licenses and look forward to working with AT&T to deploy supplemental downlink. This is a positive outcome for Qualcomm and our stakeholders," said Dr. Paul E. Jacobs, chairman and CEO of Qualcomm. "We would like to express our appreciation to FCC Chairman Julius Genachowski, his fellow FCC Commissioners and the FCC staff. The use of supplemental downlink will enable the efficient use of unpaired spectrum for mobile broadband in the U.S. and a richer, faster mobile experience for consumers."
Smartphone adoption is increasing demand for data services, Qualcomm chips, and its Snapdragon processors.

Thursday, August 11, 2011

FCC puts hold on QCOM spectrum sale

Four months ago, carriers opposed to AT&T’s acquisition of T-Mobile and its spectrum asked the FCC to delay Qualcomm’s planned $1.9 billion sale of its 700 MHz (former UHF Channel 55) FLO spectrum to AT&T.

At the end of its 180-day review of the spectrum sale on Monday, the FCC sent a letter to Qualcomm saying that the sale of the spectrum will be considered simultaneously with the (much larger and slower) review of the very controversial (and larger) AT&T/T-Mobile acquisition.

As noted by eWeek, Qualcomm shot back that it thinks that the sale should be consummated without delay:
FCC should approve the pending AT&T-Qualcomm spectrum sale now because of the clear benefits to the public from the sale that stand on their own and are totally unrelated to the proposed AT&T-T-Mobile merger.
If the merger gets approved, the current betting is that it would be heavily constrained by conditions. I’m not optimistic about the spectrum sale surviving those conditions.

With the FCC’s ruling, the best case for Qualcomm is that the T-Mobile acquisition be denied. AT&T will badly need to additional Qualcomm spectrum and the antitrust issues largely go away.

The 2nd best case is that Verizon Wireless buys the spectrum if AT&T doesn’t. However, given the sickly nature of the rest of the US cellphone industry, Verizon will know it’s the only serious bidder left and (I suspect) would pay less than AT&T’s winning bid last December.

This case raises yet another objection to the proposed merger. Most of the objections have focused on the duoopoly of carriers that reduce choice for cellular subscribers. Here we have one (of many) example for the oligopsony side: what impact would having only two large scale buyers for phones, infrastructure, spectrum, on-deck applications and other key mobile technologies.

Wednesday, August 10, 2011

Smartphones could solve prepaid carrier problems

MetroPCS and Leap Wireless reported disappointing earnings last week. MetroPCS stock plummeted after missing analyst estimates by 20%, dragging down Leap with it.

MetroPCS has been a hot stock. It’s the fifth largest cellular network operator — only MVNO TracFone and the Big Four are larger — and has the fastest growing network. It’s been aggressively advertising in its local markets, and through a roaming agreement with Leap claims to provide (voice) coverage for 90% of the US population.

Its Q2 results were not all bad — with 19% YoY increase in subscribers, and an “adjusted” EBITDA up 11% over Q1.

With the bad news, the stock has lost its high-flying multiple. Since the Aug. 2 bad news, it’s dropped almost 50% below where it traded since May.

Some were quick to announce MetroPCS’s impending doom. In Fortune Scott Woolley wrote:
The question now is, can the company's stock claw its way back? Yesterday's tumble reflects increasingly visible cracks in the budget provider's armor.
Certainly costs per subscriber are rising faster than ARPU.

At least MetroPCS is showing a profit. The shares of Leap (operator of the Cricket network) fell 32% after its quarterly loss more than doubled compared to a year ago. The stock had already fallen 20% due to fears raised by the MetroPCS disappointment.

Why are the two discount prepaid carriers facing such problems now? One factor mentioned is that they are facing increased competition from #3 carrier Sprint. Certainly its Virgin and Boost brands are aggressively competing with unlimited service plans in the $40-60 range that directly target the two prepaid carriers. (Interestingly, all three are CDMA carriers, and of course Leap is a Qualcomm spinoff).

I see a different problem. Thanks to the iPhone success, almost every man, woman and child wants a smartphone, which in the US today means either the real thing or the Android substitute.

While the iPhone remains exclusive to the Big Two, Virgin has a good range of (slightly delayed) Sprint Android phones which has enabled it to grow rapidly. From my own brief experience as a MetroPCS customer last week, its Android offerings do not yet measure up.

It’s clear that MetroPCS knows that Android is crucial to its near-term success. Both CEO Roger Linquist and COO Thomas Keys talked extensively about Android phones during its earnings call last week. So if this is only a temporary problem — with “good enough” phones coming down the road — then subscriber growth and earnings may turn around.

Meanwhile, for more than a year Leap has needed the scale that its larger and faster-growing rival could provide by acquiring it. With its smaller subscriber base and incompatible data strategy, it will have even a harder time getting the latest Android phones.

Both MetroPCS and Leap are beneficiaries and victims of commoditization: they are using price to compete, but need acceptable quality commodity (i.e. Android) smartphones to be attractive to prospective subscribers. The decision of the Big Two to end unlimited data plans creates an opening for both if they have the right products.

The collapse of the MetroPCS stock makes it less likely that the long-fought merger will happen. For antitrust reasons, I think it unlikely that Verizon would be allowed to buy either carrier, and so far Sprint has been too sickly to consider further acquisitions.

I believe the next 18 months are crucial for both companies: if their offerings are considered comparable to the (non-iPhone) offerings of the Big Four, then their subscriber and ARPU growth will continue. Otherwise, they may become cheap enough for even Sprint to afford them.

Tuesday, March 29, 2011

Will Qualcomm lose billions on T-Mobile acquisition?

The proposed AT&T acquisition of T-Mobile raises serious antitrust issues, which have yet to be investigated by the FCC. (Of course, if the deal is blocked, T-Mobile’s long-term viability will be called into question.)

One casualty of the merger controversy could be Qualcomm’s expected windfall unloading the spectrum from its unsuccessful MediaFlo venture.

The FT reported Wednesday:
[T]he Washington-based Rural Cellular Association, which represents nearly 100 rural and regional telecommunications network operators in the US, told the Federal Communications Commission that it should delay AT&T’s proposed acquisition of the Qualcomm spectrum.

“AT&T is on a spectrum buying binge, including both this Qualcomm acquisition and the recent announcement that it will acquire T-Mobile,” said Steven Berry, the association’s chief executive.

“These actions are further proof that AT&T is doing everything possible to strengthen its already dominant position in the wireless industry at the expense of competition.”
I don’t know how seriously the criticism will be taken, but their logic is understandable: helping AT&T get more spectrum was less anti-competitive when taken separately rather in combination with buying their largest GSM rival.

The other implication, unfortunately, is that if AT&T can’t buy the spectrum, who will? If Verizon knows it’s the only serious bidder, it will try to buy it for 40¢ or 50¢ on the dollar.

I’m guessing independent network operator LightSquared could use the network to build a nationwide LTE footprint, and Qualcomm spinoff Leap Wireless (aka Cricket) would certainly be happy to have more spectrum for its LTE supplier.

However, I’m guessing LightSquared can’t go to its VCs and say “you got an extra $2 billion lying around anywhere?”

So if not sold to AT&T or Verzion, I suspect Qualcomm will need to sit on its spectrum or find some other use: the sub-10% market share carriers have less cash than it does to buy its valuable spectrum. Its balance sheet at the end of FY 2010 (Sept 26 2010) showed $18 billion in cash and cash equivalents.

Thursday, March 10, 2011

Paul's fifth anniversary

Both Xconomy and the U-T covered this week’s shareholder meeting. (I’m sorry I couldn’t make it, but it’s been harder to cover the meetings since I moved to Silicon Valley.)

Former U-T writer Bruce Bigelow focused on the five year anniversary of Paul Jacobs being promoted to CEO, while the U-T focused on the share price.

Alas for shareholders, the latter story is far less interesting. Now at $54, the stock has never tested its record $88 close at the end of 1999, at the end of the telecom bubble. While the stock has recovered wonderfully from its post-NASDAQ low of $13, for the past five years it has gone back and forth in a broad trading range of $30-60.
In that regard, it almost exactly mimics my Apple stock in the 1980s, when the correct strategy was to wait for the shares to double to $50, then dump them, and buy them back as they got closer to $25. (This strategy would have only worked twice in the last seven years with AAPL, with the dips of February 2008 and December 2008 legitimate buying opportunities.)

While 2010 provided record net income, sales have essentially been flat for the past three years. The stock price is highly dependent on the growth multiple, and the U-T quoted an analyst who’d downgraded the stock due to slowing growth.
So while the industry is continuing to expand its use of mobile data services — the driver of profitability for QCOM in this century — it’s not clear how much of that will accrue to the share price and its shareholders. The pressure on QCOM over the past few years has been the commoditization of even high-end handsets, pushing down wholesale prices and thus the basis for QCOM’s royalty payments.

As Bigelow recounts, Jacobs fis has a sound strategy for expanding Qualcomm’s influence and reach in the wireless industry, beyond cellphones and (with the Atheros purchase) beyond cellular to Wi-Fi and other forms of wireless communications. Still, it’s not clear whether these efforts will grow the company or merely replace shrinking revenues in existing business.

In this regard, Qualcomm is looking like any other mature tech company, like IBM, HP or Intel. A retailer or other low tech company can usually count on the same revenues year in, year out — but Moore’s Law tech companies must accepted that the old products will decline in price and thus must be replaced by upgraded or entirely new products.

Perhaps the world’s largest semiconductor company offers a ray of hope: Intel revenues were declining from 2007-2009 until things rebounded in 2010 with revenues up 24% and record earnings. According to its January earnings call, Intel benefitted from exposure to rapidly growing product categories and geographies. It remains to be seen whether Qualcomm’s diversification will bring it similar dividends in 2011.

Thursday, February 10, 2011

San Diego to WSJ: what about us???

The front page of the Bay Area edition of the Wall Street Journal this morning proclaimed: “Wireless Industry Calls Valley Home.” The inside headline said: “Phone Makers’ New Area Code: 650.” For members of the San Diego telecom industry, those should be fighting words.
The premise of the story:
According to IDC, sales of smartphones are expected to grow 39% world-wide this year from 2010 to 421 million units. More than 40% of those devices will run on operating systems developed within 10 miles of each other in Silicon Valley.
The article by veteran tech reporter Yukair Iwatani Kane presented a oversimplified and distorted version of the US wireless industry. It played up Sony Ericsson — the has-been cellphone marker in 2010 to 6th in global market share and off the map in smartphones. It never mentioned chips at all — nor Qualcomm, the largest cellphone chip maker or its San Diego hometown.

However, Kane can’t be held responsible for the most glaring error, that of the headline: the iPhone, its OS and app store are developed and run in the 408 area code.

Still, if the measure of mobile phone leadership is software platform market share (arguable but plausible), Silicon Valley is out in front. It didn’t have to be so: Seattle (through Microsoft) had many chances but blew it, and London was ahead for a decade (due to Nokia’s investment in Symbian Ltd.) until Nokia started to fold.

This of course is about the secular shift in cellphones: it’s not about the radios and networks, it’s about the software, platform, application and the Internet. (Intel’s dreams notwithstanding, the chips are all ARM licensees which means Qualcomm must fight relentlessly to gain and maintain market share.)

If the fight is over software, then San Diego will play a decreasing role in the growth of the wireless industry. When I helped start the SDSIC in 1993, we were concerned about the region’s ability to support local software companies, and modeled some of our practices after Silicon Valley forebears. Despite our hopes, the region’s software industry never grew all that much — certainly trailing Silicon Valley, Seattle and several other cities.

UCSD and Qualcomm alumni are starting firms, but the software engineering and VC talent will remain concentrated elsewhere in the state.

Qualcomm itself would rather switch than fight. Under Jacos fils, it’s become less interested in San Diego and is expanding in the Bay Area to get local design wins and tap its software and Internet expertise.

Thursday, February 3, 2011

Effect of zombie portfolio on LTE royalties?

The WSJ reports that the liquidation of Nortel is moving on to its portfolio of 4,000 telecommunications patents, worth as much as $1 billion.

The most strategically valuable are those related to LTE, given that the Canadian firm was aggressively developing 4G technology before it went bankrupt two years ago.

The WSJ listed four telecom firms as likely bidders — Apple, Google, Huawei and ZTE — all firms relatively light on 3G and 4G patents.

However, the article mentions as a possible bidder only one of the four major 3G patent holders: Nokia, Ericsson, Qualcomm and InterDigital. The latter is mentioned in the same breath as Intellectual Ventures, Nathan Myhrvold’s well known Silicon Valley patent troll:
Closely-held Intellectual Ventures and InterDigital use patents for offensive purposes, licensing them as broadly as possible and asserting them in infringement suits against companies that refuse to take a license.
A possible rival bidder is RPX, a “defensive patent aggregator” that lists Google, HTC, Huawei, Nokia, RIM and Samsung as members. For obvious reasons, Qualcomm is not a client of the company.

Without knowing where the patents will end up, it’s impossible to predict their impact on Qualcomm’s QTL division and its IP-based business model.

However, with two rare exceptions — Broadcom and Nokia — large patent portfolios in the hands of other telecom companies have had no significant impact on the QTL business. Qualcomm has managed to cross-license patents with its customers (including more than 15 years with Nortel) without jeopardizing its royalty rate.

If the patents go to Apple, Google or one of the Asian makers, I don’t think it will impact Qualcomm‘s royalty rate. (Instead, Qualcomm’s pricing power will depend on the relative strength of its LTE portfolio vs. its 3G or cmdaOne holdings.)

I think the story is different if the patents are acquired by IV or InterDigital. Either might choose to sue Qualcomm’s LTE chips for infringement, and — unlike Nortel, Samsung or even Broadcom — they lack their own hostages that QTL can threaten with its patent portfolio. Still, I think Intellectual Ventures is a far more serious threat to QCOM than InterDigital.

In 1993, InterDigital sued Qualcomm (and was countersued) over 2G CDMA patents. The upshot was that Qualcomm paid InterDigital a flat $5.5 million settlement while InterDigital customers paid royalties for use of Qualcomm’s patents. InterDigital’s has been settling with smaller firms, but lost a major case against Nokia in 2009.

InterDigital stock has doubled in less than five months, but is still trading an discount to Qualcomm’s. They have an incentive to rebuild their patent portfolio to strengthen their hand in 4G licensing.

Given they cut their R&D back by 30% in 2009 — and their 2010 quarterlies suggest that R&D remains cut — I don’t see how InterDigital could afford to buy even one of the six portfolios. It’s also not like them to partner — the don’t need a license to patents but the right to assert — but perhaps they could presell rights to the patents they buy to existing customers to help pay for the cost.

Friday, January 7, 2011

Atheros purchase continues shift north

Qualcomm doesn’t do acquisitions as often as Cisco or Oracle. The WSJ says it bought six companies in FY2010, one in 2009 and five in 2008. Almost all of its acquisitions are below $50m.

Like Apple, it prefers to make rather than buy. This could be due to a strong corporate culture, “not invented here,” hubris, or a realization that so many acquisitions are failures (at least for the acquiring company).

The $3.1 billion plan to buy WiFi chip maker Atheros is one of the biggest and most strategic acquisitions of the company’s history. (To put the size in perspective, the company’s market cap has hovered around $70-80 billion over the past decade). The next biggest acquisition was $1b in 2000 for GPS chipmaker SnapTrack, which made Steve Poizner a multi-millionaire and perennial candidate.

However, to me the strategic importance of Atheros seems more similar to the $800 million to buy Flarion in 2005, to acquire its OFDMA technology and cement its position as a 4G patent-holder.

Yes, the Atheros technology will help it compete more for tablets, as did its 2009 purchase of AMD’s handheld business. More broadly, it continues its shift away from a cellphone chip maker to a mobile device components company, as with the 2004 acquisition that led to the Mirasol color display technology that it hopes will power e-readers Real Soon Now.

But I think the major strategic importance is that it positions Qualcomm in direct competition with Broadcom, the Irvine-based patent nemesis. Broadcom has succeeded by integrating everything with everything else on a chip, commoditizing away single-purpose chips. For mobile communications device, Qualcomm is broadening its industry footprint in a way that gives current Broadcom customers more choices.

It also increases Qualcomm’s competition with Intel. In some ways, Intel helped Qualcomm by reducing Atheros recent growth and thus depressing the sale price. (San Jose-based Atheros was cofounded by Stanford University president John Hennessy).

Finally, I think this is part of the increasing evidence that Qualcomm is emphasizing growth outside San Diego. The SnapTrack acquisition formed the nucleus of what now is its Santa Clara campus. The big Q paid $80 million in 2007 for the low-rise campus to co-locate all of its Silicon Valley acquisitions. (Interestingly, Qualcomm has said nothing publicly about its Silicon Valley expansion efforts.)

View Larger Map

The 320,000 square feet facility is smaller than one building in San Diego, the 12-story building WT that is headquarters for QCT. Still, by modern office standards, the campus could hold nearly 1,000 workers, even if the parking lot seems to limit the campus to 500 or so.

Qualcomm’s founding CEO Irwin Jacobs moved to California to teach at UCSD. However, his successor, son Paul, did his Ph.D. at UC Berkeley and clearly has stronger ties to the Bay Area than his father ever did. The Santa Clara campus shows that rather than trying to relocate SV talent to San Diego — something that has been nearly impossible since the Linkabit days — that it will create a major foothold in the valley to take advantage of its tech talent and job mobility.

Tuesday, January 4, 2011

Life after Qualcomm: Sanjay's big reward

The breakup of Motorola became effective Tuesday: Motorola Mobility (MMI) gets cellular handsets and settop boxes, Nokia Siemens gets the cellular infrastructure business, Motorola Solutions (MSI) gets government & industrial radio clients, and Sanjay Jha gets to be COO.

The split brought a nice day one stock bounce of 9.5% for MMI and 6.6% for MSI.

On one level, it marks an ignominious end for the company that invented the handheld cellphone. It also clears the way for one or both of the companies to be gobbled up by bigger companies — no small concern given that Carl Icahn owns $2b worth of shares and (as always) wants to maximize his own short-term return rather than build a long-term winner.

It didn’t have to come to this: Motorola was the world leader in handset sales as late as 1997 and second until 2007, when it still led the US cellphone market. However, it was late to shift to digital and late to shift to software. (By comparison, the infrastructure business was never able to master the complexity of telephone switching and became uncompetitive once mobile radio technology diffused throughout the industry.)

Its handset business has been losing money for many years. As announced in March 2008, the handset spinoff was an attempt by CEO Greg Brown to dump the losing handset business after being unable to sell it. Even with its recent improvement, its survival is by no means certain.

Motorola co-CEO (now MMI founding CEO) Sanjay Jha deserves full credit for the turnaround over the past 30 months, in large part through his bold decision to bet the farm on Android. It’s too soon the say whether the turnaround is permanent, as MMI faces brutal competition in all the major categories where it competes: US market, smartphone market, Android handset market and even for Verizon’s loyalty (with the iPhone LTE due Real Soon Now.)

Still, it’s a good move for Jha, who as COO of Qualcomm was going to grow old waiting two or three decades for Paul Jacobs to retire. Very few Qualcomm execs seem to want to leave the mother ship — whether it’s because of the weather, lifestyle, or gross margins, I don’t know.

His gamble to move back east has certainly paid off. Even if MMI is unable to pull it off, he will certainly be snapped up by another tech company. Exhibit A: Eric Schmidt, who jumped from the sinking Sun Microsystems ship to become CEO of Novell and — without fixing its intractable problems — got named CEO of Google.

One unresolved question: will MMI keep settop boxes? The former General Instruments (with major operations in San Diego thanks to the Linkabit Videocipher spinout) accounts for about one-third of its revenue, but there are few obvious synergies. Now that Cisco owns its main competitor, Scientific Atlanta, there’s no obvious exit strategy, but I imagine finding a home for the STB business will be one of Jha’s 2011 priorities.

Cross posted to Open IT Strategies.