CDMA growth in China

The FT this morning has a profile of the innovative management of China Telecom, the CDMA carrier in the PRC.

From what the article says, the Ministry of Information Industry's grand reorg of the Chinese telecommunications services sector — reallocating mobile licenses and consolidating weak operations with strong ones — seems to be having the desired effect. Competition is intensifying and firms are investing heavily in rolling out 3G infrastructure, both depressing profits.

In the reorg, China Telecom inherited the 2G CDMA operations run by Great Wall (a People’s Liberation Army affiliate) that became part of China Unicom. CT has been rolling out EV-DO, but many assumed that with its US technology it would be at a disadvantage compared to China Unicom (with GSM/W-CDMA) and China Mobile (the dominant carrier, using China’s home-grown TD-SCDMA).

However, the FT says that China Telecom has the highest growth of the carriers, jumping from 28m to 44m subscribers. (By comparison, China Mobile has 500m). To quote FT:

Analysts say China Telecom has established itself as the best run of the three telecoms operators.

“They are much more of a pragmatic, commercial animal than the political animal of China Unicom,” says Duncan Clark, chairman of BDA, a telecoms consultancy in Beijing.

The article credits the company’s research lab (China Telecom Shanghai Research Institute), and a company-wide innovation initiative that encourages workers to be more innovative in developing and packaging mobile services. The company runs an annual internal innovation contest, while engineers are sent to the provinces to work with regional marketing reps to understand the market.

Obviously it will be a while before China Telecom threatens China Unicom (142 million subscribers), and it seems unlikely to directly challenge China Mobile. Still, Qualcomm (and the global cdma2000 ecosystem) are fortunate to have drawn such an innovative ally in the world’s largest mobile market.

FUD against EV-DO in China

W-CDMA supporters in China are running a campaign of fear, uncertainty and doubt (FUD) against EV-DO efforts there, in a rehash of their strategies from the 2G CDMA wars.

In the great 3G reorg of China last year that created three mobile operators, China Unicom got GSM/W-CDMA, China Telecom got CDMA/cdma2000 and China Mobile got the homegrown TD-SCDMA. On January 7, all three were awarded their 3G licenses after more than five years of delay.

In a story on China Unicom’s plans to sell the iPhone in China, Forbes included some commentary on China’s three-way fight for 3G market share:

Unicom was given a WCDMA (Wideband Code Division Multiple Access ) license. China Mobile, which holds a commanding 74% share of domestic subscribers, obtained TD-SCDMA (Time Division Synchronous Code Division Multiple Access), a homegrown 3G standard based on spread spectrum technology that is different from approaches used in the West). And China Telecom was allowed to develop CDMA 2000 (a hybrid 2.5 or 3G technology which built on code division multiple access, or CDMA, technology used worldwide.
…
Among the three, China Unicom's WCDMA is regarded as the leading 3G approach. What's more, it's the only 3G technology used by the iPhone.

This sort of FUD marketing strategy is a classic technique by a dominant player to marginalize competitors. IBM in the 1970s was credited with inventing the strategy for the tech industry, and of course Microsoft used it against open source software or other rivals in the 1990s.

Perhaps cdma2000 1x is a 2.5G technology ala EDGE. The fights between GSM and CDMA camps over what should count as “3G” caused a fair amount of disagreement.

But certainly EV-DO — as fast as W-CDMA’s HSDPA — is a 3G technology. This year China Telecom has issued a series of tenders for procuring EV-DO equipment. The company is preparing a new round of handset tenders and can brag about superior data performance.

So to say China Telecom is only developing “2.5G” is a lie. The claim about W-CDMA being the leading technology is true from an adoption sense, if not from a standpoint of technological performance.

I wasn’t there, so I don’t know where the reporter got the bad information. The Chinese equipment suppliers are the least likely suspects, since leading firms like Huawei and ZTE provide equipment to all three of the major standards: W-CDMA, cdma2000, and TD-SCDMA.

However, based on the bitterness of the GSM vs. cdmaOne (or W-CDMA vs. cdma2000) fight, the most likely suspects are those who want to commercially weaken cdma2000 and China Telecom. That leaves either rival operators (China Unicom, China Mobile) or foreign W-CDMA equipment providers such as Nokia and Ericsson.

Korea 3G finally shifts to W-CDMA

For 2G, Korea was exclusively cdmaOne, the only country in the world where this was true. Operators quickly got into 3G by offering cdma2000 on their existing frequencies, but the government licenses specified W-CDMA for new 3G frequencies that (IIRC) were compatible with the Japanese selections. As with anything else in Korea, each round of choices was designed to protect (or at least help) the export efforts of Korean companies.

The website Cellular News reported Thursday that in Q4 2008, the total W-CDMA subscribers in Korea finally passed those for cmda2000: 16.5 million vs. 14.9 million. For me, this marks the end of an era for Qualcomm’s original success story in Korea, marred only by the periodic royalty complaints.

Qualcomm's progress on 3G and 4G notebooks

In conjunction with this week’s Consumer Electronics Show in Las Vegas, Forbes has a long article on Qualcomm’s design wins for its Gobi chipset.

In 2007, it made an entrance with Gobi, a module that contains a Qualcomm chipset, global positioning system functionality and a modem that supports a wide range of third generation, or 3G, cellular networks.

That last point is Gobi's selling point. Its flexible modem enables users to connect to the Web anytime, anywhere, regardless of carrier technology. That's helpful in a world that toggles between two different cellular standards: GSM (Global System for Mobile communications) and CDMA (Code Division Multiple Access). It simplifies things for PC makers, too. "[Manufacturers] love it because it takes complexity out of the equation," says Dan Shey, a principal analyst at ABI Research. "Before, they had to stock a different computer model for each carrier."

In all, Forbes says five companies — Acer, Dell, HP, Lenovo and Panasonic — plan on releasing notebook computers using Gobi chipsets to provide 3G connectivity for mobile broadband users.

Since the Forbes article, two other companies announced new Gobi-enabled computers at CES: the $1000 OQO Model 2+ and Sony with its $900 P-series. Both are netbook-sized machines being sold at twice the price, and thus the vendors seem to be using Gobi as a way to sell a premium-priced computer.

The Gobi chipsets leverage Qualcomm’s strong relationships with carriers, enabling notebook makers to win certification of their 3G-enabled laptops based on a cellular carrier’s prior certification of Qualcomm’s technology.

Forbes warns, however, that dual-mode 3G may just be a small niche for global business travelers and not a consumer market. It also notes that Qualcomm’s 3G advantage — of being able to equally be able to support W-CDMA and cdma2000 (which it calls GSM and CDMA) goes away when we get to 4G when there’s only the GSM-inspired LTE. Qualcomm promises to upgrade Gobi for LTE.

(At one point it looked like WiMax might challenge LTE but now it’s clear that it won’t. That works out well for Qualcomm, which bet heavily against WiMax.)

When Qualcomm officially conceded two months ago that UMB is dead, I wondered what role Qualcomm will play in the future mobile industry, since for the first time since 1995 it doesn’t have a mobile phone standard of its own.

In 3G, Qualcomm has been aggressively exploiting the window of opportunity created by its 3G multimode expertise to create a premium-priced, differentiated product for notebook PCs. In the early days of 4G, Qualcomm will have a new opportunity to offer tri-mode chipsets — W-CDMA, cdma2000 and LTE.

However, in the long run, the 4G world will be one of a single standard with many entrants, including low-cost producers like Huawei. High competition for a standardized product equals commoditization, so Qualcomm will either have to compete at that level or find new ways to differentiate its products.

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.

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.

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.

InterDigital sells Apple a 3G license

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

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

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

Technorati Tags: 3G, Apple, iPhone, patents, InterDigital

Strike three for Qualcomm

Qualcomm Monday lost its longshot appeal to overturn the ITC ban on importing QCOM chips that infringe a Broadcom power saving patent. Basically the USTR said she wasn’t going to overturn a decision reached through the normal administrative process, no matter how big the impact.

There’s no way to spin this. Qualcomm lost, it’s bad for Qualcomm, it’s bad for Qualcomm’s future market share, it’s bad for Qualcomm’s patent-based business model, and it’s bad for Qualcomm’s customers. Sure Qualcomm still hopes to appeal the patent validity but that seems even less likely to succeed.

Qualcomm pulled out all the stops, commissioning bigshot economists (The Brattle Group) to say that the ban will cost consumers billions. Now it will be interesting to see if that proves to be true (since both Brattle and Qualcomm will lose credibility if it doesn’t).

About the only good news for the home team is that (after more than a year) Qualcomm finally has a workaround to avoid infringing the patent.

Despite their huge win, it’s hard to believe much in the Broadcom press release, which seems more about threatening Qualcomm’s shareholders and customers (to increase pressure for a settlement) than actually commenting on the legal ruling. Quoting General Counsel David A. Dull, the press release proclaims:

“According to the IEEE Spectrum, Broadcom possesses one of the world’s most powerful semiconductor patent portfolios,” Mr. Dull said.

Let’s see. Since when is a magazine article an authoritative source of how important is a company’s patent portfolio? “One of” could refer to top 20. Even if it was “top 1,” what proportion of the patents relate to mobile phones? And how does this relate to the relevance of Broadcom’s portfolio to Qualcomm’s products, or the relative importance of the Broadcom and Qualcomm 3G patent portfolios?

I could go on. Broadcom still thinks it will get $6/chip from Qualcomm until patent 6,714,983 expires. Qualcomm obviously has no intention of paying — perhaps hoping to find some outside entity to put a reasonable value on the patent.

As best I can tell, the patent in question was invented by employees of Intermec Technologies of Cedar Rapids Iowa more than 12 years ago, and the patents were acquired by Broadcom as part of 150 patents it bought for $24 million from Unova in 2002. (Apparently the Wall Street Journal reported this in June, as did the Seattle Times. It took me longer to write this paragraph than it took me with Google to identify the Cedar Rapids inventor of the patent as working for Intermec and tie those patents to the Broadcom/Unova deal). Buying patents makes Broadcom a savvy investor and a clever patent troll, not an innovative company.

Still, Broadcom is winning under the current rules. Qualcomm was first sued by Broadcom in May 2005, and seems to have consistently underestimated the business consequences ever since. If I were a large institutional shareholder (or a customer like Verizon, Sprint or AT&T), I would ask what Qualcomm has been doing for the past two years. A smart lawyer, R&D manager (or CEO) would have ordered a full re-examination of all Qualcomm products to see if they might infringe any of the Broadcom patents claimed, to make sure that a work-around was forthcoming.

Six months ago, Qualcomm appointed a recently retired U.S. Attorney to be VP and legal counsel. If she can’t change their luck, it would seem as though some more significant management change would be due.

Technorati Tags: 3G, Broadcom, patent infringement, Qualcomm

InterDigital entering the product business

David Mock — author of The Qualcomm Equation — on Tuesday summarized the stock analyst recommendations on InterDigital Communications. InterDigital is one of the larger WCMDA patent holders — along with Qualcomm one of the few companies whose WCDMA business model is about patent royalties.

The difference is that Qualcomm decided not to spin off the chip-making business (after it settled its last patent dispute with Nokia 5 years ago) and thus it has two major divisions: QTL (technology licensing) and QCT (fabless chips for CDMA, cdma2000 and WCDMA).

I had not realized that IDCC’s business model is based on large one-time settlements. Here’s how Mock explains it:

Revenue. On average, analysts look for InterDigital to report $52 million in revenue this quarter, way below the $297 million last year, but that number was inflated with a one-time gain.

Earnings. The average analyst expectations vary wildly but average out to a $0.01-per-share loss for the quarter. …

Significant one-time settlements have anchored the bulk of InterDigital's past revenue.

What was really really fascinating was the S&P summary of IDCC’s financials:

Margins	12/05	03/06	06/06	09/06	12/06	03/07
Gross	69.7%	73.1%	88.4%	89.2%	89.4%	88.7%
Operating	12.1%	21.9%	66.9%	68.7%	70.0%	68.5%
Net	33.5%	38.2%	53.7%	54.8%	46.9%	46.3%

I do not give stock advice — especially (after riding Iridium all the way down) to myself. So I don’t offer any opinion about the IDCC prospects, only the observation as someone who studies the telecom industry (and mobile phone patents) that the IDCC revenues and profits are among the most variable (some would say erratic) in the industry.

Motley Fool’s readers are very bullish on the stock. But from what I’ve seen, the stock has a cult following like a lot of other thinly traded stocks. IDCC is tiny compared to other 3G telecom suppliers. Qualcomm is #317 on the Fortune 500, with Motorola #61; Samsung is #63, Nokia #135 and Motorola #152 on the Forbes Global 2000).

Now IDCC wants to get into the baseband ASIC business for 2G and 3G phones — making IDCC’s business model an exact copy of Qualcomm’s. (I suppose the Qualcomm loyalists would say “a pale imitation of Qualcomm’s.”) While depressing margins, this should smooth out revenues and give somewhat of an insurance policy against patent problems going forward.

But, as Mock points out, that will put them into direct competition with Qualcomm, TI and Broadcom. Even with foundries, I would imagine such chip design is complex, and its three major rivals have a big headstart. As the newcomer, it will be interesting what sort of competitive advantage IDCC will have to offer.

Technorati Tags: 3G, business models, patents, semiconductors

China's 3G plans

In February 2001, I made my first (and thus far only) visit to China, to research Qualcomm’s efforts in China. The result was an MBA teaching case “Qualcomm in China,” published in two parts by Ivey Business School (A and B) and in a slightly different form by the Asian Case Research Journal (DOI: 10.1142/S0218927502000257 and DOI: 10.1142/S0218927502000269). This case is the basis for the China market entry discussion in the 2005 book The Qualcomm Equation.

When I finished the visit (and the research), the one thing I was itching to follow up on was China’s plans for its own 3G standard, TD-SCDMA. It was obviously a big issue: direct efforts by the Chinese government to delay 3G deployment and protect access to its market to help Chinese firms develop a national (and nationalistic) technology, to help Chinese firms gain privileged market access and (as with DVDs) pay less in foreign patent royalties.

Also interesting was the role of Siemens. By then, it was already an also-ran in the global mobile phone industry and thus were transferring technology to the Chinese in hopes of gaining market access; since then, they sold their handset business to BenQ (a business that then went bankrupt) and transferred their infrastructure to a joint venture with Nokia.

I really wanted to follow up on this — it was a top goal of mine, since this was obviously the next big standards battle, both in terms of market size and also as a technology policy issue. But I lacked the funds, time and language skills to pursue it, so put it aside to do “someday.”

This week I’m attending DRUID, the main European academic conference on the economics of innovation. I was fortunate to meet Hui Yan (or as they would say in Singapore, YAN Hui), a doctoral student of my friend Prof. Bent Dalum at Aalborg University in Denmark. Hui spent 4 years working for mobile phone companies in China, including Motorola and Nokia.

Hui is doing her dissertation on TD-SCDMA development and policy, focusing on the complex interactions between the Chinese government, domestic operators, domestic manufacturers and foreign manufacturers. At the DRUID conference on Wednesday, she presented a paper summarizing her findings thus far. She describes the long complex path that the Chinese government has taken in nurturing and protecting TD-SCDMA.

Today, China has no 3G service, while more than 450 million subscribers are using 3G in 134 countries worldwide. GSM carrier China Mobile once hoped to roll out WCDMA service in 2004. As with CDMA carriers in Japan and Korea, China Unicom could presumably upgrade from cdmaOne to cdma2000 at any time it wants.

Hui reports that both major carriers would prefer to use the upgrades to their existing technology (presumably because they prefer proven solutions than relying on the unproven new technology.) However, she reports that China’s MII has again delayed 3G another year to 2008 (or later) so that TD-SCDMA will be viable before any 3G licenses are awarded. Writing as from a Chinese perspective, she laments that this “Chinese” technology only has 7% of its patents held by Chinese firms, versus 66% by the three big European manufacturers (Nokia, Ericsson, Siemens).

As with the rest of the world, 3G is being pushed by manufacturers looking to sell multibillion dollar infrastructure upgrades; in this case, this is the shared interest of foreign and domestic manufacturers, even if they prefer different technologies. Meanwhile, absent proven demand for 3G services, the Chinese carriers would prefer to just keep growing their market penetration.

Technorati Tags: 3G, CDMA, China, TD-SCDMA

Qualcomm's W-CDMA/cdma2000 chipset

Once upon a time, the Europeans and Japanese that strategically allied to make a common W-CDMA standard in hopes of pre-empting the Americans and dominating the world, but that didn’t happen.

The whole global roaming argument seemed like a nonstarter, as a few people said at the time. Sure, Europeans wander around within the EU and perhaps to Mediterranean beaches, but how many go to the US or Asia? How many Americans travel enough outside North America to care about GSM (W-CDMA) coverage? I can’t imagine it’s more than 5%.

But without a single standard, there was an interest in having dual-mode phones — more from the CDMA subscriber sides than the GSM side, since there are lots of W-CDMA only countries and only a few that are exclusively or dominated by cdma2000. Thus for years, Qualcomm has been planning and now offering MSM chips that support both the W-CDMA and cdma2000 variants of 3G technology.

Reading the Financial Times last month, I saw a brief (and glowing) review of the Blackberry 8830 “World Edition”, which uses the Qualcomm chips to provide a dual mode capability. It also got a generally positive review by InfoWorld. and from CNET. Someone said that there have been other dual mode phones (presumably by LG, Samsung or Sanyo), but if there have, they have not been visibly marketed in the US.

The original US reviews were with Verizon, but now Sprint is advertising that this phone is “coming soon.” So both companies have an attractive alternative to the claims of AT&T (née Cingular) promoting world phones.

Technorati Tags: 3G, CDMA, Qualcomm, W-CDMA

Qualcomm says “no” to 20 cents on the dollar

Kathryn Balint of the U-T had an interesting day two (three? twenty?) story this morning (C3 in the dead tree edition) on the Nokia-Qualcomm negotiations over W-CDMA patents.

This time last week, reporters breathlessly reported Nokia’s PR that it had “paid” Qualcomm $20 million for rights to use Qualcomm’s patents. When I was a business owner, being “paid” meant that I had money in hand, in my bank account or a check I could cash.

What Balint’s story today makes clear (even if she doesn’t say so directly) is that Nokia made a conditional offer of payment. Not surprisingly, the proposed payment came with a set of legal conditions:

Qualcomm also said it rejected “the accompanying multiple pages of terms upon which Nokia conditioned its payment.” The exact terms proposed by Nokia remain confidential.

Nokia has known about this deadline for more than a year, and is clearly mounting a PR campaign to both lower people’s expectations as to the value of Qualcomm’s portfolio, and insulate itself from the public perception that it’s a wanton patent infringer (like, say, Vonage). Nokia corporate has been issuing an ongoing stream of press releases.

This morning’s release says Qualcomm is a big user of Nokia patents and thus (presumably) should offer Nokia a reduce royalty or royalty-free cross-license. Of course, if Qualcomm got in the habit of doing that, its whole IP business model would be in jeopardy.

Balint had one other tidbit — the $20 million Nokia offered is what is “fair and reasonable” for the entire quarter. If (as reported) Nokia is paying $450-500 million annually in royalties, then this is less than 20¢ on the dollar from the previously agreed-upon terms. No wonder Qualcomm dismissed the offer as unrealistic.

Somewhere (can’t find the link) I saw speculation that Nokia hoped for a 50% royalty reduction (which if granted everywhere would reduce Qualcomm’s annual net income by one-third). If they offered less than 20%, then clearly that was not “fair and reasonable” but a negotiating ploy.

Of course, outsiders have no idea what’s going on behind closed doors, which makes it doubly important to ignore the PR war.

Technorati Tags: 3G, business models, Nokia, patents, Qualcomm

All Quiet on the Western Front

For nearly century (ca. 1840-1920), the dominant form of warfare between major powers was massed armies, supported by artillery. Long-distance barrages of cannon, mortar and artillery would “soften up” the opponent, particularly during the U.S. Civil War and the Western Front during the Great War (the war to end all wars). In such a context, an unexpected nighttime pause in shelling (I’m told) could be an unnerving event — suggesting either the opponent was either reloading for a major barrage, or moving forces forward for a full frontal attack.

Today (Tuesday), the lack of news on the bitter Nokia-Qualcomm IPR fight is eerie. By most calculations, April 9 (yesterday) was the last day that Nokia’s 2001 CDMA patent license with Qualcomm was valid, and thus any Nokia W-CDMA product shipments today would potentially be in violation of Qualcomm’s patents.

The stakes are high. Based on numbers given by Qualcomm CEO Paul Jacobs at the annual meeting, I estimated that the annualized (post-tax) value of Nokia royalties to Qualcomm’s bottom line was $250-400 million/year, consistent with the $450 million to $500 million (pretax) annual top line estimate made by stock analysts. However, since Nokia is still shipping some GSM phones without UMTS, the proportion is only going to increase as UMTS (W-CDMA) becomes dominant in Europe and starts to be deployed in the US.

This is really the second battle of a war that began nearly 10 years ago. In 1998, Qualcomm held the dominant IPR in the 2G IS-95 (later cdmaOne) but essentially none in GSM (from the EU) or IS-54/IS-136 (the Western Hemisphere D-AMPS). The GSM group (led by Nokia and Ericsson) and the Japanese had agreed to combine a GSM network with a Japanese W-CDMA air interface to create a 3G standard before the Americans could get their act together. The hope of the group (by then called 3GPP) was that they would not need a license to Qualcomm’s CDMA technology, or that Qualcomm could be forced to cross-license its patents (and thus cancel out royalties) as the EU manufacturer cartel had done with GSM. (These patents formed an entry barrier well-documented by the research of my colleague Rudi Bekkers.)

The last battle was when Ericsson gambled that it could ship UMTS phones without a Qualcomm license. The IPR fight threatened to become a EU-US trade war, until in March 1999 the two sides announced a deal. Qualcomm dumped its money-losing infrastructure business and got Ericsson to sign a patent license: despite hand-wringing at the time, it was a clear victory for Qualcomm. Ericsson has since closed the CDMA infrastructure division in San Diego (for which it paid a reported $250 million), leaving that market to Lucent and Nortel.

The speculation now is rampant: both sides must dig in, and both sides must settle. The world’s largest cell phone maker has a business model based on selling phones. Thus, they have been pushing for years to change the rules for UMTS royalties in two ways. First, they want value to be determined by their patent counting proposal (rejected by Qualcomm) that argues that Qualcomm’s patent royalties should be proportionate to its share of the UMTS IPR. Second, they want total royalties should be capped at 5% so more buyer money ends up in the hands of cell phone makers. (Nokia claims its total UMTS IPR costs are less than 3%, but — as with all cell phone IPR royalties — the real figures are not public).

The world’s largest cell phone IPR holder has sought to stick to a business model that says “use one patent, use them all, the price is the same” — a price that (with the notable exception of a one-time deal in China) is around 4-5%. If Qualcomm cuts royalties for Nokia, it will have to cut royalties for almost everyone else, and its IPR royalties (1/3 of revenues but 2/3 of profits) will fall across the board. So this is a pile of money to Nokia but Qualcomm’s entire future.

Conversely, both sides have weaknesses. Nokia’s offer of a token $20 million royalty payment has been suggested to be an attempt to avoid treble damages if they lose the patent lawsuit they plan on winning. Meanwhile, this is the first real test of leadership for Jacobs fils, while Jacobs père in his long career has created two companies, fought the long uphill war to establish CDMA, and of course won the aforementioned skirmish with Ericsson.

To me, the most unremarked development last week was Qualcomm’s demand for arbitration. Unremarked, perhaps, because journalists (Bob Metcalfe aside) haven’t run a business. In normal circumstances, arbitration is a win-win — get a quicker, cheaper resolution without spending piles of money on lawyers. While I don’t know the specific clause in the agreement, Qualcomm’s move implies that they think they have a stronger hand before a neutral third party — absent some new legal theories of IPR royalties of the sort Nokia is trying to establish. In 2003, Nokia requested binding arbitration with InterDigital in 2003 and lost, so perhaps they don’t want to try that route again soon.

But the reality is that (as elsewhere in the U.S.) the only short-term winners are the lawyers. As the UT’s Kathryn Balint reported in an nugget-filled story Monday, Qualcomm’s legal spending has ballooned from $50 million to $200 million a year. Of course, Qualcomm is waging a war on many fronts as its rivals seek to rein in (or end) its business model. Still, Nokia’s lawyers aren’t working for free (and it still has litigation with InterDigital) so its legal spending has also ballooned recently (I’m guessing to approach $100 million/years).

Even if Qualcomm were to win this battle, its legal fights are far from over. As Rob Black of Seeking Alpha blog notes, the next major decision is due May 8 in the ongoing fight with Broadcom.

Technorati Tags: 3G, business models, Nokia, patents, Qualcomm