Casino Royale: The Story Of Qualcomm

There is something about technology companies that makes them want to dominate the world. Oracle, SAP, Microsoft, IBM, Google and even Apple all want the world to veer around to their point of view and therefore their products. Maybe it is something to with the transient nature of technology advantage. Those who manage to be dominant, even for a short-while, are seen as visionaries. And then there are those who are almost in that camp but not quite. For much of its life Qualcomm has been in the latter camp — the almost-Microsoft.

It was founded in 1985 by MIT professor-turned-entrepreneur, Irwin Jacobs, together with six of his friends. They had invented a proprietary technology that became the seed for the wireless standard CDMA, a technique that allows large amounts of information to be transmitted over limited wireless spectrum by using complex matching algorithms.

CDMA began to be adopted by the world’s mobile operators from the mid-90s after years of relentless hard-selling by Jacobs, backed up by equally relentless patenting by his engineers in the
R&D department.

Globally, this strategy has been very successful. Today, the company founded by Jacobs is led by his son Paul, and sits on a pile of over $18 billion in cash while generating another $2-3 billion in free cash flows every year!

While this is brilliant in itself, India had eluded Qualcomm’s grasp. It has not made too much money here because its business model has just not worked here. However, things might be on the cusp of a change for Qualcomm because of a change in market dynamics and some canny risk-taking by the company to adapt its business model to fit this changed scenario. A win here will not only get it success in India, but also sink the ambition armada of its longtime foe, Intel, and with it, spell the endgame for the rival wireless standard backed by it — WiMAX.

Qualcomm’s model as it exists is simple. Be inventive, file as many patents as possible in wireless communication, and then build products around those or wait for people to queue up to use those patents and pay a nice royalty to the company.

Qualcomm’s patents are critical to almost all major wireless standards on the GSM, CDMA and even LTE (Long Term Evolution) sides, helping it squeeze a royalty out of quite literally anyone and everyone. An army of its lawyers and patent experts go after any company  that dares touch its wireless IP without paying for it.

The Way It Works
People tried to design around Qualcomm’s 3G patents but it was very tough because all patents are usually inter-related,” says Shiv Putcha, an analyst with telecom consulting firm Ovum. “Most patents can be traced back to original innovations and patents that were at the root. You simply can’t get around it,” he says. Nokia and Samsung both found this out the hard way. In 2008, after a three-year legal battle over the use of its technologies in Nokia’s phones, Qualcomm won $2.3 billion from the world’s largest phone maker and an assured stream of annual royalties over the next 15 years. In 2009 it won $1.3 billion from Samsung plus additional royalties over 15 years.

The biggest chunk of  Qualcomm’s revenue, over 60 percent of roughly $10 billion annually, comes from selling its own proprietary chipsets to mobile phone, notebook or data card makers. It is the world’s largest “fabless” chip maker, meaning it designs its chips but outsources their manufacturing to others.

Another 30 percent — and this is the interesting part, one which gives it a profit margin of nearly 85-90 percent — comes from licensing its formidable IP (intellectual property) around wireless communication (over 12,000 US and over 50,000 international patents) to chip makers like Texas Instruments or Infineon, mobile phone makers like Nokia or Samsung and equipment makers like Huawei or Alcatel-Lucent. For instance, it takes between 4-5 percent of the wholesale price of any CDMA or 3G phone made or sold anywhere in the world.

Don’t Say Hip, Say Cheap
In India, however, CDMA phones — the essence of Qualcomm’s business — never took off, though CDMA’s entry into the Indian market in 2000 was one of the most disruptive events in Indian telecom history. That’s because Tata Teleservices and Reliance Communications (RCOM) used CDMA technology as a Trojan horse into Indian mobile telephony, passing it off (wrongly) as a cross between a fixed and mobile service.

Though this flash-bang entry established Qualcomm firmly in India, it left the company with two serious issues.

First, its CDMA platform, though more advanced than GSM on most counts, quickly got relegated to the lowest end of the price and consumer segments because CDMA operators like Reliance presented it as a poor man’s technology. They did this to quickly mop up the millions of lower-income potential subscribers still not signed up for GSM.

Qualcomm also alienated itself from GSM incumbents like Bharti Airtel and Vodafone (then Hutch) who felt, rightly, that it was the ammunition provider for their upstart, backdoor competitors.

The net result was that Qualcomm was left picking up low value crumbs from the bottom one-fourth of India’s mobile market — CDMA subscribers. For close to 10 years Qualcomm has remained in that position. And now that the two members of the CDMA camp — RCOM and Tata Teleservices — had both switched allegiance to GSM, people expected Qualcomm to stay down, and out. 

There Will Be Changes
But in technology as in politics, to quote Bob Dylan, “…the loser now/Will be later to win.” A change in circumstances in India and some humble learning means Qualcomm could be a force to reckon with in the near future.

The first star that heralded its new fortune was the successful completion of India’s 3G auctions. Because Qualcomm’s IP is embedded in all 3G technologies, it will make a 4-5 percent cut off every 3G phone that will now be sold in India. In one shot it stands to make money out of almost every new phone sold in India versus just CDMA phones earlier.

 

 Illustrations: Vidyanand Kamat

“Till now India was driving the very low end for us, with profits significantly lower than other markets. But there will be a massive change once 3G kicks off because we’ll work with all the operators, including those that saw us as their enemy,” says Paul Jacobs. “The average selling prices of our phones will go up as well. Over 2014, as a market for us, India might then only be surpassed by China,” he adds.

The second omen was on March 11, at a press conference in New Delhi’s Oberoi hotel, when Kanwalinder Singh, its India head said, “Today I’m very proud to announce that Qualcomm has invested one billion US dollars into India.”

Singh did not spend that money in building offices, hiring thousands of new employees or buying local businesses. He spent it to buy 20 megahertz (MHz) of spectrum in the cities of Mumbai and New Delhi and the states of Haryana and Kerala. Qualcomm was one of the six companies that won precious spectrum to offer high speed “4G” wireless broadband to Indians. The $1 billion spent in India was its single largest bet anywhere around the world.

The funny thing though is that Qualcomm is betting on deploying a technology that it didn’t think much of to begin with, a commercially unproven technology called TD-LTE originally developed by the Chinese.

Learning from the Chinese
The Chinese government, in the mid-90s, decided to develop a technology to avoid paying royalties to Western companies like Qualcomm. They created TD-SCDMA, a 3G wireless standard. But it never really took off. The Chinese, in order to avoid paying royalties, had to reinvent the wheel. This made their technology cumbersome and inefficient.

The Chinese pumped more resources into it and refined it into TD-LTE. They also roped in two large Western partners,  Verizon and Vodafone, to conduct joint trials of LTE combing the Western (FD) flavour with its own (TD) one. Julian Grivolas, an analyst with Ovum in Paris who tracks the LTE space closely, says China’s goal was to make sure that this joint LTE becomes the next equivalent of the mobile world’s ubiquitous GSM standard.

But the company that took advantage of this trend the fastest was the one which was the last to join the LTE party — Qualcomm. For that it had to swallow its pride and abandon Ultra Mobile Broadband (UMB), a 4G technology it had been developing for many years. In late 2008, it  abandoned UMB to focus exclusively on LTE when it saw big operators tilting towards it. A few years earlier it had already spent over $800 million to acquire Flarion, a company with a significant amount of patents in areas related to LTE.

Qualcomm smartly co-opted its erstwhile foe China into becoming an ally by announcing plans to build new “multi-mode” mobile chipset that would combine the version of LTE that Qualcomm and a galaxy of mobile companies like Ericsson and Nokia had developed along with what  the Chinese had developed.
Given that a significant chunk of TD-LTE patents rest with Chinese companies like China Mobile, Huawei and ZTE, the only way Qualcomm would have integrated them into its own offerings would be by cross-licensing — basically sharing patents with them. The Chinese are returning the love because a global acceptance of TD-LTE will mean cheaper equipment prices for its mobile operators and larger markets for its equipment vendors.

With TD-LTE under his belt, Jacobs knew he had WiMAX cornered.

“TD-LTE parked its tank right on WiMAX’s lawn. And there was going to be conflict,” says Gabriel Brown, an analyst with telecom consulting firm Heavy Reading in London.

Intel Meets Its Match
It was back in 2002 that Intel bet big on a fledgling technology called WiMAX which allowed for high-speed wireless broadband with speeds up to 30 Mbps over distances as large as 40-50 km. Faced with plateauing sales of its mainstay PC processors, it figured that consumers would rush to upgrade to newer processors embedded with WiMAX. The importance of WiMAX to Intel can be judged from the fact that it gave the responsibility for popularising it to Sean Maloney, an executive vice-president at Intel, widely slated to become its next CEO

nder Maloney’s leadership Intel became the de-facto cheerleader for WiMAX, investing huge resources
to present WiMAX as the best 4G option for consumers, especially in developing countries.

A key reason for Intel’s bullishness was because WiMAX was designed to work better over “unpaired spectrum”. All wireless communication take place over two types of spectrum: Paired, meaning there are two equal chunks of spectrum to send and receive information, and unpaired, meaning there’s just one unbroken chunk for receiving or sending. Repeated attempts to get Intel to answer to queries were met with no response.

Voice conversations, being symmetric (carrying one party’s voice is as important as carrying the other’s) have traditionally been carried over paired spectrum. In contrast, data is usually asymmetric, meaning we tend to download much more than we upload, and is hence better suited for unpaired spectrum.

But as wireless data traffic skyrocketed around the world over the last few years, regulators in country after country kept coming up short of enough paired spectrum to feed their telecom operators with. Which was good for WiMAX, but bad for FD-LTE.

“There was an uneasy sort of detente that WiMAX was going to be used for unpaired spectrum and [FD] LTE over paired spectrum. There was no agreement or anything, just assumptions on the part of a lot of people,” says Brown.

 

  Illustrations: Vidyanand Kamat

Until one fine day the Chinese decided to make LTE work over unpaired spectrum as well. That technology was TD-LTE.

The result: Operators around the world, even WiMAX ones like Clearwire in the US and Yota in Russia, decided to cast their lot with TD-LTE. Big equipment backers like Nokia and Cisco backed out too. And now with India, a market large enough to tilt the fortunes of a new standard, appearing to veer towards TD-LTE, WiMAX and Intel are in a spot of bother and Qualcomm with a fairly open field. “WiMAX is a proven technology,” says Jacobs, before mischievously adding, “Proven to be a failure!”

Those in the know of things say Qualcomm’s intention is not to build out its own 4G network in India, but only to conduct limited demo trials in its four circles to show that TD-LTE works as advertised, especially alongside 3G and 2G. Within a couple of years we might see one or more operators, like Airtel or Vodafone, become equity partners with Qualcomm in a new joint venture. It will be the operators who will then use the 20 MHz spectrum that it won to build their own 4G networks.

In the interim, Qualcomm will lean on the 3G operators to only buy equipment that can easily be upgraded to LTE, thus keeping an open door for 4G. It will also try to cobble together a “nationwide alliance of the best operators”, says Singh, so “everyone’s 3G and LTE works together.”

A few years earlier, Singh might have found it hard to convince Indian operators to collaborate. But faced with a new competitor in the form of Reliance Industries, the blue whale in the ocean of Indian industry, they may not have any option but to bury their differences and follow the light from Qualcomm’s torch.

Countdown to 4G
So far, mobile networks have been designed primarily to carry voice rather than data, though every iteration since the 1990s has allowed for faster and faster data transmission speeds. The world’s first “fourth generation” (4G) networks, when they start appearing from 2012, will instead be designed primarily for high-speed data transmission. Here’s how mobile networks have been evolving.

First, There Was Voice
The first GSM mobile networks in the early 1990s (called second generation, or 2G) were designed to carry voice. Users could still exchange SMSes sent over idle signalling channels. Qualcomm’s 2G rival to GSM — cdmaOne — too was optimised for voice, but significantly provided for data transmission at speeds of up to 14.4 Kbps.

Need for (Data) Speed
With the Internet gaining popularity, there was a need for faster data traffic. Enter 3G and 3.5G. CDMA became the technical foundation for 3G in all camps (W-CDMA for GSM; EV-DO for CDMA), offering speeds up to 2 Mbps. These evolved into the 3.5G standards HSPA and EV-DO Rev. A & B, respectively. Many thought ubiquitous mobile television and video calls were finally here, but that didn’t happen. In 2007, WiMAX was added to the list of 3G standards. It was designed almost purely for wireless broadband to begin with.

Finally, 4G
Many mistakenly refer to WiMAX and LTE, a rival high-speed standard, as 4G. Neither comes close to the 1 Gbps data download speed that 4G needs.