The Story Of Qualcomm

[ravi_patent 28]

MoneyControl

Monday, July 12, 2010

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 USD 18 billion in cash while generating another USD 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 USD 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 USD 1.3 billion from Samsung plus additional royalties over 15 years.

The biggest chunk of Qualcomm’s revenue, over 60% of roughly USD 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% — and this is the interesting part, one which gives it a profit margin of nearly 85-90% — 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% 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% 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.

_“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 USD 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.

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.

[vishalmcp 8]

wow.... awesome article dude....

[raccoon 53]

Very interesting indeed!

[vikasmahajanz 33]

nice one , really liked .... got to know what BIG companies are doing

[::Hitesh:: 1,763]

Real backbone of Reliance like companies !!

Due to Qualcomm i am here ! 

[kesav 127]

A very nice article on Qualcomm.......................

What patents can do?

Qualcomm is an answer.

Atleast now, Indian companies/individuals will focus on filing and protecting their IPRs.

Govt. should adequately and appropriately staff all our patent offices.

Edited July 14, 2010 by kesav

[ravi_patent 28]

because of the qualcomm royalties cdma providers like reliance/ tata could not do fake activations and were denied the govt sponsered free lunch(spectrum based on numbers).anil ambani made attempts to convine quallcom ceo to reduce royalties to what chinese are paying.but failed. only then he decided to join gsm league!

[ravi_patent 28]

@kesav

if patents can increase prices ,(from quallcomm experience) what benefit we indians will have if indian companies also secure patents? jus qurious

[drmadhu 87]

Nice Articale.

[Maulik.Parekh 34]

Thanks for sharing the article .. really a nice one ....

[KumaarShah 143]

@ ravi,

Interesting reading, good article...

[kshah 452]

Very good article on Qualcomm, I really hold qualcomm responsible for poor state of CDMA.

@kesav

if patents can increase prices ,(from quallcomm experience) what benefit we indians will have if indian companies also secure patents? jus qurious

Patents are very expensive affair and require great vigil to protect patent. Apart from individual efforts, even judiciary need to be very pro active else patent cases can never come to a logical end.

Also there is nothing like world patent even under TRIPP. One has to get patents in each and every country. So one has to spend for patents, attorney and annual maintenance of patents.

I am not saying that patent should not be done or we should keep away from patents, but protecting patent is a challenge in India

Edited July 14, 2010 by kshah

[parin 857]

Nice Article

[kesav 127]

Patents are like one time investment(do-it-forget-it) but continuous down-pour of revenue.

If your idea is not patented, somebody else will patent that idea and you'll be paying royalty to someone for your own idea.

Indian corporates who want to become global have to learn how to capture ideas and monetize it before it reaches competitor's radar.

CDMA's failure is more to do with Europe's ban on CDMA and Nokia's inflexibility(read as greediness).

Qualcomm's excessive royalty is also one of the contributing factor but certainly not the key factor.

Let us be clear. CDMA phones are the cheapest inspite of globally having less market size and royalty.

Royalty forms very meagre portion of the total cost of handset.

[ravi_patent 28]

@kesav

from my recent memory..

lg gsm handset having mp3 player costs around 1600

lg cdma having mp3 player costs around 2700

do u still believe that royalties are not the reason..pl see

http://www.thehindubusinessline.com/bline/2006/07/03/stories/2006070303350200.htm

[kalpeshaparmar 66]

Great in depth knowledge........

Good explanation........

[KanagaDeepan 1,084]

Nice article... Now I can understand why CDMA biggies, Ambani and Tata shifted to GSM..

[ramtech 47]

@kesav

from my recent memory..

lg gsm handset having mp3 player costs around 1600

lg cdma having mp3 player costs around 2700

do u still believe that royalties are not the reason..pl see

http://www.thehindubusinessline.com/bline/2006/07/03/stories/2006070303350200.htm

Royality payable to qualcomm is 4% - 5%(6%) on MRP of the handset.As per this calculation

Rs.1000 gsm handset should cost 40-60rs more in CDMA

Rs.10000 handset should cost 400-600rs more

but in reality we are paying

for Rs.2500 handset --Rs.3500 or more

For Rs.10000----Rs.15000 or more

Ex: Samsung corby gsm costing Rs.6000 but in CDMA Rs.8500 (45% more)

Samsung Galaxy GSM costing Rs.12500 but in CDMA Rs.19990(60% more)

Qualcomm is not charging 45% or 60% royalty.Higher prices are only because of greediness of manufacuteres and operators.

Edited July 15, 2010 by ramtech

[kesav 127]

Dear Friends,

Everybody in the world knows CDMA was better technology(in spectrum efficiency wise, quality of voice wise) than GSM.

Inspite of inherent advantages it has failed mainly due to 3 key factors.

1) Europe's blanket ban on CDMA --> Certainly it's done to support European companies like Nokia, NSN, Ericsson, Alcatel-Lucent etc.,

2) Greediness of handset manufacturers --> why can't they pay just 4% to the company which has incubated and grown a technology like growing a seedling?

3) Nokia's greediness and its fight with Qualcomm

Handset manufacturers(other than chinese) clearly price the CDMA phones exhorbitantly high(not proportional to royalty) than GSM phones to ensure that the perception of "CDMA phones being costlier than GSM" remains in the mind of people.

Edited July 16, 2010 by kesav

[ravi_patent 28]

@ramesh

from ur reasoning i fail to understand why phone manufacturer( samsung) shall be greedy over cdma customers than gsm ?

regading qualcom royalities

see https://www.trefis.com/company?article=18888#

where it says

"Royalty Rate Litigation

Qualcomm charges royalties on each CDMA handset sold; and one time licensing fees from CDMA handset vendors to use its proprietary technology.

Royalty rates have always been a debatable issue and the tussle between CDMA handsets vendors and Qualcomm has taken larger proportions as is evidence from an increasing number of lawsuits against Qualcomm. The famous lawsuit filed by Nokia against Qualcomm is one such example".

Edited July 16, 2010 by ravi_patent

[rajeshkatiyar 3]

@ramesh

from ur reasoning i fail to understand why phone manufacturer( samsung) shall be greedy over cdma customers than gsm ?

regading qualcom royalities

see https://www.trefis.com/company?article=18888#

where it says

"Royalty Rate Litigation

Qualcomm charges royalties on each CDMA handset sold; and one time licensing fees from CDMA handset vendors to use its proprietary technology.

Royalty rates have always been a debatable issue and the tussle between CDMA handsets vendors and Qualcomm has taken larger proportions as is evidence from an increasing number of lawsuits against Qualcomm. The famous lawsuit filed by Nokia against Qualcomm is one such example".

Dear Friends

Letus not make it a conflicting point CDMA is dead its parent killed it .EVDO Will never come to mainstream. In UP it is localised jn LUCKNOW and Kanpur

and with 3g WCDMA EVDO will never take off .You can think about American psychology they will not mould but like to go out of buissnes.Today they are fully

dependent on China . So believe in Mao and believe in 3G

Regards

[anandjm 3]

What everyone fails to realize here is that Qualcomm also has a significant patent portfolio which covers WCDMA (3G-GSM/UMTS) technologies. In fact royalties from both 3G networks based on CDMA(EVDO) and 3G-GSM (UMTS/WCDMA) form a major chunk of their profits. EVDO is already a mainstream in countries like USA and South Korea, and the operational costs of CDMA is much lower than the current 2G GSM networks in India. This is one of the main reasons for lower tariffs on CDMA networks compared to GSM ones in India. I am not sure of UP but some states in India are fully connected by EVDO. Kerala is one state where even BSNL's EVDO coverage is quite good.

As of now, EVDO tariffs are much better (lower) than UMTS tariffs in India and in places were both networks exist. Both technologies will continue to exist till they merge together by the time 4G networks are established or in the worst case by 5G.

BTW,

a) LTE is not 4G but rather 3.5G

B ) correct me if I am wrong, but the issue of royalty payments were resolved in 2007-2008.

[raju_a 31]

LTE is a 4G tech even faster than Wi-Max.

[Arun 795]

TD-LTE is not classified as 4G but its 3.5G