Good answer to a post "reposted" here. Rather lengthly, but I think worth reading for those on this thread: The source is shown.
Subject:
RE: A question for QCOM fanatics
Date:
Fri, 27 Aug 1999 16:57:57 -0700 (PDT)
From:
Ali Bukhari <aab@yahoo.com>
Reply-To:
"Gorilla Game discussion list" <gg@webcom.com>
To:
Gorilla Game discussion list <gg@webcom.com>
--- "Calleri, Greg" <Greg_Calleri@natcity.com> wrote:
> Ron brings up an interesting point. On a similar note I have been
> in
> contact with several of the companies that are part of the
> standards body
> (Lucent, Ericcson, Nokia and Qualcomm). This is what I have found
> out.
>
> 1) When W-CDMA is made the 3G standard and rolled out it becomes
> free. Yes,
> free. That's what a standard is, a policy set by the government to
> ensure
> that all competitors have equal footing.
This is not true. Please cite your sources. Even the current GSM
standard has IPR licensing fees tied to essential and non-essential
patents. A standard is simply a mandate which allows a single
standard
to be implemented as the defacto standard (it may also be tied to key
spectrum licenses so as to force operators wanting spectrum to use
the standard).
> 2) The only proprietary or licensable products become the
> individual parts
> of the network (Chips, handsets, base stations). These products
> can be made
> and sold by anyone without a licensing fee. An example of this is
> ATM which
> is a data networking standard. Both Cisco and Lucent make switches
> that
> work on ATM without paying anyone a licensing or royalty fee. If
> you don't
> believe me than answer this, who gets the licensing fees from GSM?
Please download the Acrobat file at cdg.org
It is from the CDG website and is concerned with GSM IPR licensing
issues. It seems that GSM IPR licenses can be quite high (>10%) for
any new competitor trying to build handsets or chipsets, quite
anticompetitive. The entrenched veterans simply cross-license to
avoid license fees. Qualcomm's CDMA is much more democratic, charging
a much smaller licensing fee to everyone, instead of getting in bed
with the big boy at the expense of the smaller competitors.
> 3) What will happen is that companies will partner with each other
> to
> provide end to end solutions. For example a manufacturer of base
> stations
> would partner with a manufacturer of handsets. So if Qualcomm can
> manufacturer or produce the parts necessary for a part of the value
> chain
> they can benefit from that aspect but not the licensing fees.
>
> 4) As part of the recent settlement Ericcson does not have to pay
> royalties
> to Qualcomm on current infrastructure sales. Infrastructure is
> much more
> profitable than handsets.
Infrastructure may be profitable, but not close to that of ASICs.
Qualcomm was losing money on its infrastructure division. That is why
its margins have been expanding so rapidly since the sale of the
infrastructure division. As far as royalties, I'm not going to
comment. But could you please cite your source as to Ericsson not
paying royalties on infrastructure sales. And just because
handsets are given away doesn't mean that they aren't profitable.
The handset and ASIC manufacturers still get their money. It is the
operator (like Sprint PCS) that eats that cost to lock in the
customer to a contract.
> 5) Lucent was one of the first to do work in the CDMA field, has
> numerous
> patents and produces chips for the handsets, for that matter so
> does Nokia
> and Ericcson who are both building their own CDMA phones. While
> qualcomm
> currently (before CDMA is made a standard) can force a small vendor
> to pay
> them a fee the large companies have patents to trade. Qualcomm and
> others
> must cross license these patents so it becomes a push.
Qualcomm owns all of the key patents in wireless CDMA implementation.
Nokia, Ericsson (yes, even after their agreement with Qualcomm), and
Motorola are all licensing it. Nokia does not currently make chips
for CDMA handsets; their product has been delayed beyond belief.
Ericsson recently announced that they were going to use Qualcomm
ASICs in their CDMA phones which will be out next year. Motorola
makes their own chips, but cannot sell them to anyone else; also,
Motorola's chip was quite late to market (that's why it took them so
long to release their digital handsets) and is still inferior in
performance to Qualcomm's. This should play itself out even more
as the chips get more complex with higher data rates and multi-modes.
I don't believe Lucent makes handset ASICs, but I could be mistaken.
As far as cross-licenses and bullying small vendors, reread what I
wrote above. Qualcomm's CDMA is much more democratic, charging
a much smaller licensing fee to everyone, instead of getting in bed
with the big boy at the expense of the smaller competitors. Reread
the Acrobat file I linked to above. New entrants to the market get
hammered with royalty payments, and you say that Qualcomm is the
one that is forcing the small vendors to pay. It is quite the
opposite.
> 6) A point to remember in technology, the best technology rarely
> wins if it
> did we would all have Apple computers, run on IBM chips connecting
> to
> networks based on Cabletron switches. Installed base and customer
> reach are
> more important. Few clients ever want to change, even to a better
> technology, after its been installed. If you don't believe that
> than why is
> the US still not metric?
This would only be true if the status quo was sufficient to work
in perpetuity. So what do the operators do when they have more
subscribers than capacity available on their networks? Just tell
them, "Sorry, we're all filled up. Come back when someone dies." With
the burgeoning wireless data market, capacity is going to get more
constrained even faster (and don't forget that CDMA is tcp/ip
native, there is no need for a modem for data communication). The
rational decision would be to overlay CDMA onto the GSM networks.
Remember, analog networks were the norm before digital, yet the
switch was made to digital because it was necessary, even though many
believed analog was too entrenched. CDMA should be no different.
Also, your analogies above don't address one thing -- timeliness. A
technology ahead of its time is much less able to gain marketshare
than one brought to market when it is needed. It seems Qualcomm's
technology is starting to gain penetration just as subscriber growth
and data are taking off; they're coming in at the sweet spot.
> 7) In terms of the market reaction I can't explain why some stocks
> are bid
> up in the short term but if the market is always right why is
> Network
> Associates at 16 not its high of 68, NEON at 16 not at 78, AMD at
> 19 not 35?
> The examples are endless the market over reacts and is based to
> some degree
> to investor sentiment.
Well, none of the above really have a proprietary enabling technology
(or even a discontinuous innovation) which has a chance at making
substantial inroads in their markets. NEON I'm not intimitely
familiar
with, so I won't comment. Network Associates's market isn't really in
a tornado, and they don't have any special technology which gives
them a lock in the market. AMD, please. They are a perennial chimp
in Intel's gorilla game. By asking why AMD stock is acting as it did,
you are showing that you really don't understand Qualcomm, Intel, or
the Gorilla game, for that matter. AMD is losing because Intel is
the Gorilla and can crush AMD while barely flexing their muscles.
Look at how badly AMD is bleeding money, while Intel is improving
their margins.
Ali
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