Breakthrough Ideas (continued)
The State of the Standards War in 2002
No one has yet surrendered. But, the victor is in sight. The battle for technology supremacy and ensuing architectural control appears to me to be more than significant, definitely consequential, and most likely decisive. However, each of us is entitled to his own take. Some will say only time and a tornado will tell, that only a tornado confirms a monopolist triumph, signaling the birth of a star-node. This whole battle may be upstaged by macroeconomic events, even by shakeouts of the entire business landscape.
Admittedly, on the edge of chaos, novelty is perpetual, predictability is rare, and the scale of non-linear macro events can swamp company-specific non-linear advantage. Since the Big Bang, the arrow of time brings continuous change into being.
Nonetheless, the times have changed in this standards war. What has changed specifically? Significant conditions have sharply changed between the beginning of the 2G standards war and the present. After a reign of a decade, competitive advantage has decisively shifted from the GSM camp to the CDMA value web. This sea change is revealed wherever you look. Together, we saw changes in the ascendant technology, in first-mover advantage, in ease of migration, in direction of movement from voice to data and in the source of power from supposedly non-proprietary political standards to proprietary but openly licensed standards within the business landscape, in the rise of Asian power and the further withering of European control of the global economy, and in the geopolitical structure of a networked world that shrinks geography, increases globalization, and requires the continuing integration of communication networks. All of this dynamic change is in keeping with Qualcomm’s strategies of controlling the architecture, growing the size of the global market, and providing standardizing solutions designed to become de facto standards [see Part III].
Yet, Europe’s strategy for this third-generation standards war remained the same: “Just as we did with GSM, we will agree on a common European standard and install it around the world, using the advantage gained from our European Union’s "secretly proprietary” UMTS standard to wrest leadership once again from the U.S. and Asia.” This is a failed strategic vision because UMTS cannot live up to it name and become the Universal Mobile Telecommunications Solution.
Although the move to spread spectrum by ETSI was sufficient to reveal the technical superiority residing in universal frequency reuse, and Ericsson’s licensing of CDMA undercut the validity of their public claims, the Europeans, nonetheless, counted on the following FUD to continue to manage expectations: “Europe has the worldwide leaders in mobile telecommunication technology and marketing,” “Europe has its own essential intellectual property in spread spectrum,” and “Europe’s worldwide installed base in GSM trumps all other competitive advantages.” Great, but bogus, expectations eventually yield to reality.
Assuming you agree with my argument, and that this turn in the outcome of this standard’s war is not yet crystal clear to many players in the market, an unexpected and unperceived change announces an investing opportunity. It also adds more evidence, if any were needed, that so-called rational investors do not have the same information instantaneously or rationally use it to discount the future to bring stock prices into equilibrium with net present value. My personal investing history proves my own irrationality, and I have a lot of losses and negative emotions to show for it.
Times change, but Nokia’s strategy also remains the same, “Homogenize up-stream innovation, so our strong down-stream marketing will give us competitive advantage.” The latest example of this is revealed in Nokia’s failed effort in May to lead an industry-wide effort to cap UMTS royalties at 5%. If this stratagem were successful, it would indeed “homogenize” Qualcomm’s IPR and royalties. Although, Nokia’s tactic is transparent to industry insiders and the cognoscenti, to the public, its tactics increases fear, uncertainty, and doubt, which increases indecisiveness, which plays into Nokia’s “just wait for us, or you’ll be sorry” stratagem. For instance, see: siliconinvestor.com
On June 26, the journalist, Eric Ransdell leads with, “What a tangled web the world of IPR can weave.” He spins his own tangled web of a story in which Nokia and Brian Kearsey of the 3G Patent Platform, a so-called independent industry group, are cast as heroes vainly striving to save the world from the tangled web of 3G IPR.
The scenario begins by asking you to imagine a world in which the issues are far more complex than licensing the product. “For example, a tire manufacturer will only allow its tires to be used be used on highways that it also has an interest in building.” Following this fanciful construction, and having never heard of unfair competitive practices, he asks us to imagine, given the plethora and politics of patents, whether there ever would have been an automobile revolution or would people still be riding on non-patented horses.
Next, he contends the issue of 3G IPR is one of thorniest and most complex issues ever.
He detailed the Nokia effort to cap royalties, which given their claim of more than 25% of the essential patents registered with ETSI, must seem magnanimous. If not to you, then Nokia’s director of IPR licensing drove home the point, “We are willing to adjust our rate because it is our intention to set an example.” He continued by pointing out that the proposal was gaining support, but “Qualcomm, the San Diego-based Corporation that owns almost all the IPR behind CDMA 2000, the competing 3G standard, flatly rejected the 5 per cent royalty cap.” Yet, “according to Nokia’s research of public records, some 40 companies claim to have more than 700 essential patents for WCDMA.”
Brian Kearsey believes Nokia’s numbers are much too low. “Only about 18 companies have been shown to own essential patents for GSM,” he explains. “Whereas for 3G the figure is estimated to be at least five times that number. In addition, there seems to be several thousand patents relating to 3G technologies with others evidently in the pipeline.”
[The next Alice-in-Wonderland twist in logic is so priceless that I chose to include this anecdote.]
“There is an industry consensus that the arrangements for GSM licensing were unsatisfactory,” says Kearsey. “They were regarded as unfair, complicated, time consuming, expensive, and judged to have created a barrier to trade for new entrants.”
“In a 1998 report to the European Commission, the International Telecommunications Standards Group held that the GSM IPR licensing regime presented a demonstrable barriers to market entry. Among the ITSUG’s chief complaints were the inability to acquire patent licenses in a timely manner; prohibitively high royalty rates; the enhanced bargaining position of companies holding the broadest patent portfolios; and the uncertainties of whether royalties had already been paid by companies downstream in the supply chain. And though the technology is more than 10 years old, even today some vendors are still negotiating their GSM licenses.”
Never noting how this systematic tactic created the European GSM advantage in the 2G war, he incorrectly concluded that in the 3G war, “Each essential patent holder will be able to exclude an operator or manufacturer from the use of a 3G technology altogether by demanding unfair, unreasonable, and discriminatory licensing conditions,” explains Kearsey.” The journalist, Ransdell, goes on to say that today’s breathless concern is, “With more than 100 companies potentially entering the fray, the IPR cost element for 3G products could reach 100 per cent.”
Unfortunately for Nokia, Qualcomm’s three breakthrough ideas not only generated the patented IPR for both the revolutionary and continuing evolutionary advances in spread spectrum technology, but also after the UMTS standard was more-or-less formalized, Qualcomm further added an optimized mobile technology for high data rates, and a ZIF-architecture that protects the low end of the market and integrates the high end through multi-mode world phones. Based on their IPR, Qualcomm holds the essential patents for all CDMA, including WCDMA. Such fundamental patents always are a small minority of the patent list because they include the heart of breakthrough ideas. Many patents are just continuing refinements of such fundamental advances. Some patents can even cover bad ideas that decrease functionality, but produce transparent claims of advantage, like, say, “Hey, Qualcomm, we’ll swap even,” or “we’re setting a good example, you nasty bully!”
Of course, the Ransdell article failed to include necessary basic information about IPR, patents, or unfair business practices that would inform the reader, nor did it review the European stratagem of patenting less efficient and asynchronous variant of spread spectrum technology in a failed effort to circumvent or build up parity in licensing with Qualcomm.
In fact, The IPR issues here are clear-cut, but investors are always subjected to repeated false claims and facile misanalyses that are intended and designed to create doubts. Remember to always discover which companies actually have licensed IPR,which indicates just what is truly essential. Corporations must do their legal homework.
If you do not have sufficient information or motivation to learn about such complexities and the logical skills to parse specious arguments, then your flawed-crap-detector leaves you vulnerable to continual fear, uncertainty, and doubt. This means that you cannot win playing the role of an individual investor.
No one can plausibly deny that Qualcomm has established the leading position in the 3G Standards War. But, Europe says just wait until next year or 2005, the best, UMTS, is yet to come. Promises! Promises! Will the world wait until 2005?
Will the 3G Telecommunications Market Tip?
The world phone is a killer integration. When inclusively conceived, digital information is a killer application. Qualcomm’s global harmonization strategy currently focuses on Asia. China is growing at a rate of 60 million new wireless customers, still mostly GSM, a year. Yet, GSM1x, with later additions of 1xEV-DO in its world phones, offers a relatively easy migration from GSM or TDMA to ITU-recognized 3G performances. Asia represents the largest market for new communication systems, capable of generating vigorous demand- and supply-side economies of scale. If need be, Qualcomm bypasses Europe to gain the rest of the world.
However, if Asia, Australia, and both Americas soon turn to multi-mode phones, must not Europe try to match Qualcomm’s breakthrough technical feats? Can it do so? Can it afford to stand idly by singing the Just Wait song, as it watches the rest of the world integrate its networks and roam a seamless wireless net? Europe must heed history, including these enduring principles derived from past standard-wars:
“It is dangerous to sit back and assume that you can maintain market dominance just because you control the current generation of technology or have a large installed base. A first-mover advantage can be overcome by a superior technology if the performance advantage is sufficient and users are not overly entrenched. The collapse of the standard shows that first-mover advantages need not be decisive, even in markets strongly subject to tipping. Adapters can be the salvation of the losing technology and can help ultimately defuse a standards war. Those left with the less popular technology will find a way to cut their losses, either by employing adapters or by writing off the assets and joining the bandwagon”.
Drawn from past standards wars, these principles suggest that European vendors and operators must eventually conclude that it cannot bypass, match, or exceed Qualcomm’s technological feats in spread spectrum. If so, can European companies afford not to use the QCT multi-mode chips in Asia and, eventually, Europe? Although most of us will not roam the world, won’t people want to own a world-phone because of its buzz? The realization of a “world phone” will exponentially drive Qualcomm’s mindshare.
Although not all industries are winner-take-all, some markets tip decisively. According to Shapiro and Varian (1999, p. 188), “Whether a market tips or not depends on the balance between two fundamental forces: economies of scale and variety.” Strong economies of scale favor a market tipping to the low cost/high-demand competitor. Distinct consumer needs make tipping less likely because a variety of needs segment the market into niches. However, they also said (p. 189), “Information goods and information infrastructure often exhibit both demand-side and supply-side economies of scale, network market are subject to dramatic tipping toward temporary monopolies.”
Nevertheless, in their analysis of wireless communication specifically, Shapiro and Varian perceived the wireless markets as primarily regional, with a need to roam as secondary. Moreover, they viewed network externalities within a region as strong, but not overwhelming because users can place calls across modes through the PSTN, say, from GSM to CDMA. This analysis led them (p. 267) to the following inference, “The conclusion: the [2g] market for digital wireless telephone systems is subject to consumer lock-in (wireless carriers are heavily locked into the technology they deploy, and subscribers are somewhat locked in when they buy a phone), but not especially prone to tipping.”
Nonetheless, their conclusion was based on the dynamics that existed in 2G markets in, say, 1997-98. Shapiro and Varian were not even sure whether or not Qualcomm’s technology had made the advances that were claimed for it. And, there was never a mention of radio wave spectrum as a limited resource that makes spectral efficiency of the essence. If these authors were to accept my facts, my interpretation of those facts, and my reasoning, I believe they might now agree that the network externalities resulting from the advanced performance engendered by Qualcomm’s second and third breakthrough ideas, when added to their spread spectrum performance advantages, might well cause this market to tip decisively in Qualcomm’s favor. Harmonizing the standards seamlessly by building a single integrative, stabilizing, and expanding platform, Qualcomm’s multi-mode ASICs are in route to becoming the de facto standard.
Given both economies of scale and demand for variety, whether a market tips depends on solving all interoperability problems. If solved, end-users then have a choice of any, or all, of the various options¾seamless mobile access across diverse devices using compelling applications¾that they want or need. Qualcomm’s ASIC’s platform provides a crucial general-purpose interface for always on, always with you connectivity across needs, devices, and applications. Universal worldwide third-generation wireless interoperability promises consumers the freedom to choose what they specifically want among the variety of options.
If a single company solves the complex problem of mobile wireless interoperability and if it controls the architecture of this proprietary technology, then the market could tip decisively in its favor because only its solution could satisfy demand-for-variety as it also generated demand- and supply-side economies of scale. Thus, if it succeeds in executing this strategy, Qualcomm’s innovation of seamless worldwide interoperability opens a veritable treasure chest.
Atop its foundation of strategic architectural control of spread spectrum and it winning strategies in the 3G standards war, Qualcomm tracks the dynamic path that sets the platform standards that shape, model, and mold global dominance of third-generation mobile telecommunications. |
