Value Chain 101 with No Primate Talk
Hi --Mike,
<< I haven't posted in a long time, probably years, but I do follow the message board daily. So, I'm going to pipe in on the discussion of Qualcomm's value chain. >>
Good to hear from you. Thanks for coming out of lurk mode and contributing here.
<< For the record, I have a very clear understanding of my concept of the value chain. It's based on a particular context that, years ago, our moderator told me I would be banned from posting if I discussed that context. >>
To be more precise, he politely asked you (all of us gamers) to refrain from discussing an investing theory popularized by Geoff Moore that borrowed heavily on Moore's own theories of corporate strategy which in many cases were derived from a foundation built by other corporate strategists or economists (e.g. Michael E. Porter, Charles Morris, Charles Ferguson, Carl Shapiro, Hal Varien, Gary Hamel).
Mike, would very much appreciate your taking the gorilla stuff off this thread. While you may be a fan, many here do not think much of it. I understand there are a few gorilla threads around for that type of discussion. thanks in advance for your cooperation. Ramsey
Message 16123499
I'm hopeful you didn't take offense to that. This board and its predecessor were created for valid reasons. Tight and focused.
He did not ask you (us) to refrain from discussing other theories on corporate strategy and competitive advantage that can be applied to investment analysis and in this case analysis of the competitive advantage that accrues to companies that successfully institute and execute well thought out value chain management for the company's products and services as a component of their overall corporate strategy.
In the subject that Ramsey asked you (us) not to pursue here, and which we shouldn't pursue here, you can search long and hard in Moore's single book on investing theory -- or his four books on corporate strategy -- and find scant reference to Intellectual Property, or IP business models, or IP strategy, but perhaps in your "concept of the value chain" you have extended Moore's thinking and/or Porters, to Mike Buckley's Value Chain 101. <g>
<< That's Value Chain 101 (not implying in the slightest that you don't already know that). >>
Value Chain 101 requires reading and comprehending Michael Porter's "Competitive Advantage" (1980) or chapter one of "Competitive Advantage: Creating and Sustaining Superior performance" (1985), and familiarity with his basic value chain models and concepts. Porter's basic model describes an industrial organization buying raw materials and transforming those into physical products with the assistance of others. Porter deals with the value chain that evolves around product and services, not the output of patent factories. The basic value chain models studied by almost every 'B' school grad student that has matriculated in the last 25 years are represented graphically here ...
Value Chain 102 gets into extensions of Porter's models and evolved theories of others, and into value chain analysis of the activities within and around an organization related to the relative competitive strength of that organization in its own industry, and that examination is something that an investor may indulge as part of ongoing fundamental analysis of a corporation he is invested in or considers investing in, along with more basic examinations of the balance sheet, income statement, forward looking statements, risk elements, hype3rbole filtration, and other basic economic and managerial data of the company -- but only if he so chooses (Carranza).
There's no reason Porter's value chain models and basic theory can not be extended, and they should be since as fundamental as they are to corporate strategy they are also dated, and if you want to extend them to relatively unique operators of technology patent factories like QUALCOMM and InterDigital (or Rambus in another sector) that shield themselves from cross licensing by not manufacturing the whole product on which royalties are traditionally paid in the mobile wireless industry, that's a perfectly legitimate exercise.
As an aside, I might add that in today's corporate world, incorporating an IP strategy, particularly if it is active and offensive, as opposed to passive and defensive, and an IP licensing strategy, into a more global corporate strategy that includes successful value chain management and supply chain management strategies, a major challenge is to make sure that the IP strategy does not negatively impact the traditional value chain strategy, and that it does not result in anti-competetive antitrust action of which QUALCOMM is now facing three: one in the US, Europe, and Asia.
My references to QUALCOMM's value chain in the post to which you responded, however, did not extend to those companies that simply license QUALCOMM's IP and pay royalties to QUALCOMM while championing an end to end technology platform and value added services that is in direct competition with QUALCOMM's proprietary access-mode technology, as important as that royalty flow obviously is to the value that QUALCOMM extracts from mobile wireless industry OEMs and ODMs.
As I attempted to point out, my references to the financial health and competitive positioning of QUALCOMM's value chain extended to the companies that actively assist QUALCOMM in developing, standardizing, and commercializing QUALCOMM's own proprietary (open and/or closed) technologies, manufacture and market those technologies, and who act as an extension of QUALCOMM's own R&D initiatives ...
... AND/OR those that use QUALCOMM product components (base station modems, mobile station modems, BREW, MediaFlo, other software, tools, etc.) in CDMA2000 or in a competitive non-proprietary technology developed in SDOs/SSOs -- in this case UMTS (WCDMA with the HSPA or HSPA+ extensions) or beyond that to OFDM/OFDMA based UMTS LTE.
<< I don't believe customers' earnings in and of themselves are a valid benchmark of the strength of a value chain. >>
I don't either, but they can't be, and shouldn't be ignored as they tend to be on this particular board. In conjunction with examining their financial health one needs to examine their comparative competitive positioning in the markets they pursue.
You'll be ecstatic that I'll skip stepping through any extended takeaways from close observation of the last two quarters earnings season for cdma based mobile handsets, systems, and wireless ICs, but I will simply say I saw little positive and several negatives from these key active members of QUALCOMM's value chain:
Infra: #1 Lucent, #2 Nortel
Handsets: #1 LG (units), #2 Samsung (units); #1 Samsung (units), #2 LG (units)
3G Chipsets: #1 TI (units and revenue ), #2 Qualcomm (un its) and revenue,
CDMA2000 infra spend is at a standstill, and both Lucent and Nortel are very weak UMTS (WCDMA) players. Lucent's abysmal quarter was directly attributable to that and in the L'Alcatel case, Serge "the Merge" of Alcatel (also a weak UMTS player) and Paris Pat are going to have to figure out how they allocate mobile wireless resources and to what degree they plan to prioritize CDMA2000 v, UMTS (WCDMA).
Nortel is now run by a brilliant executive that would have been my choice to captain QUALCOMM's family run business in the recent succession but they are simply treading water in 3G technologies. They are neither fish nor foul and have no requisite scale to survive in this industry. Mike Z., will however will probably find an angle.
An extremely healthy Ericsson is increasing its share of UMTS (WCDMA/HSPA) systems and will take advantage of the natural disruption that comes from the creation of the UMTS focused Nokia Siemens JV but unfortunately having voluntarily exited active participation in the QUALCOMM value chain they are leading the charge to annihilate CDMA2000. This is not done out of animosity, simply out of practical business sense.
Huawei is likely to be a major disruptive players in comms but they recognize that CDMA2000 is quickly becoming toast, and its impossible to assess the value of their UMTS focused JV with Moto at this stage.
LG had negative handset margins for the 2nd straight quarter as a result of attempting to retain share in both emerging markets and mature markets outside of Korea.
Samsung handset share is down because they refuse to compete in emerging markets and their operating margin is single digit because they are late with both GSM EDGE and 3GSM models which they focus on more heavily on than CDMA2000 models outside their domestic market.
As previously noted, Moto was the lone positive on the CDMA2000 handset side. It took considerable time but they finally appear to have mastered incorporating QUALCOMM's 1xRTT and 1xEV-DO MSMs into their basic 2.5G and 3G platforms.
Nokia of course just keeps increasing its global share in high margin high ASP UMTS (WEDGE) handsets, extending their utilization with legitimate 3G multimedia functionality which few others are doing, and distributing them on 2.5G (3G if you think 1xRTT is 3G) networks.
QUALCOMM is not yet putting a dent in TI's commanding lead in UMTS (WCDMA) baseband or applications processors whether integrated or standalone and the gap between TI's wireless IC revenue and QUALCOMM's continues to widen. Freescale appears to be holding its own and appears to have an improved offering close to commercial. QUALCOMM is probably taking some share from EMP(status of the U350/U360 somewhat uncertain), NEC, and Agere, but they remain way short of their potential, and woefully short of the expectations they set for investors in 2003, 2004, 2005.
I could go on but I won't. Applause please ... <g>
<< As one person implied, we need to determine the causes of earnings trends before concluding anything about them. >>
¿¿¿ Say what? Skip the mumbo-jumbo, please. You either do that or you don't. ???
If you haven't done it, you aren't up to speed. If you have, please elucidate.
That's what I attempt to do for myself. What do you do? Hopefully you don't assess the market by simply lurking this board on a daily basis or praying to Yahweh, the Confucius, or IMJ. If your window to the mobile wireless world is this board you are as hobbled out of the gate as my neighbor Barbaro was in the Preakness.
That is basically why anyone with a substantial investment in one or more players in mobile wireless comms equipment or mobile wireless ICs who actively manages his own portfolio should -- to the degree he has the time to devote to it -- listen to the quarterly earnings CCs of the industry's market leaders and major players or at the very least examines their earnings presentations and releases, and scan financial analysts reports available through his brokers. If time is limited financial message boards like this can help, but it requires setting substantial noise filtering.
<< As just one simple example, if the world economy goes into a recession that causes the total earnings of Qualcomm's customers to decrease, that cause-and-effect scenario is not an indication of a weakening value chain. Similarly, if macro economics cause all of its customers to enjoy increasing earnings, that is not an indication of a strengthening value chain. >>
The bandwidth bubble bust that Skip referred to occurred in, and helped cause the Y2K meltdown of 2000. The telecom recession trough which followed the evaporation of capital necessary to building out 3G infrastructure occurred in mid 2002, and since then the sector has witnessed some rather spectacular recovery plays -- by Ericsson, Motorola, and QUALCOMM (even Lucent and Nortel, at least momentarily until reality dawned), in 2002 to 2004, and by TI and Nokia in 2004 to 2005.
<< The single strongest evidence for me of Qualcomm's strengthening value chain is exactly what Jim Mullens repeatedly mentions -- the number of end users that will increase as WCDMA adoption spreads throughout the world. In fact, were it not for that significantly important part of the value chain, I wouldn't be a long-term investor in Qualcomm. >>
It is heartening to see Jim and others championing and rooting for a technology that directly competes with QUALCOMM's proprietary implementation of Hedy and George's invention. That's quite a turn around from the tenor of posts to these various boards from 1999 to 2003.
It's perfectly understandable, but still ironic to observe the number of posts here on a board that established a set of commonsensical rules to keep posts to a minimum but informative, deriding the companies that contributed the most to commercializing UMTS (WCDMA) and making its hypergrowth a reality and ahead of any realistic schedule one could imagine-- Ericsson, Nokia, TI, Matsushita and NEC, who are 5 of the protagonists in the ECCC complaint, as well as Freescale, Siemens, and Motorola. This despite all QUALCOMM's efforts to delay UMTS (WCDMA) and substitute their proprietary alternative.
<< You mention that Nokia is not a valued member of Qualcomm's value chain. I wish it were a more valued member but, for me, to say that it isn't a valued member doesn't stand up to scrutiny. >>
You are entitled to that opinion but your opinion and the foundation for it you have conferred doesn't yet pass my smell test, so best we call it a draw or simply agree to disagree. <ggg>
Alternatively if you care to expand and can organize your thoughts more coherently, please have at it.
<< If it were not a valued member, Qualcomm wouldn't be working so hard to renew the agreement that expires next year. >>
If they don't renew the agreement, while they may not be out of the chipset business, they will most certainly be infringing Nokia's IP in GSM, EDGE, WCDMA, HSPA while they continue chipset manufacturing operations and they have already acknowledged that, and potentially also in CDMA where Nokia has an active licensing program which they are well aware of.
They will mutually agree to renew the agreement, although in my humble opinion they won't do it by its expiration, leaving a cloud that will affect QCOM's valuation --- more than Nokia's.
<< The "hefty royalties" that you mention paid by Nokia to Qualcomm make it a valued member. >>
I think I acknowledged the significance of Nokia's royalty payments to QUALCOMM's value extraction from them, even while specifically and in my mind, justifiably, excluding them as active participants in QUALCOMM's value chain, just as I also specifically excluded Ericsson, arguably the two most influential players in mobile wireless telephony today.
<< Conversely, Nokia is working so hard to negotiate a renewed agreement because part of its revenues depend on Qualcomm's success. >>
Absolutely no part of Nokia's revenues, with the exception of a rather insignificant amount of low margin revenue derived from CDMA2000, are dependent on QUALCOMM's success. Zero. Zilch. Nada.
OTOH, it is an absolute imperative for Nokia to renegotiate a license for QUALCOMM IP because while LG has refrigerators, washers, and dryers, to fall back on if they can't maintain a sustainable and financially viable CDMA2000 business, Nokia doesn't, and Nokia is not going to be able to manufacture multimode UMTS (WCDMA) equipment and possibly even GSM equipment without a QUALCOMM license.
<< Otherwise, it would walk away from the current agreement. >>
It is walking away from part of it, as a byproduct of ramping down its CDMA2000 initiatives.
<< We won't see press releases from Nokia indicating their gratefulness for Qualcomm's success, but in the vernacular of value chains, Nokia is silently grateful. >>
I confess to having missed the origin of that vernacular in Value Chain 101 and 102, 201, and 202, so if you care to cite verse and source, whether it be Moore, or Porter, or other, I will have learned something, and benefited from the exchange.
I catch your drift, however, so I think it might be perfectly appropriate to say that QUALCOMM is 'silently grateful' for Nokia's outstanding success in UMTS (WCDMA).
<< I doubt that I'll participate in any extended discussion about this, so please don't be offended if indeed this is my one and only post on the subject. Instead, be grateful. :) >>
--Mike, while it's always a pleasure to dialogue with you, and I've sincerely missed doing so of late, I will neither be offended nor grateful if you post no further here on this subject, and extended discussions of Value Chain 101, or 202 -- even if they apply to QUALCOMM -- are probably best made where Ramsey suggested discussions of Moore's investment theory be made.
Please don't blush but I do consider you to be one of the premier long-time contributors to SI and TMF investing boards, and in addition to learning from you, our dialogues in the past have helped me sharpen my own investment thinking, and in several instances modifying it.
Apologies in advance for long sentences. Feel free to punctuate.
Cheers,
- Eric |
