Breakthrough Ideas (continued)
Topsight Into Qualcomm’s Strategic Dynamic Paths.
The battles for control of the GSM standard scarred the business landscape that Qualcomm entered. This business landscape was marked by a climate where IPR, standards, and tornados promised stormy weather. Nothing better to unite a fractious GSM/TDMA group than an upstart rival promising a new revolutionary advance.
Nonetheless, Qualcomm was a knowledge company, where the term knowledge implies that ideas are its primary means of generating profits. All knowledge companies must be prepared to win battles over intellectual property rights. So, breakthrough ideas¾carefully patented¾formed the foundation of Qualcomm’s unfolding strategy.
Seeking proprietary, but selectively open, architectural control of the CDMA platform, Qualcomm CEO Dr. Irwin M. Jacobs implemented a standards-based business design that would protect its intellectual property and generate increasing returns to scale as CDMA was adopted. Once CDMA became an accepted ITU and de facto standard, Jacobs understood that Qualcomm must seek to grow the size of the overall mobile telecommunications market. Thus, two overarching strategic goals reigned paramount: (1) gaining CDMA-architectural control, and (2) increasing the popularity of mobile wireless solutions to increase network externalities.
The Potential Economic Return. Jacobs used classic network market strategy. Although Jacobs developed his own specific strategy, it is “as if” he were following generic economic reasoning similar to that of Shapiro and Varian (1999, p. 198, with my additions) for network markets. The ultimate success of Qualcomm’s strategy would be measured by its strong and sustainable excess returns on invested capital after establishing network externalities. Its economic reward would be a function of the total added value that CDMA architecture brought to the mobile telecommunications industry times Qualcomm’s share of that industry. The value added to its industry depended on the intrinsic value of CDMA technology. Compared to FDMA and TDMA technologies, how much does CDMA improve mobile telecommunication? How much would Qualcomm’s contribution be missed by its value web and by its industry were it not available? Given that CDMA adds value, its total added value also becomes a function of CDMA’s popularity¾how widely the technology is adopted. By Metcalf’s law, an arithmetic increase in the number of nodes in a network increases its value exponentially. In network markets, whether from demand-side scaling or from a growing number of complementary products, both direct and indirect network effects multiply the value of Qualcomm’s share of the total added value.
Thus, Qualcomm’s share of the total value added depends on its ultimate market share, the size of the mobile telecommunications market, the reach of its value web’s networks and the richness of their services and applications, the expanding scope of the mobile market beyond voice to include High Data Rate, Wireless Internet, and device-to-device communication, the size and scope of royalty payments that it receives, its sales growth rate, its operating profit margin, its incremental investment rate, and the stimulating or cannibalizing effects that any new technology it develops has on its sales of existing CSMs and MSMs.
Generic Network Strategies. However, Qualcomm’s ultimate economic success depended on its proximate strategic success in stimulating positive feedback. Because it is a network market, generic network strategy dictates securing a leading market position where critical mass sharply inflects adoption rates. It strategic dynamic path required generating increasing returns to ignite critical mass, which sets off the explosive dynamic force producing dominance.
To ignite positive feedback, technology companies follow either revolutionary or evolutionary strategies. The strategy of revolution offers compelling performance advances in a discontinuous technology. The strategy of evolution offers consumers a compatible migration from a prior technology to an incrementally improved but continuous version. Also, a company must choose either an open approach, making the necessary interfaces and specifications freely available to others or a proprietary approach, retaining licensed control. Aspiring to play a gorilla game, Qualcomm’s strategic dynamic path required securing proprietary, but selectively open, architectural control.
Shapiro and Varian (1999; p, 199) described four generic strategies in network markets depending on whether the strategy emphasizes evolutionary Compatibility or revolutionary Performance, which is crossed with decisions to retain Control or to Open a standard. Compatibility with Control was named "Controlled Migration." Compatibility with Openness was named "Open Migration." Performance with Control was named "Performance Play." And, Performance with Openness was named "Discontinuity."
According to Shapiro and Varian, not all standards wars are alike. Switching costs become the critical distinguishing feature. This issue of switching or adoption costs rests on whether your technology and your rival’s technology are compatible or incompatible with both the previous generation’s architecture and with each other’s.
The 2G Standards War was a war of Rival Revolutions because neither TDMA/GSM nor CDMA were compatible with analogs’ first-generation FDMA architecture or each other’s 2G architectures. The second generation promised advanced performance that increased cellular access by two different sets of multiples based on the digital revolution in computing power as combined with one of two competing theories of modulation: time division versus code division, each a digitally-driven rival revolution requiring switching costs from the previous generation’s use of analog modulation. Both TDMA and CDMA networks were exemplars of advanced Performance Plays. Thus, the issue became: can CDMA’s superior advanced performance overcome TDMA first-mover advantages that produced its large installed base?
Based upon the dual compatibility criteria, the 3G Standards War must be classified as a war of American Evolution versus European Revolution. That is, 3G CDMA2000 is evolutionarily compatible with 2G cdmaOne, but the UMTS spread spectrum interface is not evolutionally compatible with GSM’s RAN. This critical difference in evolutionary compatibility is the difference that makes all the difference. It creates huge switching costs and foreshadows the outcome of the 3G standards war.
This is especially so because a true UMTS revolution requires a play on advanced performance. But, UMTS is fatally flawed in its basic architectural global design rules and years behind in its engineering implementation. Yet, each of Qualcomm’s breakthrough ideas guarantees both evolutionary compatibility with cdmaOne and revolutionary performance advantages from breakthrough ideas and implementations. First, CDM2000 1X is evolutionarily compatible with cdmaOne, but also significantly advances performance by doubling voice capacity and enabling medium data peak rates and throughput. Second, the evolutionary compatibility of CDMA2000 1xEV-DO with most architectural features of cdmaOne, taken together with its revolutionary optimized high data rates, guarantees a revolutionary performance advance within an evolutionarily compatible context of retained global design rules for major interfaces and parameters of prior CDMA architecture. Third, the breakthrough of direct conversion in the baseband that eliminated the necessity for intermediate frequencies and permitted a revolutionary evolution of the CDMA2000 family of 6xxx ASICs by synthesizing competing architectural standards by tightly integrating their once-competing GSM/GPRS/UMTS global design rules into harmonized CDMA2000 chipsets. This changed the spread spectrum game completely to one that only Qualcomm can win. Qualcomm rules spread spectrum design rules.
Three Strategic Phases. If strategies define stepping-stones to strategic control, then Qualcomm’s strategic development can be divided into three phases as they traversed their dynamic path to achieving strategic architectural control. The phases are dynamic, both temporally dynamic and scale-dynamic from architectural breakthroughs.
Phase 1: Their 2G strategies was an advanced Performance Play, a revolutionary strategy in a war of Rival Revolutions based on innovative technology and the control of intellectual property.
Phase 2: Their 3G strategy for its existing and greenfield customers used a path of Controlled Migration, offering (a) a radically evolved 3G performance path that remains evolutionarily compatible, both backward and forward, for voice and medium speed data, (b) a variant 3G data path, also predominantly evolutionarily compatible, that deploys a separate 1.25 MHz carrier that is optimized for High Data Rate only, or (c) a voice-data-on-demand path that flexibly shifts carrier usage between voice or data as needed either in the forms of 1x EV-DO or 1x EV-DV.
Phase 3: Their unfolding set of 3G strategic dynamic paths directed primarily toward its rival’s TDMA/GSM/WCDMA customers that variously overlay the older 2G GSM infrastructure, compete directly to provide UMTS ASICs to 3G operators, and, most radically, dissolve the performance-compatibility conundrum by delivering a technology that seamlessly integrates multi-mode, multi-band, multi-network distinctions to harmonize different standards, either piecemeal or simultaneously, by modularizing, integrating, and standardizing a seamlessly interoperable globally compatible mobile wireless network.
All three time-phased strategies remain nested within Qualcomm’s overarching strategic goals: (1) to achieve and expand strategic architectural control of their platform; and (2) to grow the size of the overall mobile telecommunications market, including voice, high data rate, and wireless Internet markets.
But before we look at the details of contemporary tactics and strategies, we need to understand the advanced performance potential inherent in spread spectrum itself as manifested during the 2G Standards War and to sharpen the contrast in strategies based upon European coalitions versus American free market competitions. It is the difference between shaping and adapting to the future.
Bold and risky, its phase-one strategy, a Performance Play, meant that Qualcomm had to stimulate a network effect completely on its own. Intended to ignite positive feedback, this strategy required not only a striking new technology with significant and substantial competitive advantages over existing technology, but also the ability to maintain control of its new architecture until it became a de facto standard in the face of competitive challenges certain to come. As the business strategist Allan Afuah (2000) pointed out, possessing a superior technology does not ensure competitive advantage for three reasons: (a) it takes more than superior technology to deliver value to customers; it requires “complementary assets,” such as distribution channels, marketing capabilities, brand-name reputation, or manufacturing ability; (b) competitors often find some way to copy or get around the technology to catch up or leapfrog it; and (c) where two or more technologies compete, the superior technology does not always win because a competitor’s positive feedback may ignite first, either by chance or through superior complementary assets, to create network effects that boost its benefactor to dominance in the niche. |
