Breakthrough Ideas (continued)
Qualcomm’s 2G Tactics Within its Performance Play Strategy
Qualcomm’s second-generation war is classified as a war of rival revolutions. Both TDMA and CDMA were incompatible with 1G’s FDMA. Both offered rival architectures that promised advanced performance. However, Qualcomm’s architecture was significantly more advanced. The secret to its success combined a superior architecture with a strategy that got the job done the hard way.
So, how did Qualcomm, completely on its own, ignite positive feedback in the face of its competitors’ overwhelming advantages in five of seven network-market assets and despite its rival’s successful tactical use of preemption and expectations’ management, both occurring within the context of a bitter standards war?
By taking advantage of its intellectual property and innovative technical prowess, Qualcomm successfully executed five tactics: (1) Use a cash cow business to fund R&D in order to grow the CDMA business; (2) Prove excellence by demonstrating excellence; (3) Defend and extend your intellectual property; (4) Become your own vertical value chain until you build a horizontal value web, then sell-off the low margin businesses and nurture your expanding value web; and (5) Play the Asia card to ignite network effects.
1. The Cash Cow. As part of Qualcomm Wireless Business Services (QWBS) Division, OmniTRACS is a satellite mobile communication system¾processing 7 million data transaction per day in their 7/24/365 Network Management Centers. With its fleet management solution, Qualcomm serves 1,300 U. S. trucking companies, including 38 of the top 40. OmniTRACS continues to address new markets¾private fleets (signed a major customer to a five year agreement covering 7,000 units), heavy equipment (signed United Rental for 750 units; hosting web services for Komatsu), wireless medicine (signed development agreement for first device/service), and developing new trucking markets in Europe, Latin America, and China, including a recent buy-out of its Mexican distributor.
OmniTRACS continues to build new products¾OmniExpress, using terrestrial data services, OmniOne, using BREW enabled mobile phones, and QTRACS, using an as-soon-as-possible web model for dispatch services. With 126 current customers and 2500 vehicles using Qualcomm hosting, the QTRACS/Web service provides: (a) a secure interface to OmniTRACS, OmniExpress, and OmniOne; (b) messaging, positioning, and scalable mapping; (c) full visibility, command, and control for fleet manager; and (d) either QWBS or customer hosting. The BREW application, OmniOne, which was launched in May, targets owner operators and small affiliated fleets to help them improve their efficiency in deploying, tracking, and messaging vehicles to increase their owner’s return on investment. Empty trucks produce no profits; but, in route dispatching is efficient. In response to the Homeland Security initiatives, QWBS is pursuing government funding, introducing new security enhancements for airplanes, trucks, and ships, and, with SAVI, upgrading the defense transportation tracking system.
OmniTRACS was Qualcomm’s first-built business. It served as a significant source of cash for CDMA development. Moreover, the success of OmniTRACS also demonstrates that Qualcomm has superior competencies in location tracking, security, and mobile telemetrics.
2. Demonstrate Excellence to Prove Excellence. Because of their rivals’ facile tactics of managing expectations, for instance, that Qualcomm’s technology would never work, violated the laws of physics, and demonstrated its CEOs mendacity, Jacob’s counterstrategy was to announce the advanced capabilities of CDMA, to demonstrate them as they were developed, and to prove their value through data gathered in operators’ trial networks.
Based in the scientific method, this tactic proved to be indisputable, demonstrating CDMA’s technical excellence and validating Qualcomm’s advanced-performance-play strategy. Demonstrating excellence to prove excellence is remarkably convincing. Convincing indeed, because the resulting data demonstrated that Qualcomm’s sound science and technical excellence mattered to the operator’s bottom line.
3. Intellectual Property. Qualcomm holds almost 2500 issued or pending U. S. patents, with several times that number of foreign filings. In 2001, Qualcomm had ten or more favorable rulings on patents in the U.S., Japan, Korea, and Europe. To date, their frequently tested patents in the U.S. and abroad always have been upheld. Their patents are pervasive and essential for any deployment of all forms of spread spectrum, including at least 100 patents identified as specifically relevant to WCDMA.
Only certain patents are key to defining the innovation in a discontinuous technology. Now that you understand spread spectrum technology, you know that essential patents include the process for spreading the spectrum by using a higher chipping rates to spread the bits of information and create the processing gain, the wave form and codes employed, the processes that underlie advanced power control, rake receivers, vocoding, soft handoffs, and the like.
Many supporting patents related to improving the essential innovative processes extend the breadth, depth, and length of intellectual property protection as innovation moves from spread spectrum, to optimized data transport, to direct conversion in ZIF-architecture, to multi-mode and multi-band breakthroughs. From the minds of Qualcomm’s engineers come these patents that line the halls of headquarters, these proud trophies, these vigilant medals of valor and value, to guard and honor a knowledge company.
The same royalty rates apply to all versions of CDMA. Qualcomm licenses its intellectual property at fair, reasonable, and non-discriminatory terms to over 100 major telecom players around the world. Any violation of any single claim in any one of these patents is subject to litigation. In FY’01, they spent $409 M, or 15.3% of revenues, on R&D, using the patenting process to protect their innovative IP continuously and indefinitely into the future. Qualcomm added 665 patents in 2001, after adding 318 and 449 patents in the two preceding years. The last two lonely European holdouts, Siemens and Alcatel, negotiated licenses in 2002.
4. Be-All-To-Grow Value Web. Making a virtue of necessity, Qualcomm vertically integrated all value chain activities to demonstrate and prove the excellence of their CDMA solution: it invented the commercial technology, designed the communication system, designed, but outsourced, the manufacture of its proprietary CSMs and MSMs, installed the CDMA infrastructure, provided and helped install the infrastructure for it first foreign carriers, manufactured the CDMA handsets, and performed the system integration. Qualcomm continued to educate the operators by helping them solve all technical problems so they could fully exploit CDMA’s superior performance to become successful. It nurtured their successes to secure and extend its own.
After its successes with carriers in Hong Kong and Korea, system integrators like Lucent, Nortel, and Motorola joined the value chain as system integrators as PrimeCo (now Verizon) and Sprint PCS rolled-out in 1996. Lucent and Motorola tried their hand at manufacturing their own IS-95 chips with little success, eventually choosing to use more of Qualcomm’s.
Qualcomm spun out Leap Wireless in 1998 to stop competing as an “operator” with its carrier customers. Next, on December 22 1999, Qualcomm announced that Kyocera was acquiring its CDMA consumer phone business. This took Qualcomm out of the competition for handsets with the OEMs, its MSM customers. Thus, with a large value web securely in place, Qualcomm had succeeded in building a value web and was free to sell off its customer-competitive low margin businesses.
Qualcomm continued its value web tactic of nurturing its value web. Here, the key ideas are: (a) each company should have the opportunity to advance its goals within the value web; (b) each contributing member in the value web, which consists of a constantly shifting mix of members in continually changing relationships, should share in the rewards when it participates in an integrated effort to ensure that each product- or system-specific value chain remains effective and unbroken; and (c) the star-node must nurture and lead, rather than dominate, its value web.
Drawing on Interpersonal Theory, I contend that the leadership of a modern value web requires affiliative-control, a friendly-dominance like that exercised by the head of a family for the good of the web, not a hostile-dominance designed to maximize a leader’s hegemony or short-term profits. This leadership principle, which might be called affiliative-control-as-mastery, distinguishes between seeking dominance as power-over the value chain and developing the mastery as power-to innovate, lead, and nurture.
This affiliative-control principle of leadership logically follows from Interpersonal Theory, from the strategic goal to grow the size of the overall market, and from the strategic architectural principle of strengthening the reach and richness of the value web. Gratification delayed equals value web expansion equals profits magnified. Affiliation plus control equals mastery of the future.
The Asia Card. A first-rate telecommunication system is essential for any country to become a player in global economic markets. Yet, there are no wire line telecommunication systems in much of the world, given that half of the world’s population has never made a phone call. Where there is no wire line, it is cheaper and faster to install wireless. Asia represents the world’s largest actual and potential telecommunication’s market; China is already the country with the most wireless mobiles at only single-digit penetration, capable of growing at a rate of 60 million a year.
Moreover, new markets create new opportunities for new network effects. In new frontiers where no competitor has yet achieved critical mass, the first-to-scale company that reaches critical mass will dominate (if, and only if, it rewards its value web). From the network effects gained from rollouts in China, Qualcomm anticipates the creation of economies of scale that surpass those of its GSM competitors. Qualcomm assumes that the growth of 3G will dwarf that of 2G and pass the scale of GSM/UMTS in the next few years.
When Korea chose CDMA for its national wireless system in 1993, it hoped to develop the world’s most advanced wireless system and become a global player in telecommunications. It succeeded. Korea used this [last]summer’s World Cup as an opportunity to show the Europeans, who claimed to be the best, how far behind they actually were.
In Korea, SKT launched CDMA 1x (one times existing capacity), the world’s first standard’s compliant 3G system, on October 1 2000. In May 2001, KTF and LG Telecom of Korea launched the world’s second and third 3G systems. On January 8 2002, SKT launched the first commercial 1xEV-DO (Data Optimized, formerly called HDR), which was followed by KTF’s second launch in May 8, 2002.
As well as having the general economic benefits associated with having the world’s most advanced telecommunications system, South Korea is now seriously participating in the world economy as an international vendor of handsets, Wireless Local Loop (WLL), and other infrastructure equipment, particularly in the U. S., S.E.A., and China, with promising WLL prospects in India. In fact, wireless is becoming Korea’s primary international growth market. Already, Korea’s export of communication products and systems rivals automobiles as its leading foreign export.
Korea’s progress reassures China of its own potential to grow into a CDMA power. Moreover, Korea and China recently signed a memorandum of understanding to jointly develop wireless (and all other forms of telecommunication) with the express goal of jointly developing 4G intellectual properties.
Qualcomm Gives Asia what Europe Denies.
At the URL below, on March 7 2001, SI poster “engineer,” who is a former Qualcomm QCT executive, discussed how Qualcomm had to prove CDMA worked in the face of tremendous FUD from rivals, how Qualcomm was delayed a year by TDMA rivals who petitioned the CTIA and asked them to delay any Qualcomm roll-out until an approved standard was in place, how ETSI never approved the GSM stacks in any phone submitted by the Chinese or Qualcomm who somehow could never meet their standards, and still more insider perspective. According to engineer (emphasis added),
So the Chinese dictated to the GSM crowd that they wanted to go with CDMA, which they felt after talking with Q that they have a very good chance to get the lion’s share of the local mfg market. Qualcomm would help them get certified, and sell them compliant hardware and software. This forced the GSM crowd to make that famous change to “our next generation will be CDMA based.” A giant concession for the GSM crowd to make publicly. But leading up to December of 1998, when the Chinese government announced “the next system in China must be CDMA based,” we saw a tremendous amount of FUD being generated by Ericsson and others trying to beat down Qualcomm once again. What was really happening was that ERICY was secretly negotiating for a CDMA lic and to buy the infrastructure division of Qualcomm to secure a place in that Chinese rollout. We all saw what really happened in 1999. Again, Qualcomm and Dr. J. continued on a single path. Deliver what they said they would, perform like they said they would, and secure positions in world markets like they said they would.
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Because, as “engineer” had said earlier, “CDMA technology was a quantum leap ahead, …this is why the Chinese dictated to ERICY in Dec 1998 that they MUST GO CDMA.” siliconinvestor.com
This same perspective on China continues to unfold, for instance in a June 20 2002 article by Dmitri Ragano, entitled Hidden Dragons. According to Ragano:
The Chinese Communist Party has quietly cultivated a homegrown industry with a protectionist stance that requires foreign companies to transfer knowledge and capital to get access to the local market.
“China has been the anomaly among developing nations,” according to Tim Kelly of the International Telecommunication Union in Geneva, Switzerland, “in protecting and carefully regulating the development of its wireless market.”
. . .It was not until 1998, that an appliance maker named Keijan produced the first Chinese-branded mobile phone. Since them more than 16 other local companies have entered the fray … these local companies now hold 25 percent of the market . . .
To overcome fragmentation, an industry consortium of domestic manufacturers has pledged an alliance aimed at taking 50 percent of the Chinese market within five years, which they believe will then have 350 million subscribers. This goal can be interpreted in different ways since the government has dictated that 50 percent of all cell phones sold in China must be made locally in the future . . . thefeature.com
Whereas, European companies denied that opportunity earlier. Qualcomm gave Asia the opportunity to become telecommunications manufacturers. With the largest telecommunications market in the world, China exercised its unusual customer power by dictating that CDMA was its future (or at least, part of its future), presumably leading to Ericsson’s capitulation.
European Strategy Backfires! In any event, Europe’s anticompetitive practices backfired. China resented the Europeans blocking them from establishing any significant share of the manufacturing of their in-country GSM phone system. China used it state-control and market-power to counter GSM-control. In November 2000, at least temporarily, China banned both joint ventures and wholly owned foreign companies from investing in mobile makers. This means that Nokia, Ericsson, and Motorola could have no new joint ventures and must export 60% of phones made in China, which must include 50% Chinese components.
China must control its own telecommunication destiny. Thanks to Qualcomm, it will. Qualcomm’s China Card took many years of patient negotiation, always predicated on fair and pragmatic deal making designed to expand the worldwide market. Cooperation is based on mutual trust gained from experience. To help China to develop and control its own mobile telecommunication manufacturing, Qualcomm both licensed its CDMA innovations and shared its tacit knowledge.
According to “engineer,” both Qualcomm and Samsung had extensive facilities in China since 1996. “Qualcomm began working with the Chinese in basestation design in 1996, Samsung put in a fully installed test network in 1997 in Shanghai. Both have been operating a ‘CDMA University’ there since that time.” Beginning in 1991, Qualcomm had taught Samsung, LGIC, and Hyundai in Korea how to build its CDMA infrastructure. The use of trial networks continued, expanding into 1X, which is the basis for China Unicom's decision ded that now was the time to move from cdmaOne to 1X, and, currently into several 1xEV-DO trial networks, which will become commercial when China becomes able to compete effectively in handset manufacturing and distribution.
On the SI Moderated Qualcomm thread, Ben Garrett indicated, after closely following 3GPP2 activities, that he believed that Qualcomm tacitly approved of China contributing some intellectual property to the new (June) and recently adopted 3GPP2 and ITU 1xEV-DV standard. This would represent a giant leap forward for China’s future in telecommunications because it aspires to become a 3G and 4G leader.
This facilitating stance of Qualcomm contrasts with Europe’s reliance on a political process for making so-called non-proprietary standards, which is too slow--resulting in the still un-finalized UMTS standard that is being politically produced by internecine struggles over what is to be included and who owns which part of it. (Even Qualcomm plays in this 3GPP process, hoping to see the standard technically improved.) Still worse, the UMTS standard is being decided by political negotiation among a group of European companies without CDMA experience rather than scientifically, through an empirically demonstrated ability to meet technology criteria. SI poster Ben Garrett (his emphasis) argued:
But 3GPP is literally flooded with members. This is their strongest political asset. This is their greatest liability when developing technology. They’ve grown beyond their ability to function as anything other than a political entity. There is no testing or cross verification of technology prior to the voting and approval of contributions. There isn’t time.
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Garrett continued by contrasting this political approach with that of 3GPP2 where all technology is tested and cross-verified (although Garrett was not pleased by the recent rushing through of the 1xDV standard). In 3GPP2, the creators of potentially competing contributions must use a mutually accepted testing procedure to meet mutually established performance criteria prior to consideration for inclusion in the standard.
That is, 3GPP2 functions fairly and scientifically, being reminiscent of Jacob’s proposal in 1998 for a means to arrive at a single world standard. The American reliance on competition to prove a technology’s value before it is mandated to be a standard is a best practice. |
