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Copyright 2010, Business.in.com

Casino Royale: The Story Of QualcommHow Qualcomm learnt to love the Chinese, parked its tank in Intels backyard and itstollbooth at the centre of Indias telecom highwayby Rohin Dharmakumar | Jul 12, 2010

There is something about technology companies that makes them want to dominate theworld. Oracle, SAP, Microsoft, IBM, Google and even Apple all want the world to veeraround to their point of view and therefore their products. Maybe it is something to withthe transient nature of technology advantage. Those who manage to be dominant, evenfor a short-while, are seen as visionaries. And then there are those who are almost inthat camp but not quite. For much of its life Qualcomm has been in the latter camp the almost-Microsoft.

It was founded in 1985 by MIT professor-turned-entrepreneur, Irwin Jacobs, togetherwith six of his friends. They had invented a proprietary technology that became the seedfor the wireless standard CDMA, a technique that allows large amounts of information tobe transmitted over limited wireless spectrum by using complex matching algorithms.CDMA began to be adopted by the worlds mobile operators from the mid-90s afteryears of relentless hard-selling by Jacobs, backed up by equally relentless patenting byhis engineers in theR&D department.Globally, this strategy has been very successful. Today, the company founded byJacobs is led by his son Paul, and sits on a pile of over $18 billion in cash whilegenerating another $2-3 billion in free cash flows every year!While this is brilliant in itself, India had eluded Qualcomms grasp. It has not made toomuch money here because its business model has just not worked here. However,things might be on the cusp of a change for Qualcomm because of a change in marketdynamics and some canny risk-taking by the company to adapt its business model to fitthis changed scenario. A win here will not only get it success in India, but also sink theambition armada of its longtime foe, Intel, and with it, spell the endgame for the rivalwireless standard backed by it WiMAX.Qualcomms model as it exists is simple. Be inventive, file as many patents as possiblein wireless communication, and then build products around those or wait for people toqueue up to use those patents and pay a nice royalty to the company.Qualcomms patents are critical to almost all major wireless standards on the GSM,CDMA and even LTE (Long Term Evolution) sides, helping it squeeze a royalty out ofquite literally anyone and everyone. An army of its lawyers and patent experts go afterany company that dares touch its wireless IP without paying for it.The Way It WorksPeople tried to design around Qualcomms 3G patents but it was very tough because allpatents are usually inter-related, says Shiv Putcha, an analyst with telecom consultingfirm Ovum. Most patents can be traced back to original innovations and patents thatwere at the root. You simply cant get around it, he says. Nokia and Samsung both

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found this out the hard way. In 2008, after a three-year legal battle over the use of itstechnologies in Nokias phones, Qualcomm won $2.3 billion from the worlds largestphone maker and an assured stream of annual royalties over the next 15 years. In 2009it won $1.3 billion from Samsung plus additional royalties over 15 years.The biggest chunk of Qualcomms revenue, over 60 percent of roughly $10 billion

annually, comes from selling its own proprietary chipsets to mobile phone, notebook ordata card makers. It is the worlds largest fabless chip maker, meaning it designs itschips but outsources their manufacturing to others.

Another 30 percent and this is the interesting part, one which gives it a profit marginof nearly 85-90 percent comes from licensing its formidable IP (intellectual property)around wireless communication (over 12,000 US and over 50,000 international patents)to chip makers like Texas Instruments or Infineon, mobile phone makers like Nokia orSamsung and equipment makers like Huawei or Alcatel-Lucent. For instance, it takesbetween 4-5 percent of the wholesale price of any CDMA or 3G phone made or soldanywhere in the world.

Dont Say Hip, Say CheapIn India, however, CDMA phones the essence of Qualcomms business nevertook off, though CDMAs entry into the Indian market in 2000 was one of the mostdisruptive events in Indian telecom history. Thats because Tata Teleservices andReliance Communications (RCOM) used CDMA technology as a Trojan horse intoIndian mobile telephony, passing it off (wrongly) as a cross between a fixed and mobileservice.Though this flash-bang entry established Qualcomm firmly in India, it left the companywith two serious issues.First, its CDMA platform, though more advanced than GSM on most counts, quickly gotrelegated to the lowest end of the price and consumer segments because CDMAoperators like Reliance presented it as a poor mans technology. They did this to quicklymop up the millions of lower-income potential subscribers still not signed up for GSM.Qualcomm also alienated itself from GSM incumbents like Bharti Airtel and Vodafone(then Hutch) who felt, rightly, that it was the ammunition provider for their upstart,backdoor competitors.The net result was that Qualcomm was left picking up low value crumbs from the bottomone-fourth of Indias mobile market CDMA subscribers. For close to 10 yearsQualcomm has remained in that position. And now that the two members of the CDMAcamp RCOM and Tata Teleservices had both switched allegiance to GSM, peopleexpected Qualcomm to stay down, and out.

There Will Be ChangesBut in technology as in politics, to quote Bob Dylan, the loser now/Will be later towin. A change in circumstances in India and some humble learning means Qualcommcould be a force to reckon with in the near future.The first star that heralded its new fortune was the successful completion of Indias 3Gauctions. Because Qualcomms IP is embedded in all 3G technologies, it will make a 4-5 percent cut off every 3G phone that will now be sold in India. In one shot it stands tomake money out of almost every new phone sold in India versus just CDMA phones

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earlier.

Illustrations: Vidyanand KamatTill now India was driving the very low end for us, with profits significantly lower thanother markets. But there will be a massive change once 3G kicks off because well workwith all the operators, including those that saw us as their enemy, says Paul Jacobs.The average selling prices of our phones will go up as well. Over 2014, as a market forus, India might then only be surpassed by China, he adds.The second omen was on March 11, at a press conference in New Delhis Oberoi hotel,when Kanwalinder Singh, its India head said, Today Im very proud to announce thatQualcomm has invested one billion US dollars into India.Singh did not spend that money in building offices, hiring thousands of new employeesor buying local businesses. He spent it to buy 20 megahertz (MHz) of spectrum in thecities of Mumbai and New Delhi and the states of Haryana and Kerala. Qualcomm wasone of the six companies that won precious spectrum to offer high speed 4G wirelessbroadband to Indians. The $1 billion spent in India was its single largest bet anywherearound the world.The funny thing though is that Qualcomm is betting on deploying a technology that itdidnt think much of to begin with, a commercially unproven technology called TD-LTEoriginally developed by the Chinese.Learning from the ChineseThe Chinese government, in the mid-90s, decided to develop a technology to avoidpaying royalties to Western companies like Qualcomm. They created TD-SCDMA, a 3Gwireless standard. But it never really took off. The Chinese, in order to avoid payingroyalties, had to reinvent the wheel. This made their technology cumbersome andinefficient.The Chinese pumped more resources into it and refined it into TD-LTE. They also ropedin two large Western partners, Verizon and Vodafone, to conduct joint trials of LTEcombing the Western (FD) flavour with its own (TD) one. Julian Grivolas, an analyst withOvum in Paris who tracks the LTE space closely, says Chinas goal was to make surethat this joint LTE becomes the next equivalent of the mobile worlds ubiquitous GSM

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standard.But the company that took advantage of this trend the fastest was the one which wasthe last to join the LTE party Qualcomm. For that it had to swallow its pride andabandon Ultra Mobile Broadband (UMB), a 4G technology it had been developing formany years. In late 2008, it abandoned UMB to focus exclusively on LTE when it saw

big operators tilting towards it. A few years earlier it had already spent over $800 millionto acquire Flarion, a company with a significant amount of patents in areas related toLTE.Qualcomm smartly co-opted its erstwhile foe China into becoming an ally byannouncing plans to build new multi-mode mobile chipset that would combine theversion of LTE that Qualcomm and a galaxy of mobile companies like Ericsson andNokia had developed along with what the Chinese had developed.Given that a significant chunk of TD-LTE patents rest with Chinese companies likeChina Mobile, Huawei and ZTE, the only way Qualcomm would have integrated theminto its own offerings would be by cross-licensing basically sharing patents with them.The Chinese are returning the love because a global acceptance of TD-LTE will mean

cheaper equipment prices for its mobile operators and larger markets for its equipmentvendors.With TD-LTE under his belt, Jacobs knew he had WiMAX cornered.TD-LTE parked its tank right on WiMAXs lawn. And there was going to be conflict,says Gabriel Brown, an analyst with telecom consulting firm Heavy Reading in London.Intel Meets Its MatchIt was back in 2002 that Intel bet big on a fledgling technology called WiMAX whichallowed for high-speed wireless broadband with speeds up to 30 Mbps over distancesas large as 40-50 km. Faced with plateauing sales of its mainstay PC processors, itfigured that consumers would rush to upgrade to newer processors embedded withWiMAX. The importance of WiMAX to Intel can be judged from the fact that it gave theresponsibility for popularising it to Sean Maloney, an executive vice-president at Intel,widely slated to become its next CEOnder Maloneys leadership Intel became the de-facto cheerleader for WiMAX, investinghuge resourcesto present WiMAX as the best 4G option for consumers, especially in developingcountries.

A key reason for Intels bullishness was because WiMAX was designed to work betterover unpaired spectrum. All wireless communication take place over two types ofspectrum: Paired, meaning there are two equal chunks of spectrum to send and receiveinformation, and unpaired, meaning theres just one unbroken chunk for receiving orsending. Repeated attempts to get Intel to answer to queries were met with noresponse.Voice conversations, being symmetric (carrying one partys voice is as important ascarrying the others) have traditionally been carried over paired spectrum. In contrast,data is usually asymmetric, meaning we tend to download much more than we upload,and is hence better suited for unpaired spectrum.

But as wireless data traffic skyrocketed around the world over the last few years,regulators in country after country kept coming up short of enough paired spectrum to

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feed their telecom operators with. Which was good for WiMAX, but bad for FD-LTE.There was an uneasy sort of detente that WiMAX was going to be used for unpairedspectrum and [FD] LTE over paired spectrum. There was no agreement or anything,ust assumptions on the part of a lot of people, says Brown.

Illustrations: Vidyanand KamatUntil one fine day the Chinese decided to make LTE work over unpaired spectrum aswell. That technology was TD-LTE.The result: Operators around the world, even WiMAX ones like Clearwire in the US andYota in Russia, decided to cast their lot with TD-LTE. Big equipment backers like Nokiaand Cisco backed out too. And now with India, a market large enough to tilt the fortunesof a new standard, appearing to veer towards TD-LTE, WiMAX and Intel are in a spot ofbother and Qualcomm with a fairly open field. WiMAX is a proven technology, saysJacobs, before mischievously adding, Proven to be a failure!Those in the know of things say Qualcomms intention is not to build out its own 4Gnetwork in India, but only to conduct limited demo trials in its four circles to show thatTD-LTE works as advertised, especially alongside 3G and 2G. Within a couple of yearswe might see one or more operators, like Airtel or Vodafone, become equity partnerswith Qualcomm in a new joint venture. It will be the operators who will then use the 20MHz spectrum that it won to build their own 4G networks.In the interim, Qualcomm will lean on the 3G operators to only buy equipment that caneasily be upgraded to LTE, thus keeping an open door for 4G. It will also try to cobbletogether a nationwide alliance of the best operators, says Singh, so everyones 3Gand LTE works together.

A few years earlier, Singh might have found it hard to convince Indian operators tocollaborate. But faced with a new competitor in the form of Reliance Industries, the bluewhale in the ocean of Indian industry, they may not have any option but to bury their

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differences and follow the light from Qualcomms torch.Countdown to 4GSo far, mobile networks have been designed primarily to carry voice rather than data,though every iteration since the 1990s has allowed for faster and faster datatransmission speeds. The worlds first fourth generation (4G) networks, when they

start appearing from 2012, will instead be designed primarily for high-speed datatransmission. Heres how mobile networks have been evolving.First, There Was VoiceThe first GSM mobile networks in the early 1990s (called second generation, or 2G)were designed to carry voice. Users could still exchange SMSes sent over idlesignalling channels. Qualcomms 2G rival to GSM cdmaOne too was optimised forvoice, but significantly provided for data transmission at speeds of up to 14.4 Kbps.Need for (Data) SpeedWith the Internet gaining popularity, there was a need for faster data traffic. Enter 3Gand 3.5G. CDMA became the technical foundation for 3G in all camps (W-CDMA forGSM; EV-DO for CDMA), offering speeds up to 2 Mbps. These evolved into the 3.5G

standards HSPA and EV-DO Rev. A & B, respectively. Many thought ubiquitous mobiletelevision and video calls were finally here, but that didnt happen. In 2007, WiMAX wasadded to the list of 3G standards. It was designed almost purely for wireless broadbandto begin with.Finally, 4GMany mistakenly refer to WiMAX and LTE, a rival high-speed standard, as 4G. Neithercomes close to the 1 Gbps data download speed that 4G needs.

This article appeared in Forbes India Magazine of 16 July, 2010