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iPhone and the Future of Qualcomm

Posted on Wednesday, May 9th 2007

Qualcomm (QCOM) has been reaping the benefits of the worldwide mobile industry boom for a while. Qualcomm engages in the design, development, manufacture, and marketing of digital wireless telecommunications products and services based on its Code Division Multiple Access (CDMA) technology, key competitor to GSM, the other standard.

In fact, while most of the world has standardized on GSM, the US market continues to be fragmented, with 2 of its major carriers each on GSM (Cingular AT&T and T-Mobile) and CDMA (Verizon and Sprint Nextel). Meanwhile, all those who use CDMA technology are required to pay royalties to Qualcomm, making the company a great growth story.

This summer, Apple enters the market with its iPhone, carried exclusively by Cingular. Each of Verizon and Cingular AT&T have about 56 Million subscribers in North America, and are two of the largest. This means, that Apple has put a stake in the ground to have gone with GSM. Verizon is testing dual-standard, hedging its bets, and could also standardize on GSM in the next few years.

If the iPhone becomes a grand success, then one of two things would happen:

* All the carriers would have to play ball with Apple, and if Apple so desires, they will all think about lining up behind GSM, and tackle the global interoperability issue once and for all.

* Or, Apple will play nice, and support both standards.

In the former case, the iPhone will gradually push CDMA out, while in the latter case, CDMA can keep going.

Apple has a great knack for aligning the arrowheads of an industry, and since the global interoperability and standardization problem is already bugging the mobile industry, they just may decide to force the issue to resolution.

This would not spell good news for Qualcomm.

[Much of the analysis in this article was already done by Tristan Louis back when the iPhone was still in a speculative phase.]

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Qualcomm owns most of the WCDMA patents. Cingular will provide iPhone content on its WCDMA network. Which implies, Qualcomm will win again.

Sajith Wednesday, May 9, 2007 at 10:33 AM PT

Just a quick correction to the first comment: publicly available research shows that QCOM owns anywhere from 25-40% of essential WCDMA patents, with Ericsson and NOK having similar levels of 25-30%. It’s a huge stretch to say that QCOM owns “most of the WCDMA patents.” It owns most of the CDMA patents (~85%) but not in WCDMA.

On the article, this is some of the most backward thinking I’ve ever seen. It’s essentially saying that the success of ONE device would push Verizon to migrate to GSM from CDMA. This is outrageous. Not only do they have over 60M CDMA subscribers with CDMA devices that would not work on a GSM network, but Verizon would also have to spend billions of dollars to deploy GSM nationwide. Now, Verizon is undoubtedly looking at moving to LTE in the 2010-2011 timeframe (LTE is the 4G version of GSM, similar to UMTS/HSDPA being the 3G version of GSM). But there’s no way Verizon is moving to GSM or even UMTS/HSDPA. And especially not for one device. If rumors are to be believed, then Apple tried to pitch the iPhone to Verizon first (which would have been a CDMA product). Only after Verizon walked away, did Apple pursue Cingular with a GSM variant. GSM, of course, also makes the most sense from a global perspective for Apple because it can then leverage the product throughout LTA, APAC and Europe (whereas the vast majority of CDMA subscribers are isolated in North America, Japan, Korea and India). And if Cingular’s exclusive on the iPhone expires, Apple would gladly create a CDMA version if Verizon is willing to commit to volume levels that create a sound business case. To suggest that Apple has picked a technology (and is unwilling to support another technology whose chipsets are widely available from horizontal players) and will force US operators to universally adopt GSM is nonsense.

Sorry for the rant. I usually find solid analysis here, so I feel the need to point out the flaws I see in this argument.

jps Wednesday, May 9, 2007 at 8:43 PM PT

I agree with ‘jps’s comment. I usualy visit this blog for solid analysis and this post disappoints me. I have worked in handset market for number of years and handset manufacturers do not work that way. Even a very highly successful phone like Moto Razr could not and cannot change operator dynamics, even though it is a mass market phone which sells in huge huge volumes.
I do not think iPhone will achieve such volumes at least in short term simply because it is meant for niche market. I feel similar to Razr, Apple will follow option 2 whereby it will create variants to suit all possible networks and markets. Mountain will never come to mohammad mohammad will have to go to the mountain.

Lalit Thursday, May 10, 2007 at 1:24 AM PT

Folks,

The standardization of the handset / cellular market is a 5-7 years process. I agree that in the short term, iPhone will not achieve this level of change.

However, I am in Europe right now, and my Verizon-Treo phone doesn’t work here, not without paying high charges – outrageously high charges.

Your points above about the short term situation are well-taken. However, the main reason I am excited about the iPhone, and am dedicating this much space and mental bandwidth to it, is because I think it is one of those industry galvanizing events, that will send a lot of people back to the drawing boards, to rethink their strategies.

For anyone who travels a lot, the business of non-seamless, and inexpensive global roaming is a huge pain in the ass. The only standard that can work as a global default is GSM.

That’s why, my belief is that all the handset vendors and the operators will eventually need to align with GSM.

All I am trying to say is that iPhone is one of those events that can nudge this transition along.

Apologies anyway for not saying it well.

Sramana

Sramana Mitra Thursday, May 10, 2007 at 3:19 AM PT

Sramana apparently doesnt understand that 3G for the GSM carriers is based upon a (W)CDMA air interface, and that Qualcomm derives the same royalties from WCDMA as from CDMA2000, and sells a complete line of chipsets and software for WCDMA and its enhancements - HSDPA/HSUPA, and in the future HSPA+ and LTE. She also seems t6o assume, contrary to Apples own statements, and to reasonableness, that Apples iPhone will always be antiquated and use EDGE as its data pipe, rather than evolve to 3G, Qualcomms sweet spot.
I find the various points made by this author as being ignorant and bizarre, and agree with the others who have commented on her opinions.

Jeffrey Thursday, May 10, 2007 at 6:48 AM PT

Pointing out Qualcomm’s key patents in the GSM (WCDMA) arena is good, irrespective of the % they own.. but in agreement with Jeffrey, have you thought about the air interface yet. It’d be hard to argue that the iPhone won’t eventually support HSDPA, Cingular/AT&T’s already implemented, and ever-expanding, 3G network, if not just because of sheer customer demand (and disappointment in HSDPA not being in the first rev of the iPhone product.) I guess it must, therefore, also be unfortunate news for Qualcomm that their HSDPA chip sits squarely at the heart of what is arguably AT&T’s premier device, the Samsung Blackjack. I’m sure AT&T’s decision, as the largest GSM carrier in the US, to use a device with Qualcomm’s HSDPA chips as well as chips enabled with Qualcomm’s FLO technology, mean bad iPhone news for Qualcomm. Most handset manufacturers, choose chips based on quality, price, and availability – and operator’s do the same with devices. Saying that Qualcomm, who’s HSDPA chips were the first to be commercially implemented with an operator in the US, has only to lose as the result of an iPhone that will most certainly need GSM’s evolutionary technology, HSDPA, going forward, is only short-sighted.

Mike Thursday, May 10, 2007 at 8:29 AM PT

This argument is wrong. Apple’s iphone for all its ability is a 2G product when the high-end market is moving to data such as over the air music download and TV on handsets.

Apple will require, within a year, a 3G licence to produce and sell a high-end phone to maintain sales and pricepoint. The handset market is very competative with short product lifespan. The carriers control their network not the handset manufacturers/vendors.

Another John Thursday, May 10, 2007 at 8:49 AM PT

To think Apple’s IPhone will sway the CDMA operators along the other technology path is ludicris! Clearly the author doesn’t quite understand this wireless handset industry and what really drives technology choices. To say that an unproven phone will dramatically change our industry is crazy. Did the RAZR or Pearl kill CDMA? Ummm…no. Why would the IPhone? CDMA operators (of which I work for one) will base their decision on many factors. Handsets, indeed are a key factor, but it’s a holistic portfolio decision…not one based on one device. One device which likely won’t impact the industry as much as everyone thinks. Qualcomm is well positioned in both camps, you should educate yourself first before writing incorrect comments.

Peter S Thursday, May 10, 2007 at 10:42 AM PT

does anyone care that wcdma is 3G GSM and qcom plays big here?

will Thursday, May 10, 2007 at 12:07 PM PT

Sramana, please read my post and do not leave such arguementative writings any more. first, please stop drinking the “Apple Kool-aid”. I am a big Apple fan also 9owned them since the abeginning in 1982) but you are pretty mixed up here. I have to tell you that it is a bit unclear what these writers are trying to say to you above so let me be clear.
There was once GSM and there was once CDMA. GSM was by far the biggest worldwide standard and CDMA (patented by qcom) was the “up & comer”). Modern day 2007.
GSM has now migrated to 3g (with 4g in the future). Sramana, 3G is based on CDMA and dirivitives of CDMA called W-CDMA. QCOM owns less of the patents for 3g, but still owns many. Again, please note that GSM is now investing the millions of dollars to upgrade to 3G (third generation), which is based on CDMA/W-CDMA. This is s fact that you should know for future posts.
On a personal note about the Apple Phone. I think it is much to expensive. Also, currently you “could” use Sprint or Verizon (CDMA) to view live streaming “quicktime” movie trailers from Apple’s website if Apple could have reached a deal with them. CDMA is the ownly wireless phone tech fast enough. GSM WILL NOT BE FAST ENOUGH TO DO THAT. (Especially the 2g GSM apple’s phone will be based on.) AT&T realized this, and this is why these GSM company’s are quickly upgrading their networks to 3G!! They want to be able to compete with “true High Speed INet” which currently only the CDMA carriers worldwide have.

Bottom line: After all the lawsuits about royalties have been settleled over the next few years about who gets what in the 3G/4G world (which is again, Sramana, built on CDMA/W-CDMA technology),, Qualcomm will have a “smaller slice of a MUCH BIGGER PIE”. These are the basic facts.

TJ Thursday, May 10, 2007 at 12:57 PM PT

Wow, this is the first time I have experienced an onslaught of attack from self-important “experts”, including a bunch of private (and very rude) flame messages.

I have said one thing in this series: that the iPhone is positioned as a laptop replacement device, which causes a rethinking in both the handset and the laptop industries.

And, as a result, it will need to cause rethinking in the carrier business.

All your points about Qualcomm’s assets are well-taken.

Just for clarification, I don’t look at the iPhone as a device. The importance of iPhone is in its ability to galvanize the industry to rethink a lot of things.

I think, I have said this once before?

Sramana

Sramana Mitra Friday, May 11, 2007 at 4:41 PM PT

It is you who titled your piece “iPhone And The Future Of Qualcomm”. Had you simply wanted to posit that the iPhone would be revolutionary, we could have discussed that. However, in couching this as a CDMA v GSM battle royale, you ignored the basic reality that 3G for GSM carriers is a variant of CDMA, and therefore a boon, not a blow, to Qualcomm. One would have expected you to understand the technologies involved, before ignorantly pronouncing the death of a major telecom innovator – Qualcomm. Next time, either do the research necessary to support a position, or stick to something you know.

Jeffrey Friday, May 11, 2007 at 6:02 PM PT

Jeffrey,

I will surely research the issues you and others have raised, and write follow-on posts. I don’t at all promise to stick to what I know, becase one of the reasons I do this blog, or consult, is because I use both as personal and collective learning devices. You see, data is available everywhere. It is the ability to analyze and synthesize that gives meaning to the data. And it takes work, which I generally put in.

You guys above have all been disrespecting the work that goes into producing this blog, because of one post where perhaps I did not do as good a job.

I suggest you read the rest of the series in context, to learn something yourself. I will, always, do everything in my power, to plug the gaps in my own knolwedge, because that’s who I am.

Thanks, Sramana

Sramana Mitra Saturday, May 12, 2007 at 2:22 AM PT

[…] eco-system, and how each are likely to respond (Intel, Samsung, Marvel, Nvidia, Broadcom, ARM, TI, Qualcomm). It is clear, that whichever chip vendor comes up with the minimum power consumption, maximum […]

Sramana Mitra on Strategy » Blog Archive » iPhone and the Future : Synthesis Tuesday, May 15, 2007 at 6:12 AM PT

[…] wrote iPhone and the Future of Qualcomm last week, and it generated a huge amount of controversy. My main point in the iPhone series is […]

Sramana Mitra on Strategy » Blog Archive » iPhone and the Future of Qualcomm : Addendum Tuesday, May 22, 2007 at 6:17 AM PT

Hogwash – first of all, iPhone doesn’t even support 3G so the thought of Apple bringing manna from heaven and solving the interoperability issue is just taking their success with iPod and the iTunes store and extending that same thinking to the cellular business.

Unfortunately, unlike the music business where you can work with a few publishing houses to server a very large chunk of the global music market, the same scenario does not exist in the cellular business. Think Steve can go round the world and convince the Korean or Japanese governments to dump some of the best cellular infrastructures in the world because Apple wants to help solve the issue.

Sharikou 180 Tuesday, May 22, 2007 at 10:35 AM PT

Hi there,

Steve was alone in the music battle. In the cellular battle, he is far from alone. Read the addendum post which discusses Nokia, Motorola, Eriksson’s stake in the GSM patents.

Sramana

Sramana Mitra Tuesday, May 22, 2007 at 10:43 AM PT

[…] It also means that Qualcomm will not benefit from the iPhone anytime soon. […]

Sramana Mitra on Strategy » Blog Archive » iPhone and the Future of AT&T Wednesday, May 23, 2007 at 3:46 PM PT

Nice!

Euaggelos Wednesday, July 11, 2007 at 12:15 AM PT

Simply stated, no device is so revolutionary that it will force a format change, especially one from CDMA to GSM. That would be akin to a “revolutionary laptop device” forcing one from broadband to dial-up technology. A device cannot force technology downgrade….perhaps upgrade. Now, I do believe that the other handset manufacturers WILL be greatly influenced by Apple and you will see tremendous user interface changes in the years to come to copy the i-Phones look, feel and usability. Regards,

Julio Monday, August 13, 2007 at 11:01 AM PT

[…] more color on Qualcomm and the GSM-CDMA debate, here are 2 prior pieces: the highly controversial iPhone and the Future of Qualcomm and its […]

iPhone’s Carrier Competitors: Verizon - Sramana Mitra on Strategy Thursday, August 23, 2007 at 8:56 AM PT

Hey,

It may be a stretch, but the iPhone will dominate the industry. Writing August 23, we’ve seen the almost universally ecstatic reviews (see just out, Assoc Press Review). So, here’s what we know today:

  • Great Launch, ecstatic reviews, few problems
  • Apple will get $8/mo from US, EU telcos leading to incredible profitability.
  • iPhone has a 2 to 4 yr 1st mover advantage!
  • With great profitability, no one will catch them. Apple will be the Energizer Bunny on developing this device.

So, great unmatchable device, great profitability, Mac laptops/desktops advance, iPods conquer, killer tablet to ship, total media domination, and whatever else they care to do between campaigns…

Apple will be trading at $500 within 4 years, and THEN it’ll get interesting! This issue about GSM, WCDMA is just some flotsam that will conform to Apple’s era.

That’s MHO, at least!

I'm betting on Apple Thursday, August 23, 2007 at 5:01 PM PT

I know others have already pointed out the flaws in Sramana’s linkage of the iPhone with QCOM’s demise. The other thing to keep in mind is that as we transition from 3G to 4G, QCOM will transition from a CDMA centric to an OFDMA centric innovator. Sure, the percentages will fall, but like someone here points out, pie will be much bigger. I wouldn’t be surprised if AAPL or GOOG lead the way for the next gen of wireless, with the help of VZ, S and ATT – backed by QCOM, TI and NXP. That’s what’s going to happen. NOK will have to play nice.

Ram Saturday, November 3, 2007 at 10:47 AM PT

will someone please explain how apple will make a 3g iphone and not have a liscence with qcom to pay royalties? This is not talked about anywhere on the web,, I have searched and searched and not even a discussion about it? Is there an upcoming legal battle coming? Interesting since recently qcom and apple switched top lawyers. Also, apple has liscenced from qcom before (truvoice technology from qcom for quicktime in the late 90’s). I think this is very interesting but I can not find anyone talking about it. Will apple have to play ball with qcom or not when it comes to liscencing patents for 3g??

teage1 Thursday, April 24, 2008 at 10:34 AM PT

They will pay royalties to Qualcomm. More on this later.

Sramana Mitra Thursday, April 24, 2008 at 11:42 AM PT

[…] last week reported its second quarter results. Earlier coverage is available here and here. Vijay Nagarajan’s extensive coverage is available here in which he looks at its […]

Chips and Handsets: QCOM, NOK, Infineon - Sramana Mitra on Strategy Monday, April 28, 2008 at 2:25 PM PT