Friday, December 28, 2007
So far, I have presented an argument for why Interdigital stands to gain from the iPhone. Early this fall, the company signed a 7-year licensing agreement with Apple. Here is my interpretation of the license –
- The license is retro-active to the day one of the iPhone. This implies that Apple is also paying for 2G technology licensing. So, the $2 million increase in its guidance around September (which analysts speculated was due to the Apple deal) was from licensing 2G technology alone.
- Interdigital has traditionally used the flat-licensing fee model. This has perhaps led analysts to interpolate the $2 million. They now speculate that the company’s earnings per quarter from Apple will be capped at $2 million thus yielding $56 million over the 7-years of the license agreement. Fair enough! But the catch is that with the 3G iPhone, Interdigital not only gets a flat licensing fee (per its IP licensing model) but also makes a PER UNIT ROYALTY for every Infineon platform sold. Besides, the licensing fee for 3G is also likely to be higher as it encompasses both 2G and 3G IP.
- Here are some rudimentary calculations I came up with. If Apple gets 1% market share and sells one 3G iPhone for two 2G iPhones it sells in 2008, then at $2 per handset, Interdigital can make $8 million for the year just out of handset sales. This number can only increase with the 3G sales looking to exponentially increase in 2009 and 2010. So, for now, it is hard for me to believe that the Apple deal is worth only $56 million for Interdigital.
Well, that is my speculation! I will closely watch the company’s quarterly numbers and of course, the release of the next iPhone to see if my analysis is right.
The fourth part of my Interdigital series on Sramana Mitra's site.... Some of it is a re-cap of what I had written over three months ago here.
I concluded the last article in this series postulating that Interdigital will stand to gain not only from the licensing of essential patents to Apple but also from individual iPhone sales. To reason this out, let us take a quick look at the Infineon chipset in the current iPhone design-
The platform used was Infineon’s MP-EU. The platform itself supports UMTS (3G WCDMA FDD).
- Contrary to a myth, the current iPhone does not support 3G that can be enabled by a software switch. The chip used, SGOLD2-8876 is only capable of EDGE (a 2G enhancement). So, despite the platform’s capability, the iPhone is limited by the chips in it.
- MP-EU has Interdigital 3G protocol stack and baseband design and the King of Prussia-based Interdigital stands to get royalty for every 3G phone using the platform.
Based on this information, if Apple continues to use MP-EU for its next generation, upgrading its baseband chip alone to support UMTS, then Interdigital will immediately start to get per unit royalty. Of course, MP-EU does not support data-centric HSDPA which will give a better mobile internet experience. Infineon’s next generation chipset MP-EH supports HSDPA also and is covered under the 2006 expanded agreement with Interdigital. I think that MP-EH, along with S-GOLD3H, the HSDPA baseband solution that Infineon sampled last February is a good iPhone V2 candidate provided performance and interoperability issues are ironed out. There are at least two reasons that come to my mind when we seek to speculate on the heart of the next iPhone -
- Apple already has the MP-EU in the market and is testing it for stability and optimizing it for performance. The Marvell Wi-Fi solution had performance issues that were quickly ironed out. Similarly, Apple is conscious of the power consumption of the Wi-Fi chip and its effect on the total battery-life. I am guessing that the iPhone creators are already working to address such issues in the current platform. So, they are unlikely to prefer a new solution, at least in the short-term. In fact, in the absence of a stable HSDPA solution from Infineon, Apple may still opt to come out with just a WCDMA/UMTS version. This will require minimal changes to the current platform.
- The total cost of MP-EU and the 2 IFX chips in the iPhone is speculated at close to $16. Infineon can potentially offer Apple its 3G solution at a comparable cost (perhaps ~$20).
In summary, I speculate that Infineon will continue to be in the iPhone and therefore Interdigital also stands to gain substantially. In the sequel, I will take a quick look at my interpretation of Apple’s deal with Interdigital.
Thursday, December 27, 2007
In the last article in this series, we took a brief look at Interdigital’s new 3G ASIC venture and the thought process behind these moves. In this piece, I wish to focus on the company’s alliance with Infineon, the German semiconductor company, whose latest claim to wireless fame is its presence at the heart of the iPhone.
The alliance with Infineon has been a rather crucial one for Interdigital. The companies have been working together on 3G technologies in a strategic relationship since 2001. Last year, there were two important pacts that strengthened this alliance –
- Infineon licensed its GSM/ GPRS/EDGE S-GOLD 3 baseband modem and protocol stack software from subsidiary Comneon to InterDigital. This essentially allowed Interdigital to produce its own chipsets with 2G and 3G baseband modems. The agreement gives Interdigital the right to use Infineon’s 2G technology in its own modem offering or to sublicense the technology to third parties developing their own 2G/3G modem offerings. This deal facilitated the company’s ASIC plans in the 3G space. Interdigital successfully conducted initial evaluation tests on this combined 2G/3G modem with a state-of-the-art HSDPA advanced receiver solution this month. While Interdigital continues its march towards the smartphone market, Infineon will benefit from the licensing of components of the modem, the complete design, and of course, the sale of ASICs.
- In January, the two companies expanded their relationship to incorporate HSDPA development as well. Under this expanded agreement, the companies will continue the joint development of the 3G protocol stack software technology for Infineon’s 3G platforms. This agreement expanded the collaboration to include the data-centric HSDPA as well. This agreement also “amends the per-unit royalty rates to be paid to InterDigital for the sale of Infineon’s ASICs containing jointly-developed protocol stack software.”
While the first agreement gives Interdigital a foothold in the highly competitive ASIC world, the second agreement is also fundamental for its future outlook. Here is why –
- Interdigital gets a share for every Infineon 3G chip sold world-wide
- Infineon’s 2G chipsets are in today’s phones, most notably the iPhone
So, if iPhone V2 which will arrive in 2008 has the Infineon chipset, then Interdigital will stand to make money from every iPhone sold world-wide. In the sequel, I will look at why this is likely to be the case.
Wednesday, December 26, 2007
2007 has been a happening year for the wireless industry. Apple’s iPhone and Google’s Android are just two examples of how even outsiders want a part of this very luscious pie. 2007 was eventful for another reason – the legal battles between two American communication devices manufacturers – Qualcomm and Broadcom. I have drawn from the legal wrangling between these giants to dissect the future of Qualcomm. In the coming weeks, I hope to similarly review the fortunes of Broadcom. It will be good to start with a perspective on the company’s strengths and weaknesses.
Broadcom was started in 1991 by Prof. Henri Samueli from UCLA along with Henry Nicholas III, a former student of his. As its name indicates, it was started with the idea of selling broadband communications solutions. It is illustrative to take a quick look at Prof. Samueli’s background to understand the strengths of Broadcom as a company. He founded Broadcom to leverage his interests in digital signal processing, communications systems engineering, and CMOS integrated circuit design for high-speed data transmission systems. The company, even today, takes pride in its proprietary DSP hardware architectures, system-on-a-chip design methodologies, high-performance CMOS designs for RF, analog and mixed circuits and its custom microprocessor architectures.
The company’s strengths are especially interesting in the context of its much touted entry into the mobile space. While these strengths are imperative to the company’s success in this space, they also highlight an important weakness - the de-stressing of the theoretical underpinnings in their design and development process. Mobile wireless communications is severely constrained by power and also faces interference issues. Besides, there is and will continue to be competition for spectrum, and receiver algorithms need to be designed with that in mind. It is therefore important to understand the theory behind the system design. An ideal company needs a balance between the theoretical notions and the system design.
Broadcom has definitely sought to address this traditional weakness by roping in bright information theoreticians. Chief among them is the VP and CTO of the mobile and Wireless group, Dr. Nambi Seshadri. I have great respect for Dr. Seshadri, who in 1999 was the co-recipient of the Best Paper Award from the IEEE Information Theory Society (essentially the highest recognition accorded to information theoreticians around the world).
So, like most semiconductor companies, Broadcom’s traditional strengths are in circuit design. It perceives mobile communications as an application of its strength. With its relatively late entry into the mobile space, BRCM’s long-term interests will hinge on its successful trial and delivery on the chip announcements made this year. The success will not only be measured by price and inter-operability but also on relative performance. Therein lies the company’s uphill battle.
In the next few articles in this series, we will look at the company’s growth and businesses and how they fit into its future plans.
This is the second part of my article on Nokia's Indian presence. You can also read it from Sramana Mitra's website for which this piece was written.
As we saw in the prequel to this piece, India is a very attractive market for handset vendors. Nokia, is perhaps the best prepared to address this exploding market. So, what does Nokia have going for it in India?
By virtue of being one of the early birds and backing it up with sustained quality, Nokia once commanded about 80% of the market share. It is hence the most recognized mobile brand-name in the country.
- Its market share has eroded now to 55%. But with many other big companies like Samsung, LG, Sony-Ericsson and Motorola becoming more competitive, we should understand that 55% is still very high (in fact, higher than its global market share of about 40%). What is more is that the company has the potential to sustain this share through the revolution.
- The company has a staggering 90,000 distributors all around India. Essentially, it has its footprint in 90% of the country’s retail stores. Besides, there are 30,000-35,000 stores exclusively selling Nokia phones.
- Nokia has a manufacturing plant near Chennai, 50% of whose output is consumed internally. Surprisingly, the Finnish giant is able to sustain higher manufacturing costs in India to compete against cheaper Chinese phones.
- The company introduced phones models (Nokia 1100 and 1110) that have been doing very well in the Ultra-low cost handset (ULCH) market at around $50. While the margins may be much lower than the other higher-end phones, this has helped stem competition from the Chinese vendors apart from Motorola that was denting its share. Interestingly, world number two handset maker Samsung has consciously walked away from ULCH market. It wants to be the preferred phone for feature-phone users.
- Phone designs are customized for India. Globally designed handsets are slightly modified to suit the local needs. The Nokia 1100 has a torch and is dust-resistant in its Indian avatar.
- The company took this customization to the next level by opening a design studio in Bangalore together with Srishti School of Art, Design and Technology. The studio is set-up to explore a range of design trends and themes that suit the country and other emerging markets. The hope is also to research into usage models and its design implications.
While these points illustrate Nokia’s dominance and its understanding of the Indian market better than any other vendor, the last point highlights its adaptability. The company has, through this initiative, demonstrated its will to retain its leadership position in India.
As I mentioned in my previous article, the demographics of the Indian mobile buyer is rapidly changing. Only a company which understands this and creates a niche for itself can thrive in the next few years. On my observation of the Indian consumer, ABI analyst and friend, Shailendra Pandey says, “In India, the points of caution that you have mentioned do apply to Nokia, but at present these apply even more to other handset vendors (especially the other big four - Motorola, Samsung, LG and Sony Ericsson). This therefore again puts Nokia in a stronger position.” I will agree with him. These are the initiatives that give it the true ‘global’ label.
In August this year, Nokia announced that India surpassed U.S as its second biggest market next to China. As India’s mobile handset market grows, Nokia’s position can only get better.
Nokia (NOK) has the most global footprint in the wireless industry today. While there are several facets of the Finnish company worth discussing, I would like to focus on one of my pet themes – Nokia in India.
Let us start by getting some perspective on the Indian handset market –
- In August 2007, the number of mobile subscribers in India hit the 200 million mark. To give you a perspective, there were only 100 million subscribers in May 2006. Note also that India’s population is over a billion of which around 750 million are in the 15-64 age group. So, there is a substantial portion of the market yet to be tapped considering that the teledensity of around 20% is nowhere close to the 60’s that we see in countries such as the U.S.
- The total number of handsets estimated to be shipped in 2007 is about 80 million, which is a 33% increase from last year’s 60.62 million units. This is 7.2% of the total world-wide handset shipments for 2007.
- There are around 100,000 retailers for mobile phones in India.
Besides, there are a couple of things I noticed about the demographics of the Indian mobile customer when I visited Chennai last year.
- When cell-phones took off, it was either the executive or the jazzy college-going kid. Later, it was in the hands of every other college kid, meaning that the middle-class Indian was coming around to the fact that the mobile is after all not a spoiling influence on the kid but more a utility. Today, more and more of the conservative working class which typically eyes utility, wants to be mobile. This explains the popularity of the Ultra-low cost handsets. With a vast majority of India still rural, the profits lie in the volumes. For the subscriber-base to keep growing, this section will have to be served the phones they can afford. So while there will always be a market for costlier phones and convergence devices, the lower-end phones will play a key role.
- India is no longer two or three years behind in technology. The status-conscious urban consumer wants and gets the latest.
With these points in mind, I will, in the sequel, investigate how Nokia is positioned to maintain its leadership position in India.
Friday, December 21, 2007
Monday, December 17, 2007
I have, so far, refrained from expressing my opinions about my company, Atheros Communications (ATHR). But late last week, we announced that we will acquire u-Nav Microelectronics for $54 million that includes $15.4 million in cash and 1.28 million shares of Atheros common stock. This news has forced me out of my silence.
Firstly, I am happy that Atheros has added an extremely important strategic piece to its portfolio. I have, in my articles dating back to July, mentioned that the future of wireless is in integration-the ability of the same wireless chip or card to support multiple technologies. Qualcomm has been a traditional champion of this notion. Whether it is Snapdragon, its omnipotent chipset or its
Secondly, it signifies a bigger consolidation of the wireless industry and its various components. While I will not glorify this acquisition, I do wish to emphasize that the future survival of a wireless company is contingent on its portfolio expansion. These companies can no longer afford to be one-trick ponies. Thus, we are likely to see some significant trends through the next couple of years.
- Mobile companies shopping for other GPS companies: The problem is that not many small players with competitive solutions are available in the market today. Few names that crop up include SkyTraq, CellGuide, NemeriX etc. It will be interesting to see players like Marvell, NXP and Freescale get GPS capabilities.
- Companies may exit 3G space: A lot of the GPS action has taken off along with 3G technologies. The consumer also wants powerful devices. With the market slowly consolidating on the mobile side, players like Qualcomm and TI will thrive while Broadcom, STM and Infineon (each of whom have GPS in their kitty) could take a part of the pie, especially with interest from vendors such as Nokia and Apple. For the others, it is a do-or-die situation. If they cannot acquire GPS capabilities, they cannot be competitive and hence risk losing out in this space. This in turn implies a further consolidation of the market with companies announcing their exit slowly.
- More technology integration: We have a list of mobile broadcasting standards that fall in this list. SiRF, for example, complements its GPS core competence with DVB-H capabilities it acquired through TrueSpan in 2006. Qualcomm’s Snapdragon platform can integrate most broadcasting standards. We also have integration across multiple standards as demonstrated by
Thus, the next two years will be fairly crucial for a lot of the wireless players. As for Atheros, at a price of $54 million, it won itself an entry into an important technology market, a good product, good engineering expertise and a ticket to the wireless future.
Tuesday, December 11, 2007
Monday, December 10, 2007
Tuesday, December 4, 2007
Tuesday, November 20, 2007
Friday, November 16, 2007
In a month-old article titled "Forsee out: Will Sprint still Xohm or is UMB back?, I had stated reasons why Sprint may no longer see Xohm attractive post-Forsee. Sure enough, we are seeing its ramifications already. This retro-step is simply an indication of Sprint's commitment as a company to WiMax roll-out. It perhaps wants to so it can gain a leadership position for 4G. Unfortunately, at the current moment, there is no economic case that its investors see. Though it is still likely that Sprint will continue its roll-out efforts, this means that the pace of such a roll-out itself will be slow. There are a few comments I will make here -
- Tough times for Mobile WiMax means a field day for the proponents of the other two competing 4G technologies, UMB and LTE. With its existing relationship with Qualcomm, Sprint may migrate to UMB as and when there is a demand for 4G speeds in the market. On the other hand, LTE is very much in the running, especially if all competitors opt for the technology thereby driving their respective costs down.
- Sprint's focus will now be to secure the customers and build a better brand image to stabilize the future. What is the point of investing billions if it cannot guarantee a loyal customer-base!
- Companies like Motorola, Samsung and Intel that have vested interests in the success of mobile WiMax may now step in and be more proactive with the roll-outs, especially with Clearwire. Sprint perhap is also hoping that some posturing can help drive the WiMax costs down as well.
- Increasing footprint beyond its core competency areas is essential for its long-term growth. An acquisition like Firethorn can help Qualcomm achieve this. Besides, it will give Qualcomm more visibility as the mobile revolution takes center-stage. As a chip vendor or as an IP powerhouse, it will not get attention from the consumer. Software offers a better brand-marketing avenue, especially if the related domain hits it big.
- Offering an integrated solution has always been one of Qualcomm's strengths. In fact, it has been one of its market-share strategies, its differentiator in the market place. Ask for the chipset and you get a bunch of drivers for free. Now, with software prowess in a domain that could potentially be ubiquitous in tomorrow's mobile world, it can provide a complete silicon solution. I would love to carry a phone and only a phone. If it can replace my credit card etc that I carry in my wallet, it will be perfect. With its hardware design leadership, this sounds like a good synergy.
- Looking at this initiative in the context of Android adds more glitter. Android is perhaps a bull-dozer effort. Google can pump in the money and the effort to get its platform into mobile phones. With smart-phones and other convergence devices slowly becoming the norm, an acquisition like this, as offbeat as it may sound signifies some vision. The timing is perhaps more important and indicative of Qualcomm's gamble. Announcing this close to the heels of the Android announcement reinforces its belief in the future of communications.
Thursday, November 15, 2007
- A quarter conference call in which the company, despite posting a stellar quarter announced a below-par expectation for the next quarter. This expected earning excludes the money it will be getting from Nokia accounting for a drop of about $0.25 in EPS. This sent the share prices tumbling to $36.60, almost a three-year low.
- The share has since steadily climbed back to around $41 helped by an optimistic analyst conference and the news that a Nokia case was overthrown in Dutch courts.
- There were other events that bolstered the share price back. The off-beat acquisition of Firethorn and the Android partnership with Google.
- It is OK that the shares tumbled to $36.60. But here is the deal. At that rate, the company has pretty much absorbed all legal risks. This is precisely the point I was making in my Qualcomm series on Sramana Mitra's site. Other analyst opinions following the Analyst day yesterday reflect my opinions loud and clear. My point is that Qualcomm is infact doing a smart thing by not taking into account any money it has to receive fro Nokia. Contrast this against a situation when it assumes a 5% royalty while it has to settle for 2%, say. In essence, the company is converting this legal risk into a positive. Now, any money that comes from Nokia royalty, 2% or 5%, it does not matter, will only be an upside, right? Besides, I have pointed out in my analysis, Gobi itself is enough to push the share valuation back to $41 or so.
- With the optimism surrounding Firethorn and Android, the shares can only go up. Of course, to me, both these ventures are still unclear in terms of monetization for Qualcomm. So, I will reserve my comments on these for later.
- Legal Battles Galore: An overview of the company's battles with Nokia
- The Aftermath: The effects of such battles
- The Margins: A margin analysis indicating the adverse effects of continued reversals
- The 3G Goldmine: An analysis of the 3G explosion
- Digging Gold: An answer to how Qualcomm can dominate 3G
- The Nokia War: A peek into the company's history with Nokia
- The effect on Valuation: An event-driven valuation analysis showing how the share price can take a beating with negative events
- Chasing more Silicon: A quick look into how Qualcomm has positioned itself to expand its footprint as a semiconductor company
- More on Valuation: A composite event analysis concluding with my expected valuation of the Qualcomm share price considering all good and bad events possible
- The Epilogue: A view of the company's future strategy and outlook
I welcome comments on each of these and in general, the quality of the articles and how useful it was for you.
Tuesday, November 6, 2007
Monday, November 5, 2007
Friday, November 2, 2007
Wednesday, October 24, 2007
Before I go into the findings, here are a few assumptions I have made. Feel free to correct me and we can get a more accurate valuation together.
- Around 120 million laptops are expected to ship in 2008. I have assumed a CAGR of around 14% to project until 2012
- Start with a high 10% market penetration for Gobi in 2008 adding 5% every year hence
- Chipset cost starting $50 for 2008 and reducing to around $40 in 2012
- Royalty at 5% of chipset price
- Operating margins of 25% for chipsets and 90% for licensing fees
With a couple of lawsuits going against it, or if the Nokia negotiations yield slightly unfavorable percentages, the share value can still potentially slide below its current market value. Nonetheless, I think this is a good sign of things to come. As an engineer, this technology leadership excites me while my analyst side is curious to see beyond the veiled curtain:)
As I have highlighted elsewhere, I have reasons to believe that if QCOM does not mend relationships with the handset vendors, it risks being marginalized on the chipset market share despite stellar products. And more than anyone else, the executives at QCOM are aware of this. There are two paths and the company will attempt one or both -
- re-inventing itself as it diversifies into new markets and product lines
- making handset vendors happy by reducing royalty rates 'somewhat' in return for a higher chipset market share.
And let me re-iterate: QCOM will diversify and the PC/Laptop/Notebook market is lucrative. It will attempt to capture more of the silicon in this space. Based on the direction of all the lawsuits and licensing discussions, I expect it to internally shift some focus to other segments so it can compensate for any lost margins due to licensing fee reductions. Watch out for any announcements pertaining to integrated WiFi products coming from its Airgo acquisition.
It has an uphill battle though, because it has to establish credibility in such new markets amidst potential mudslinging. But given history and its technical leadership, I would not be surprised if it easily does that provided there is some tempering of its characteristic aggression.
I am very happy to see this product, though I am not surprised. For one, I strongly believe that in order for QualComm to maintain its position in the semiconductor industry, it should start diversifying. I am betting on QualComm making greater strides in the PC/Notebook market. I do not wish to digress on these comments and will reserve them for an article to be published later on Sramana Mitra's site. Secondly, as I have often stressed in my earlier articles, the future of wireless is all about integration. The technologies have been defined for the next 10-15 years. It is about how these are packaged and made available to the user who wants it all in one gadget. So, this is a right step in that direction.
Will it be successful? I am optimistic about it. The reason is that it has gotten a lot of different folks excited. Laptop makers like HP are raving about it and the carriers are behind it. So, QCOM seems to have got the value-chain bottoms-up, at least that is the impression it wants to give. Contrast this with the situation in the mobile space where it is in loggerheads with a lot of handset makers and other chipset makers. The computer manufacturers stand to make money out of subscriptions as well. So, they may not be inhibited by the initial cost in their quest to make it happen. Carriers of course will back any technology that can grow their subscriptions meaningfully.
This being said, I am not sure about the single-day or other short-term subscription ideas that are doing rounds. The infrastructure set-up cost will not lend itself to such schemes. I can see tie-ups between carriers if longer contracts are signed. But perhaps, a slightly higher cost structure for the long contracts can help offset these short-term schemes that popularize the technology.
In the sequel, I will look into what this means to QualComm among other things.
Tuesday, October 23, 2007
Companies have shut their offices and many risk losing data, the product of hours of hard work. The wireless wars took the back-seat for a while as mother nature united the very engineers behind the success of each of these firms. Today it does not matter if you are an investor in QCOM or a staunch BRCM follower. The whole community has come together to help each other in distress. I know friends from BRCM being helped by others in QCOM. I know people who cannot worry about BRCM's earnings fall this quarter or about QCOM's impending call. As an analyst, there are various factors that I research, but nature's fury can hardly be accounted for. My heart goes out for all the people there who have made the wireless industry what it is today. Ironically, I am unable to reach most of my friends through my cell-phone because seemingly, all these networks are jammed.
I hope the fires subside soon. Please join me as I pray for as quick a return to normalcy as possible.
Friday, October 19, 2007
- the CDMA infrastructure was already rolled out in a lot of places
- dual access to GSM and CDMA was unprecedented in India
Monday, October 15, 2007
Part 6 of the QualComm(QCOM) series titled QualComm: The Nokia War can be read on Sramana Mitra's site now.
This one explores the explosive relationship with Nokia (NOK) and the war for position in the 3GPP negotiation tables.
More to come soon...
Thursday, October 11, 2007
The point is that Sprint is yet to completely monetize its CDMA infrastructure which runs to billions of dollars by itself. The carrier is also faced with churn issues. The investors' position is perhaps that the basic business plan should accommodate means to steady its current network and then look into the future. With the need to roll out the 2.5 GHz band, Sprint is faced with a double-edged sword.
It is quite possible that the new CEO will likely go with the investors. So, I can well see Sprint's investment in WiMax tapering off leading to an eventual spin-off. What this opens up is also an oxygen mask to UMB that just last month was dealt a severe blow with Verizon hinting at LTE. QualComm (QCOM) perhaps sees this as an opportunity to revive the long-term fortunes of the standard dominated by its IP.
With the other OFDMA standards being more even on the IP front, UMB presents QCOM an opportunity to retain its IP value while also having a dominating chipset market share. So, any small window of opportunity on this standard is good for the San Diego company. That is why I see this as a positive for QCOM.
Friday, October 5, 2007
Also watch out for more articles that will talk about the revenue impact of the EC and the US lawsuits and QualComm's future (not just 4G) strategies.
Tuesday, October 2, 2007
In the next couple of posts, I have a five-year analysis of the handset market share and revenue forecast enabling us to see a bigger picture about the lawsuits that are flying left, right and center.
Monday, October 1, 2007
- Royalties may go down from 5% to 2% of the handset ASP. Or at least that is what the anti-QualComm wants.
- With Europe amounting for around 20% of the total handset market on an average, this in turn amounts to an estimated $4 billion in lost revenue ( at 90% operating margins) over the next five year
Tuesday, September 25, 2007
- The platform used was Infineon's MP-EU. This platform supports UMTS (3G WCDMA FDD).
- Contrary to a myth, the iPhone does not support 3G that can be enabled by a software switch. The chip used, SGOLD2-8876 is only capable of EDGE (a 2G enhancement). So, despite the platform's capability, the iPhone is limited by the chips in it.
- MP-EU has Interdigital 3G protocol stack and baseband design and the King of Prussia-based Interdigital stands to get royalty for every 3G phone using the platform.
- The 2G protocol stack is from Infineon itself but there is potentially some Interdigital IP involved in the chip+platform even without 3G. The license is retro-active to the day one of iPhone implying 2G royalty.
- The total cost of MP-EU and the 2 IFX chips in iPhone is speculated at close to $16.
Monday, September 24, 2007
- The $2 million increase in the guidance that seemingly is the basis behind the $56 million calculation may after all be royalty for the 2G phones sold through this quarter.
- On the 3G front, the royalty from IP itself may be higher, so that number may increase next quarter and beyond.
- Most importantly, in the event of Infineon getting the design win, iPhone will be using substantial contributions of Interdigital from both the software protocol stack and the design. Besides, Infineon has a per-chip royalty agreement for these two pieces.
Friday, September 21, 2007
The iPhone currents, on the other hand, seem to be moving away from QualComm if rumors are to be believed. Apple may opt for the Infineon (IFX) 3G chip (incidentally, my first mention in the iPhone V2 suitors). What may have prompted the Apple (AAPL) decision needs a separate analysis by itself. In this article, however, I wish to discuss where it leaves QualComm.
Is this bad for QualComm? Yes, and no. Yes, because it is not partnering with a handset vendor with an increasing market share. The No-part is a little less obvious but here are my reasons -
- QualComm's legal battles with Nokia (NOK) and BroadCom (BRCM) and the impending ITC ban: Based on the final rulings in much of these cases, QualComm chips may not be allowed to enter the US in the future and this will include an iPhone if it features such disputed chips. Besides, the royalty that it may have to pay the other parties may cut down the margins substantially on a per-chip basis. This is true in general, but a bad publicity with a highly visible product is the last thing the company wants.
- WCDMA royalties: If a 3G iPhone is available in 2008, about 2.5 million units will be sold that year. This number is expected to climb to about 17.5 million units in 2010. With a conservative average selling price of $350 and a royalty percentage of 6% (especially if Infineon does not have any underlying license deal), QualComm stands to make close to $50 million next year and as high as $340 million in 2010 just on iPhone sales. Compare this against $@ million a quarter, 7-year deal between Interdigital and Apple. This number appears exagerrated, but unless Infineon is able to work around the IP issue, the numbers stand.
I will also write about Infineon and its partner Interdigital (IDCC) in my next article. For now, I will let you chew on this one. For the mathematically minded, if I get a request, we can discuss my numerical methodologies.
Besides this, both LTE infrastructure and handsets are expected to be cheaper despite similarities in technology and deployment. There are three reasons for this -
- There are many more vendors in the LTE space. Ericsson demoed an LTE solution earlier this year. Other infrastructure vendors are already working towards this. Even QualComm(QCOM) is actively working on LTE prototypes and products. The competition is expected to keep the average selling price (ASP) on either end lower than in UMB which is dominated by QualComm on the handset side and a few players on the infrastructure side.
- Licensing and royalties will be lower in LTE due to the diffused nature of the IP. Compare this against a proprietary UMB that will have QualComm alone laughing all the way to the coffers. This again will have an impact on the ASP.
- With Sprint-Nextel already putting its weight behind WiMax, the demand for UMB will be much lower resulting in higher costs again.
- LTE is not a GSM technology, it is rather an evolution of the GSM standard
- WCDMA/HSDPA that serve as the link between GSM and LTE is based on CDMA physical layer. In other words, the core over-the-air interface is similar in flavor to CDMA2000
- UMB is not CDMA-based, but is rather an evolution of the CDMA2000 standard. In fact UMB and LTE are based on the same underlying Orthogonal Frequency Division Multiple Access (OFDMA) technology.
- This may be bad for UMB, but not entirely for QualComm.
- Irrespective of whether UMB or LTE, or for that matter, WiMax wins, at the end of the day, CDMA as a technology is on its way out and even QualComm knows this.
- Since the migration to UMB or LTE will have involved similar infra-structure overhauling, it makes sense for Verizon to go with LTE (I will elaborate on this in a subsequent article)
Wednesday, September 19, 2007
- The 3G version, as I have already mentioned, suffers from a costlier chip also. The average price per 3G chip is closer to $25 as against single digit numbers for the Infineon chip in the iPhone today. Besides, the royalty structure for 3G amounts to about 28% of the average selling price of the 3G phone. Apple typically keeps its cost constant for more features. This will imply reduced margins from iPhone V2
- The power consumption issue does open up the question of who the baseband supplier will be. Will it be QualComm (QCOM), which has made strides in power management since iPhone V1? Will it be Infineon that has been confirmed to be developing UMTS (3G) baseband chipsets for atleast 2 companies? And if so, where does the recent licensing deal between Apple and Interdigital (IDCC) fit in?
- Who will supply the A-GPS capability for the iPhone?
- Would iPhone V2 be HSDPA-enabled?
Wednesday, September 12, 2007
Few points to note -
- Though absent from the beneficiaries list, Sprint will be able to sell phones from any of the manufacturers who won the stay today.
- QualComm chips cannot be imported directly into the US. Not a major issue, but highlights the fact that this stay merely seeks to limit the damage caused to the others.
- QualComm does not have to settle with BroadCom and will perhaps let the law take its course.
In other QualComm news, their case against Nokia went to courts yesterday as well. So, there will be more interesting legal outcomes this year. One thing that I want to re-iterate is that this ruling will not hamper the ruthless efforts to break the company's business model. Even the phone-manufacturers who won the stay will want more competitors in the chip-vendor space. Note that Motorola, one of the beneficiaries is already moving away from QualComm.
More analysis to come soon.
Tuesday, September 11, 2007
Sunday, September 9, 2007
The 'Yes' list
- The touch-screen that was the iPhone's identity
- Wi-Fi, allowing internet access through the 'Safari' browser with custom yahoo and google functions.
- Music download from Wi-Fi hotspots at Starbucks locations
- Digital Radio
- Flash drives of 8 or 16 GB
The 'No' list
- Of course, the phone part of iPhone
- A microphone
- A bigger hard-disk
- Wi-Fi had to come: The iPod has to compete with Zune features and allow for wireless download of music
- Flash Drive, the power saver: The flash drivehas been used to compensate for the power-hogging Wi-Fi feature. The 'Touch' advertises 22 hours of music playback or 5 hours of video playback. Makes sense!
- Wi-Fi browsing: The Safari browsing experience is likely to be a paid service. If so, then the primary use will be limited to the business population and the intended reach of the device will not be as fast. On the other hand, the easy-to-use interface along with the mobility may have people willing to spend if affordable.
- The microphone: With a microphone, it can be used as a VoIP phone along with the Wi-Fi feature. There were perhaps 2 reasons for its absence. Apple, wants to maintain a good relationship with the carrier community, especially considering it is yet to globalize the iPhone. Secondly, my suspicion is that the GSM chip from iPhone is still in place in the iPod touch. Although it makes economic sense for Apple not to spend design cycles for an iPod that is essentally an iPhone clone, the presence of a microphone will let hackers enable the phone feature as well at no cost.
Looking ahead, the next generation of iPod touch (not knowing when that will come) will have -
- Free browsing on Safari, or at least cheaper and more affordable services with a wider range of applications
- Bluetooth 2.0 or higher, perhaps integrated with Wi-Fi chips
- The microphone will come once the iPhone obtains a stronger foothold. VoIP calls from home or hot-spots will become popular, especially when integrated with a sleek iPod.
On a personal note, I am undoubtedly thrilled. I wanted to get an iPhone but did not think the phone part was worth it. So, apart from the Flash drive, the VoIP feature looks attractive for the future, but I don't think I can wait to get 'touched' by this new gadget from Steve Job's garage.
Tuesday, September 4, 2007
That is the caption for the special Apple event tomorrow. Its stocks have risen 12.5% since August 28th and I think it is for a good reason. While the internet is abuzz with speculations about the announcements, I do anticipate one thing for sure: The new iPod.
The iPod has to come for various reasons -
- There has been a rut in both iPod innovation and sales growth over the past couple of years. It is high-time Apple re-invents the product.
- The iPhone was an Avatar of the iPod but with phone capabilities. Steve himself announced that it was the most powereful iPod as yet. It makes sense that Apple should give the market a stand-alone non-phone version of such a gadget as well. Besides, its innate ability to surprise not with-standing, Apple should cater to customer demand and anticipation of features such as wide-screen, touch-screen etc.
- Wi-Fi is already in competing gadgets as the Microsoft Zune. iPod should not appear dated especially given that another of Apple's product already has such features. I do not think this will encroach the iPhone's market since the phone and its associated features (like the voice mail feature) have to be the USP of iPhone.
- Wi-Fi will open up avenues of using the iPod as a fixed wireless phone (with VoIP services) and would be a handy addition. The issue with Wi-Fi however is going to be battery life. Unless Marvell and Apple have worked a solution for that, this may be a bottle-neck.
- A Mac OS based iPod, again in line with the iPhone thereby helping it transition from just a music player to a PC-surrogate. This would open the gates to applications and features that make the iPod powerful.
- A flash version of iPod with less battery utility to compensate for the power consumption of the Wi-Fi chip.
In summary, Apple tomorrow will unveil a product-portfolio that is in line with its unique vision while trying to leverage the unshakeable market share of the iPod. It may well signal the further transition of mobile devices into omni-potent mean machines.
Wednesday, August 29, 2007
"I don't know what is copying and what is original but if there is something good in the world, we copy it with pride," - Anssi Vanjoki, head of the Nokia multimedia division
Nokia (NOK) demoed their latest software on what appeared to be an iPhone rip-off, and let me call this phone the 'No-phone', along with services under the brand name Ovi. And Mr.Vanjoki was answering questions regarding its striking resemblance with Apple's (AAPL) iPhone, be it the touch-screen or the interface.
I should appreciate Nokia for candidly admitting the truth. If the gadget used is a sign of things to come from Nokia, it is their direct reply to Apple. All other factors remaining the same (and I assume Nokia will do a good job at that), this hand-set should have some definite advantages over the iPhone. Some of them are listed below.
- The device promises direct music transfer from the internet to the mobile, a no-no with iPhone.
- It is likely to have 3G versions during release. Whether it promises higher data-rates or not, at least there is a perceptual advantage with the 3G tag.
- Nokia has 1/3rd of the hand-set market share in the world. So even in places where the carrier lines up phones (eg. U.S.A as against in India), they should have negotiating power to leverage unprecedented deals with respect to retaining their own services etc.
- Nokia certainly has the brand-name to compete with Apple. The snob-value associated with an iPhone may not be there, but people will definitely trust a Nokia device enough to buy it.
- Nokia phones are not likely to be locked to carriers. This means more customers all around the world. They are gunning for instant pervasiveness as against the exclusiveness tag from Apple. They will have to price it below the iPhone or at least competitively to gain with this strategy.
- Though it is a brazen copy, Nokia is likely to learn from iPhone mistakes and present a better product. They will directly be competing with iPhone V2 when that comes up.
Tuesday, August 28, 2007
- The carriers are yet to monetize on the infra-structure they have built so far. So, even if they attempt to vigorously promote 4G, the investors are unlikely to authorize another 50 billion dollars for new OFDMA based infra-structure.
- 3G is just getting popular, especially in the U.S. For example, AT&T (T) is slowly adding cities to its WCDMA roll-out. 4G will have to wait since a lot of these carriers are thus committed to 3G.
- New carriers need to pick from the available candidates for core technology. Each is plagued by unique issues and the choice is thus not obvious. WiMax has mobility issues, UMB is solely QualComm's technology and the wireless value chain will be vary of this and infact want to avoid it.
- LTE has just been completed as a standard and there are reports that most stumbling blocks of the Physical layer have been ironed out. QualComm (QCOM) and Ericsson are the only companies developing prototypes. All others are either struggling with their HSDPA or HSUPA solutions and are not even close to HSPA+, leave alone LTE. Not many have the deep pockets to run parallel tracks like these two giants can afford to.
- Extensive field-testing has not been done with any of these technologies. Field testing, as many will agree, can spawn its own cycle of debug and development. And this will affect the availability of the devices even if the 700MHz spectrum and its winners are waiting with open hands.
Monday, August 27, 2007
Nokia (NOK) announced recently that India has surpassed U.S. as its second largest market next to China. This is largely due to its unique manufacturing plant set-up in Chennai. The investment, much against the common thinking (India is not for manufacturing), seems to have paid off with 50% of those phones (60 million in the last 18 months) being consumed internally.
Another staggering piece of statistics is that 46% of an estimated 118 million Indian mobile subscribers use Nokia phones. To cap it, the Telecom Regulatory Authority of India (TRAI) has annouced 7.3 million additional mobile subscribers in June alone. So, if Nokia can sustain this market share, which they hope to based on their infrastructure investment and their long-standing brand-name in India, it will be a happy story to the coffers.
On the other hand, I do want to signal some caution -
. The demographic of Indian mobile subscribers is slowly morphing. When the mobile revolution started, it was either the executive or the jazzy college-going kid. Later, it was in the hands of every other college kid, meaning that the middle-class Indian was coming around to the fact that the mobile is after all not a spoiling influence on the kid but more a utility. Now, more and more people are realizing this. Moreover, the introduction and popularization of the ultra-low cost phones has gotten more of the working class and the rural India, traditionally conservative and very utilitarian spenders, to start using mobile phones. This trend is likely to continue. My take is that while there will always be a market for the higher-segment phones, the ultra-low cost phone market will play a key role and that section of the paying public is likely to dominate the mobile subscribers in the near future.
. On the higher-end, the paying customer wants the latest. India is no longer two or three years behind in technology. People want and get the latest and are willing to pay up.
These two factors will be important in defining the future of Nokia or any company for that matter in India. Any company that wishes to break into this market will have to strike a nice balance. All it takes is a RAZR or iPhone type technology-hype to tilt the market balance. Nokia may be up to this challenge given that they have set-up local design centers to read the pulse of Indians and give them the phones they need. But the Finnish company better be on their toes or they could be left high and dry.
On the other hand, the growing ultra-low segment typically operates on low margins. I am not sure how Nokia wishes to address this segment considering that Indian manufacturing plants may not be able to compete with their Chinese counter-parts. The 'Classic' from Reliance is a classic example of cheap and good-looking phones.
Thus with pressure from even carriers such as Reliance, Nokia has its task cut out here and faces an uphill battle to sustain the market share. It may however be helped by its well-built brand image and its pioneer status.
Friday, August 24, 2007
Boy, I am looking at the attention the article in Business Standard and Rediff is getting and I should say that the web-site has succeeded in yet another of its publicity stunts. And of course, it has also helped build the gPhone aura. No wonder Google backed off from any comments.
This being said, let me re-iterate that a gPhone in its full glory in a fort-night is either a figment of imagination by a couple of fertile minds or is just wrongly processed information. I can see some kind of a service agreement in the cards between the carriers and google and this may have been mistaken for a gPhone launch.
Another possibility that a friend pointed out is an announcement in a couple of weeks about the gPhone availability. As he said, and I will readily agree, if google wants to go the apple route, then the first thing it should learn from the 'fruit company' is the market intelligence and the creation of the hype. They have the brand, they need a product to pitch it in the mobile space. They definitely need hype and fever around such a product. Well Google, here you go! You have a good start, even it was not entirely intentional.
Thursday, August 23, 2007
Treat yourself with this laugh riot on gPhone -
It is probably the case of an overzealous reporter with a key-board in hand. The article talks about gPhone heading for a world-wide launch in a fortnight. Improbable! And here are some of the reasons -
- Prototype to Product: This is a long process. Any prototype that is OKed by the carriers will have to go through rigorous test procedures not just to pass regulation but also to meet performance metrics defined by standards. The product cycles are definitely not a fort-night long.
- GPS and other features: The gPhone is likely to be a model that thrives on GPS and Wi-Fi. These features present additional issues that need to be tested. Not trivial!
- Technology: GSM or CDMA? 2G or 3G? The article talks about a lot of carriers and to suggest that a phone will be out for each of them in 15 days is outrageous. Apple is not stepping beyond GSM for the moment. Why would Google gamble on fairly new mobile concepts for various technologies simultaneously?
I could enumerate a 101 more reasons. But it would sound silly. I do wish though that journalists are more responsible and apply a little more logic rather than going for a few additional hits to their sites.
Wednesday, August 22, 2007
- As market leaders in the 3GPP space, they cannot handle QualComm as a chip-set supplier unless the latter's position is toned down. Nokia's getting out of the chip-set business means that QualComm is a potential supplier of 3G chips to them. From Nokia's perspective, they would want to reduce the cost of even the most competitive chip-sets to improve their margins. This would require reduction of QualComm's bargaining power and that comes implicitly by devaluing their IP position.
- It will be sweet revenge for Nokia considering they were literally pushed out of the CDMA business not long ago. This is unlikely to be the determinant or root motivation for the ITC ban request or the slew of suits. I just want to illustrate the bad-blood that flows here.
- Nokia will want to assert its position as a phone vendor as opposed to chip-set manufacturers to establish superiority in the industry and in the value chain.
Wednesday, August 15, 2007
BroadCom's song to QualComm
Every breath you take
And every move you make
Every law you break, every chip you make
I'll be suing you
Every single day
And every lie you say
Every game you play, any means to stay
I'll be suing you
Oh, cant you see
You owe me a fee?
How my coffers fill
With every drop you spill
Every move you make
Every law you break
Every smile you fake, every claim you stake
I'll be suing you
Since last year,you've fallen from grace
I dream at night, I can only see your face
I look around, and its you I wish to replace
I feel so proud, to just be in this race
I keep laughing baby, baby please,
Oh, cant you see
You make me smile in glee?
How your poor heart aches
With every step I take
But every move you make
Every law you break
Every smile you fake, every claim you stake
I'll be suing you
Every cent you rake, every chip you make
I'll be suing you
I'll be suing you
Monday, August 13, 2007
So we have the first major pin to fall after the recent legal set-backs that QualComm has had. Their general counsel Mr.Lou Lupin laid down his papers. So, QualComm is trying to push it off as a failure from its legal team. This may well be true, especially with respect to the recent ruling by a Federal jury in San Diego. This being said, many however believe that the company has quite often resorted to brazen violation of intellectual property laws and that they are paying the price for it now.
Nonetheless, I would look at this event as more of a face-saving act rather than the beginning of an elaborate cleansing procedure.
Wednesday, August 8, 2007
Oh, and I forgot to mention something I read attributed to Nokia's head of communications, the link for which can be found here -
So here goes..
"It's also unclear whether Nokia's chipset development changes will mean cheaper phones. The chipset is just one component in a mobile phone and among several factors that influence pricing, Suominen said."
The way I read this ...
"Hey QualComm, know your place. We, the phone-makers, control your fortunes."
So, what would the chip-set makers say in response to this statement that is laden with an assumption of supremacy?
- efficient use of its own engineering resources in developing its platform and the modem rather than fighting it out with the likes of QualComm (QCOM) who demonstrate engineering market leadership time and again.
- being able to pick from a consolidated pool of suppliers thereby getting a better pricing that would enable them to compete more effectively on hand-set pricing.
- the further snubbing of QualComm and potentially weakening the chip-maker's position.
- lesser involvement in the standardization activities since they will be a level removed from the core technology.
- reduced profit margins for QualComm due to more competition.
- a new player in the 3G space, namely ST Microelectronics, which has its first design win with Nokia.
- a further enhancement to BroadCom's position as an emerging mobile wireless chip-set leader with the EDGE design win.
- a jolt to TI who were hoping that STM was more a threat by Nokia than a reality but have instead landed in an unenviable situation fighting competition to get to Nokia.
- a re-alignment on the cards in 3G standardization activities with Nokia shedding its dual interests.
- a potential for future design wins for the likes of Interdigital who are developing GSM/WCDMA chip-sets.
As if all the talk and the attention that QualComm has been getting from the ITC ban is not enough, a federal judge in San Diego ruled that QualComm intentionally with-held disclosure of inventions during a discovery. Further, it ruled that the company also intentially hid a couple of patents from the video compression standards. This action implies that QualComm was precluded from enforcing these patents and seeking royalty.
Now, tell me something.
. Have other companies become smarter and are they hiring smarter lawyers these days?
. Has QualComm's legal team gotten too tired enforcing patents and litigating all these years?
. Or is QualComm really unethical and hence is paying for it dearly now? If unethical, is it any different from the others and is just paying the price for being smart and for leading the pack?
I would be delighted to get a few opinions on this.
The denial of Presidential Veto as I had mentioned was quite expected. This is definitely not an extra-ordinary circumstance for the President to have exercised his power. The next natural question is the impact of the ban of QualComm, BroadCom and the others.
1. Its business as usual in its offices. The engineers had their tasks cut out the day the ruling was made. They had to present a quick work-around which was acceptable to the customers. And if QualComm's engineering and legal teams are to be trusted, they must have done a fairly good job in packaging the solution in a manner that BroadCom can no longer litigate against.
2. The business model will be heavily challenged in the days to come. More litigations and counter-suits are on their way with Nokia lining up for the battles as well.
3. It will likely have a lesser negotiating power when it comes to the cross-licensing tables. So, my suspicion is that apart from part of the Verizon bill that it will likely foot, there will likely be a loss of revenue from its patent portfolio. So watch out for its patent portfolio growth and track the corresponding revenue from the IP and they will have a story to tell.
1. It has risen to the status of the industry Robin Hood and has perhaps led by example that the QualComm model can be broken if this onslaught can be sustained.
2. It has gained traction with the service provider community (with new friendship with Verizon and something similar perhaps on the cards with Sprint). This community was understood well only by QualComm for a long time and the San Diego company played its cards very well with them. The complete packages that were offered with QualComm products and the extra-mile it went to keep the carriers happy afforded the company its superior position in the industry. Perhaps, with this situation, that equation hs been slightly altered.
3. Converse to the QualComm case, BroadCom will have higher leverage at the cross-licensing tables that will help it obtain cheaper deals with QualComm for the 3G solutions out of its stables. This will reflect in higher profits if it succeeds in making its 3G chipset pervasive.
1. Verizon and the carriers are in a win-win situation. Now, they have QualComm on its toes while there are other companies eager to get closer to them. The carriers can now demand better modems, more features and get better pricing. More suppliers, lesser price, better products - the common economic mantra works here.
2. Nokia and anyone other than QualComm are likely to take this as a precedent and step up the ante. Lets move aside to let street-smart lawyers rule the roost.
3. Phone manufacturers are likely to both benefit and suffer. They may not have any problem getting current phones in if Sprint also strikes a deal similar to Verizon's. But, in the future, unless this issue is resolved, they may have to go for non-QualComm chipsets knowing fully well that they may get a raw deal with costlier yet poorer performing and poorer serviced products. Of course, this assumes that the other chipset providers cannot product competitive wireless chips. But unless these companies can prove otherwise, that would be my instinctive guess. On the other hand, if QualComm works around this issue, then the same manufacturers can get cheaper chipsets from QualComm citing comparable prices from competitors. So they can eat into QualComm's profits further.
In summary, I don't believe that QualComm's business model is completely unharmed. The process is already underway and the other components of the wireless industry have positioned themselves to chip away from the company's profits. So though it may appear that the model remains intact, the impact is nonetheless likely to be felt.