Operators and the hand-set market

Wednesday, May 30, 2007

ABI research Mobile wireless industry analyst, Mr.Shailendra Pandey had a very interesting article on the operators eyeing the handset market seriously. The article can be found at the following URL though you have to register with the ABI web-site to have complete access to it.

http://www.abiresearch.com/products/insight/Handset_Vendors_to_Face_Increasing_Competition_from_Mobile_Operators

The author highlights the most important point I have been making about the wireless market. IT IS A RACE FOR CONTROL. I would, on the other hand, cautiously disagree with Mr.Pandey about the operators trying to poach into the handset market.

There are a few valid outward signs that may have led to that conclusion. A deeper look however suggests a long way to go before the operators can achieve their objective, if that's their intent. Firstly, I see the Reliance move as an isolated case. As I mentioned in my previous article, Reliance is good in identifying the pulse of the average Indian and this is yet another example. For Reliance, it is more an exercise to populate their network (though the phones are sim-card based). They have extablished a good network and as mentioned in Mr.Pandey's article, an unparalleled brand-name with the Indian consumer. Selling their phones would immediately start providing them returns on their infra-structure investment. The hand-set market is more a by-product of the move than the main intent itself.

Of course, it is definitely a cause of worry for Nokia or Motorola. They have failed to capitalize on their brand-names by exploiting the ultra-low cost phone market in India. On the other hand, with the paltry margins per phone in this segment, they may not have much to gain anyways even if they ship volumes of phones to these markets. That has again played well into Reliance's hands. Their margin does not only come from the phones but on the service provided as well. Let us attempt some crude mathematics. If 5 million handsets are sold at Rs100 profit and if 50% of these buyers opted for Reliance service at an average talktime for Rs.100 per month. This would cost Rs.250 for the user. Let us say that Reliance makes Rs.100 as profit per handset after accounting for maintenance and administration expenses. This, then amounts to an annual revenue of Rs.6000 million(around $150 million). Compare this to the profit they may be making out of selling handsets, say around Rs.100 that would give Rs.500 million. So even if the churn is once in 3 years, It is still an extra 3-4% extra revenue annually. Reliance would definitely welcome this but it is immediately apparent where their real sights are on. Infact, I am postulating that they would now be happy if Nokia, Motorola or anybody else also enters the ultra-low cost handset market in India. They would have succeeded in their ultimate objective: Lower the cost of the handset to make it accessible to the bulk of India thereby increasing subscription to their services. Their coffers would then over-flow even further.

As far as Vodafone goes, they would definitely like to assert themselves as the end-provider to the paying customer. But we should remind ourselves that they share an excellent rapport with the handset vendors like Motorola. Besides, as I have mentioned earlier, if they really plan to impact the handset market, they should insert themselves more actively into the standardization and even the R&D efforts. Though they have certain desirables, they are not all too assertive at the standard body meetings to impact the evolution of the standard and also the equipment specifications. With lack of expertise in handset manufacturing, one is left to think how good their phones will be performing when compared to all the original players. So even in their case, it appears to be more of posturing to pressurize the handset vendors. They perhaps have the luxury of capacity available to play the game. They have an expansive GSM/WCDMA network built out to have a relatively fewer poor-performance phones out there.

NTT Docomo of course, has traditionally been a different player exercising complete control in its space and is more of an exception currently. It would be difficult for other operators to get to that status.

As a wireless insider, I would like to see the prices of phones go down while performing better and better. Of course, added to this is the availability of multiple features. If we can get this along with cheap service, then the world will shrink even further. It is going to take time to get there, especially with the wierd industry dynamics. Also, with respect to the main premise of this article, I would personally like to see more trends especially from the U.S. and European operators to see a semblance of them taking control of the handset market. Mr.Pandey's insights are very valuable but I would not like to generalize a few isolated trends.

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The Reliance Move

Thursday, May 17, 2007

I have always admired the Reliance Clan for their business acumen and for their ability to read the pulse of the Indian buyer while bringing the latest to them.

India is being modernized and there is a free-flow of money these days in urban India. But a closer look will point to the fact that the technology boom has played into the hands of a select few. This has definitely furthered the rift between the rural section of India (which is over 80% of the population) and the urban few. The suave floating population that has exploded in the metros no doubt hold a potential for high-end technology, but if one can bring these marvels at low-cost to the average and below-average Indian buyer, then the volume would be enough to offset the low margin. And that is precisely what Reliance had in mind when it launched the Ultra-low cost handsets under its own-brand "Classic". Widely believed to be from China, these handsets available under Rs 1000.00 (around $20) are a steal. Additionally and more importantly, the goal is to change the Indian mindset that cellular phones are a luxury. If this hits it big, they will have enough phones to populate their networks and the revenue flow from their infrastructure would be much higher that what it is now.

Like most of their ventures, this move has so far yielded more than what they can have imagined. A million hand-sets in a week. One may wonder that at this rate, Reliance will have a capacity issue very soon. But here is the catch. Indian users, especially the section of the population that is likely to have bought the phones would use the mobile scantily and for emergency purposes alone mostly. They are unlikely to spend hours on their cellphones like their urban counterparts. It is also likely to be a status symbol out there. So, it appears to be a calculated gamble from Reliance. Their hope is that they would have a lot of dormant users who are likely to buy the phone and a sim-card that would last them, say, three months. This would mostly translate to around 100-300 minutes of airtime. So, they are unlikely to run into capacity issues immediately. They would be making more optimal use of their infrastructure. In my mind, if they can pull this off, this is a master-stroke and should open the gates to what was always thought of about India and mobile phones: a big untapped market potential.

A puzzling thing however is the phone economics for Reliance. Do they have a margin at all on the phones or is it merely to get the population hooked to the cellphone culture thereby gettin returns on their investment in the infrastructure? It seems to be the latter. After dsicounting the 5% or so of royalty money to QualComm, Reliance has to build a phone under Rs 800 even to break even. And this has to include the RF chain,the protocol stack, base-band chip(which I presume would be nothing very great thereby eating into their capacity) and of course the address-book and other user features that come with it. This seems to be a hard target to pull off but if they squeeze out a Rs100 margin and sell 10 million phones, that is some attractive profit.

As an aside, of course, QualComm stands to gain as well with this move. Apart from the millions in royalty, this move is likely to help penetrate CDMA in the GSM dominated Indian mobile market.

Let us now wait and watch Reliance's bigger plans unfold. The commodatization of a perceived luxury is yet another step towards developing the bulk of India.

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Posted by Vijay Nagarajan at 4:31 PM 0 comments Links to this post  

Patents - a note

Monday, May 7, 2007

Patents protect the intellectual property of any company, big or small. It is also a major source of revenue for some of them. Before we jump into the details of RAN1, it is important to re-inforce the importance of IP and where it fits into the bigger scheme of things.

Patents can be broadly divided into transmitter-side and receiver-side patents. Transmitter-side patents are high-risk high-reward patents. They form the basis of any wireless standard if they can be squeezed in. The best patents are those whose claims can be shown to be part of a standard. So if someone implements this, then they naturally infringe and this leads to royalties and other means of compensation. Since a standard primarily decides the transmitter, signal design and basic control structure while leaving receiver side design issues to the vendors, patents on such topics form essential IP for any such standard. Companies, strive hard to "stuff" their IP in thereby giving them some leverage while taking the standard forward. This gives vendors a huge competitive advantage and higher profit margin. On the other hand, a lot of smart ideas on the transmitter side never see the light of day due to the lack of consensus.

Receiver-side patents are more of a niche area. Though most basic receiver architectures are a given once the transmitter is standardized, there are always ideas that always push the limits of performance under these constraints. The burden of proof, however, is on the inventing company and it is very difficult if not impossible to get any particular receiver structure adapted by the standard. The closest any company can get is to specify the minimum requirements such that their receiver would have a differential performance making it attractive to the service providers. But as one can see, the flaw in this approach comes from the fact that the minimum specification by itself is a matter of comfort and convenience. Besides, these patents have a value if they can show disruptive performance over existing architectures that can give anyone vendor a competitive advantage. Again, as mentioned earlier, many players are not in the market based on performance but more on manufacturing capabilities and mass production. This makes their case that much more difficult.

Another means of sorting patents is based on whether they are design or architecture patents. Design or system level patents are considered of most value just because the concept itself is considered irreplaceable if standardized. On the other hand, architecture or implementation patents are of value only to the extent that it makes a business case to use them as against developing alternative implementation means of a given context. For example, if it takes $100 Million to develop a basic receiver component circumventing some IP in the market, while the asking price for that portfolio is only $50 Million, the decision is fairly a no-brainer pending issues such as IP contamination etc.

This back-ground should lead us to a better understanding of what happens in RAN1.

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Standardization - an even battle-field?

The standardization process for the wireless standards also illustrate how the dynamics in the wireless industry play out. 3GPP2, of course, is a one-man show. If QualComm wants to make the best of its Flarion acquisition by standardizing the purchased IP, it has a clean passage to do so. It is however not such a smooth ride in 3GPP.

3GPP is dominated by the European bigwigs and others who are wary of QualComm's engineering capabilities. They are very careful not to allow any one player to dominate or even insert essential IP for which they will be paid huge royalties. In fact, 3GPP, has almost devolved into an effort to stop the advances of CDMA2000 and the resulting dominance of QualComm. The WCDMA evolution path from the GSM world has been carefully written such that QualComm does not own all essential IP required to build a modem. Of course, this is where each company's position on what is essential IP differs. This is also the genesis of all the lawsuits and counter-lawsuits that have hit the wireless world recently. We will get to this point a little later. For the time-being, let us focus on some action in 3GPP.

3GPP has multiple working groups. There are a couple though where the fiercest of wireless battles are fought. The first is Radio Access Network Working Group 1 (RAN WG1 or simply RAN1), where its all about the future. The so-called "Long Term Evolution (LTE)" path talks of the means to the next generation. The second is RAN4 where the current modem development technology is defined. In other words, RAN4 defines the present and the specifications that each phone has to meet.

In the sequels, you will find some highlights from both of these working groups to provide a look into the mindset of each of these companies.

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Posted by Vijay Nagarajan at 10:32 AM 0 comments Links to this post  

QualComm - a case study.

Friday, May 4, 2007

The previous report talked about the service provider's sway over the industry and hinted on the interplay with the other players, especially the chip and platform vendors. Let us take a deeper peek into this interaction in an attempt to try and understand the impact the manufacturers have in bringing the best of technology to us. This is best done with an example, and who better to investigate than QualComm.

QualComm, as I fondly mention to everyone, is the Microsoft of EE. It is a success story like no other's in wireless. It is Quality Communications at its best! QualComm is the company that perhaps has the biggest love-hate relationship with the wireless industry. They all love their technical leadership, but then hate their guts. The "Cool-ade" that QualComm offers to the CDMA service providers is unparalleled. Why else does Sprint have most of its phones with QualComm chips? They have the best chips out there, but then they have a better service and support capability. They have excellent market intelligence too to stay ahead of the competition. For example, they provide so many extra features that make the phone manufacturer's life so much simpler and of course the purchase choice easier. Besides, just the sheer engineering excellence makes all other chipsets a no-go. If that is not all, they also have the basic patents for CDMA earning them enough royalty that can keep their research program ahead of others. These factors imply market dominance and this is reflected in the fact that they have 95% of the CDMA market share.

It is also true that though there are basic requirements being put out by the service providers, the chip vendors strive to provide more than what is asked for. This raises the bar for small players and vendors whose margin comes from manufacturing excellence as against engineering and design leadership. Besides, this also ensures exclusivity in a lot of cases. I can't imagine the phone manufacturers creating a different platform for different vendors because they support different features. It is likely that they build a single test platform that would support the best chip made available to them. This has the potential of shutting off other chip vendors who strive hard to get their basic chipset to work.

The strategy QualComm follows is not obvious but definitely logical. There may be a few good ways to get to market leadership like engineering leadership and manufacturing excellence. But there is only one way to get there to the top and to dominate the wireless market. Make the best radio ahead of others. This will enhance your position with the phone manufacturers and the service providers alike. This will also provide enough cash inflow to stay ahead of the competition. QualComm seems to have understood this mantra for success quite well. When other phone manufacturers struggle with basic HSDPA phones,QualComm is out developing chips for the next generation. They can certainly afford to do this owing to the revenue inflow from their priceless patent portfolio and their CDMA market dominance. They have consolidated their leadership position with a great research team that looks ahead to the future standards. Besides, they have also strengthened their IP portfolio with respect to future OFDM/OFDMA standards by acquiring Flarion for a very reasonable price.

Clearly, there is no question who dominated the CDMA 2000, 3GPP2 evolution path. As far as the US is concerned, considering that WCDMA is the evolution path for 3GPP as well, I can well see their strategy and engineering leadership work into their hands. Even if other big names like Nokia, Ericsson or Motorola try their best to retain their leadership in the 3GPP standards, QualComm will succeed in pushing ahead. Its rapport with the service providers and their reputation for building quality communication products coupled with their strong IP portfolio is likely to take them to their purported ambitions of capturing close to 50% of the 3GPP market.

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Posted by Vijay Nagarajan at 4:21 PM 0 comments Links to this post  

Service providers: More on the "orifices"

Thursday, May 3, 2007

In the prelude to this article, we talked about the players in the industry. This then should give us a good idea of how the industry works. Or would it?

One would imagine that the service provider should be the key mover and shaker in the industry, of course keeping in mind that they are "serving" you and me. This suggests that both the chip and the platform vendors pretty much dance to their tunes. But let us dissect the situation a little further to get a better insight.

The service provider in a lot of markets is the closest to the end user. For example, in the US, Sprint or Verizon pretty much provide a selection of mobile phones to choose from, they offer the service packs and more often than not, the only people you have to interact with for most of your mobile needs are the customer service representatives in the stores or over phone. Other markets like India are dominated by service providers that allow the customer to purchase his choice of phone from a third party vendor as long as it is compatible with the spectrum and the standard.

The first model gives us some insight into the power wielded by the service providers.They have a certain degree of control over the chip and the phone vendors. They can demand that phones have capacity-enhancing features and other "cool stuff". They can also potentially auction for phones they would feature. This can get cut-throat with phone vendors trying to eke the best value for their phone while trying to capture market. But the headaches include constant customer nags about poor service. As was mentioned in an earlier article, it is unlikely in this scenario that the phone would be blamed for poor reception. To a certain extent, this is a fair expectation from the customer because the service provider has to be diligent in choosing its phones. It has to necessarily strike a balance between reasonable performance in terms of not being a burden on capacity, add-on features like cameras and mp3 players, sleek looks and of course low cost. Now, this is too much to ask for and something has clearly got to give. A low cost phone is clunky while a sleek feature-filled phone has poor reception quality.

The service providers also have to give in to the demands of both chip and phone manufacturers. Since their reputation is at stake, they have to go for reasonably well performing chips. Besides, they need to make sure that they have continuous technical support for the phone. So the ball is not always the Service Provider's to score. At least it is not a slamdunk.

On the other hand, there have been instances of them leveraging their power to obtain sweet deals from chip and equipment manufacturers. There are instances when minnows in the industry were used as pawns to obtain cheaper chipsets from the giants. And then there is the case of Reliance Communications, India threatening to roll out a GSM network throwing away its CDMA infrastructure. This got QualComm on its toes and Paul Jacobs to India! Of course, it appears that Sprint is playing the trick again. It was committed to using some extra spectrum it had in Dallas. It has signed up to use this resource towards rolling a fully functional WiMax network. I am inclined to look at it more as a veiled threat to QualComm than their commitment to the success of WiMax and their move away from 3GPP2. Careful analysis of the situation would reveal that Sprint has nothing much to lose while a bunch of vendors have invested a lot of resource into this effort. At the end, Sprint is likely to be contended if QualComm comes out with competitive EV-DO chipsets for the data market. It may be a ray of hope for the WiMax proponents to demonstrate its capabilities, but is not a defining win over CDMA.

Thus the service providers do control the industry to a large extent. But then they are not all powerful. After all, the service providers are not the true engineers of the wireless industry, they are merely facilitators for the technology to reach the paying public. So they have to successfully co-exist with vendors to maintain the balance of power.

In the sequel, we will examine further, this interplay with the vendors. Until then...

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