Wireless Industry Analyst

• Feature integration
• Power management
• Ease of integration

• have better power management capabilities
• have smaller space requirements for the chip-set (which would also be enhanced by migration to the newer 65 nm technology) implying more room for music storage
• be backward-compatible with GSM networks. This is more a requirement for Apple given that most 3G networks are not pervasive and users are likely to be serviced by both GSM and WCDMA based on their location

While the world awaits June 29th to see if iPhone can live up to all the hype and expectations around it, there is another question that looms large: What next for iPhone?

Apple apparently has set a goal to obtain 1% of the US hand-set market share and analyst reports suggest that it may well be a reality. On the other hand, in order to extract maximum value from the wireless industry and also establish pervasive presence, Apple will have to
- expand presence in the U.S.
- enter other markets

Expansion of U.S. presence: iPhone is entering the U.S. market with GSM, a standard that Cingular A.T.&T supports. Cingular also has an exclusive iPhone license for a couple of years. Thus in the U.S., Apple's market share increase depends, to a large extent, on its charm influencing customers to migrate from other carriers to Cingular. While the iPhone perhaps has that attractiveness, it is a very costly proposition to do so. Apart from the high-price of the phone, the cost of breaking existing phone contracts is a likely deterrent to any major migration. The lowest someone is looking at to switch is $650, an amount the average phone-user is unlikely to pay up. The initial sales are likely to come from the business population (that too only for people who look at a highly integrated device) and the gadget-crazy youngster for whom owning an iPhone may be a 'cool thing'. This said, unless the phone performs or if Apple comes up with improved future versions, the 1% figure for sales can stagnate.

Performance implies good voice quality and reasonable data speeds apart from all the innovative features in the phone. These in turn depend on a) the base-band chip-set currently in use and b) the data rates supported by the standard itself. The Infineon GSM chip-sets in the iPhone probably have a good and cheap design, something imperative to keep the overall cost as low as possible. On the other hand, GSM is limited in its data-speeds. And that is also the reason why 3G has gained prominence. HSPA systems can offer higher nominal rates. But the point is, in the U.S., among the non-CDMA providers, only GSM is prevalent. WCDMA networks are being built only now and that too in major cities alone. As I have mentioned in a previous article, the economics of the iPhone would be prohibitive if 3G support were provided because the chip-set will have to be dual-mode: one that supports GSM and WCDMA. This also has an impact on the power management side. Secondly, the data-using population is miniscule. To optimize the phone for a small fraction of the population which is data-savvy may not have been a good strategy for the first version. Granted that this very segment of population also has the highest probability of owning an iPhone but there needs to be a balance. To provide for the needs of that cross-section however, iPhone has Wi-Fi capabilities coming from the Marvell chip-set. To me, it is a great move since Wi-Fi speeds are way higher than the cellular speeds. Besides, it is important in the context of all cellular manufacturers migrating towards an integrated Wi-Fi/cellular chip-set. In other words, while the cellular chip-set companies are slowly recognizing the importance of Wi-Fi integration with cell-phones, Apple is already one-up on them with Wi-Fi being touted as the answer to high-speed data despite the limited coverage options. The notion at Apple is that for their current market penetration strategy and their pricing, 3G is unattractive. Also, if the phone does live up to the hype and more people feel at home parting with around $600, then Cingular would gain a lot of customers and Apple does not have to worry as much about expanding their US presence to other service providers.

Now when would the market call iPhone a failure? I would not doubt the user-interface or the iPod aspects of the new gadget.My doubts would be on one or more of the following-
-the base-band modem features have multiple issues with voice-call processing, interoperability etc.
-user-data experience in the GSM network is below expectations both with respect to speed of connection and services
-interoperability of multiple features like data, voice and music is not as good as anticipated.
The bottom-line: people could get the feeling that they are not getting their money's worth and if that happens, then all the talk of iPhone changing the way people think of cell-phones may not hold water.

If the first version does fail, then Apple will have to scamper for the next revision. It appears that with further advances on the power management side and more integrated features, Apple might be able to meet the demand for higher data-speeds with 3G for the same costs easily. That apart, Apple will have to strike a balance between a)getting more pervasive through other service providers and b) maintaining an aura of exclusivity and snob value. It looks like 3G may hold the key for the next version, more so in case of failed expectations.

Expansion into other markets: The primary target for the iPhone expansion would be Europe where high-end phones are more likely to be sold. Apple would love to get into a market like India, but there is a basic lack of synergy between the Indian model and the Apple strategy, at least by the looks of it. India pretty much thrives on low and medium-end phones and the profits and operating margins are fairly low. With its prohibitive costs, the iPhone is unlikely to cause a huge frenzy in India and the likes. Europe thus becomes a natural next step. With UMTS networks widely deployed by Vodafone, Orange and 3, it is obvious that the iPhone in Europe will invariably have to be 3G ready. If a European iPhone were to come out in the next few months, it is likely to be costlier than its American version given the economics of having the dual-mode phone. The business population of the rest of the world however may have to make do with the GSM version if and when Apple decides to look beyond Europe.

In summary, even for iPhone to survive into the future, leave alone dominate it, Apple will need to go 3G. Many in the industry understand this and are positioning themselves to win the big prize: a place in the iPhone. In fact, it seems that the survival of some of the chip-set vendors may in turn depend on an Apple acceptance. In the sequel, we will examine the various options Apple has in front of it and the factors it may have to consider before it picks chip-sets and vendors.

While the IP battle rages, BroadCom is slowly moving towards a more complete UMTS solution. It recently announced a $146+80 million acquisition of Global Locate, a GPS company. Now, they are equipped to enter the niche market of chips with integrated features. With previous Wi-Fi, blue-tooth and FM capabilities and with the new range of GPS products and IP from Global Locate, BroadCom's game would be to bundle all these with its UMTS chip, with the hope of shutting the other small players in the fragmented UMTS market.

As I have mentioned in a previous article, the company with the super-set of features is most likely to have a design win with a device manufacturer since the latter would want to build a single platform to support these chips. QualComm, for example, already has Wi-Fi and GPS assets from Airgo and Snaptrack respectively, and is thereby positioned as a front-runner in the race, especially with superior modems. BroadCom appears a little late in obtaining GPS but then we should remember that the company was getting its act together with the modem performance and interoperability testing earlier. With those issues likely out of the way,it is now attempting to carve a niche or at least is trying to become one of the top 3 UMTS IC supplier with a more complete product offering. Of course, it remains to be seen if the pace of QualComm's R&D efforts can be matched. While the industry is grappling to get the basic HSDPA act together, QualComm is already gravitating towards the next generation HS chips. BroadCom's hope perhaps is that the ITC ban will divert resources within QualComm thereby giving it some extra time to try and catch up with its bitter rival.

Also, it remains to be seen now what Marvell and Free-scale are thinking on the GPS front. They don't have GPS features as yet and there are not too many small companies to grab at now. Would they try to license from the $1.6 billion Sirf or are they likely to take the acquisition route? If it is the latter, the time is running out, both from an availability stand-point and a design-win stand-point. BroadCom is already making noises about making it to the top 5 UMTS IC suppliers. So we should see some more GPS deals soon. I also think that the window of opportunity for all the other players is getting smaller by the day and the weaker/financially poorer ones are likely to be left out. We will see market consolidation in this space and a few clear winners emerging. In the meanwhile, let us wait and watch the frantic action!

THe ITC ban that has left QualComm high-and-dry and BroadCom basking in its moments of glory is definitely not an aberration. It has been viewed by some as trouble that QualComm invited for itself.

Here is my take on it. BroadCom went into IP cross-licensing discussions with QualComm. The IP aggressive QualComm would have thrown out some of these patents from the discussion tables citing limited value while still being its own pricey self. A miffed BroadCom obviously felt that its portfolio had a greater value than suggested and decided to take the matter to the courts. While BroadCom would have had its novelty claims, QualComm would have argued on obviousness and prior-art. I had a look at the patent and the invention and the primary claim are fairly simple. But clearly, QualComm's arguments did not hold water. The claim was clear enough for the jury to come to a straight-forward conclusion despite QualComm's best efforts. Now that the ruling is out, QualComm is obligated to respect it, give credit to the inventors for thinking about it first no matter how simple or basic the invention is and find a solution. And this is something I would have expected QualComm to anticipate considering ts own aggressive stance. So, it is almost child-like to cry wolf and seek helping hands.

BroadCom, on its part, is expected to be reasonable in the price it quotes for QualComm. Obviously, it cannot be discriminatory in its pricing meaning that QualComm should have a fair shot at being able to pay the royalties and shut this matter there. My suspicion thus is that QualComm's hesitation does not come from the price that BroadCom may have asked ('steep' as used by QualComm may be an overkill), but more from the loss of pride, position and power. This is likely to embolden the others and more bitter battles can be expected. We are seeing that Nokia is already filing more lawsuits for 6 other patents. So QualComm wants to be able to control its own destiny and not compromise on the value of its own portfolio in an attempt to license patents from others at a much higher price than before. But hey, something has got to give!

Also, contrary to QualComm's explosive press-release, BroadComm has taken a rather dignified stance choosing not to get into an ugly war of words. The release that you can find in the link below clearly hints at the genesis of the law-suit-

http://www.broadcom.com/press/release.php?id=1013134

The coming few days will be very interesting for the U.S wireless industry and we will get to see more of where everyone's loyalties lie. For the moment, it appears that the long-time defending champion is caught on the back-foot.

Here is QualComm's official position on the ITC ban.

http://www.qualcomm.com/press/releases/2007/070607_disagrees_itc_decision.html

Notice the press-release positioning themselves as the champion of the US cellular industry while BroadCom is accused of using the IT ban "as a vehicle to attack the U.S. cellular industry." An obviously biased opinion of a miffed giant! Besides, they seem to pass much of the burden on the entire industry while it is really their own product and their own engineering expertise that is in question. Verizon, while signing in on the Presidential veto request has precisely made the same point.

It is apparently a knee-jerk reaction. A truly altruistic position would be to say, "we will pay up for the common good of the country and the industry. After all, it is our product that is in the midst of the controversy." Again, of all the companies in the industry, QualComm should understand IP and what it entails, and I am sure they do! They have never really given sweet deals to anyone as far as IP is concerned. So, BroadCom is only returning the favor.

The bad blood between BRCM and QCOM has festered for a while now and has peaked with the ITC intervention. The press-release rubs in where it hurts BRCM most, its failure so far to break into the WCDMA market. WCDMA was a prize they sought very vigorously, especially after the acquisition of Peter Van Rooyen's Zyray Corp., and the spinner chip. Grapevine has it that the chip spun last year was below par and failed a few basic tests. So, now while they are trying to sort issues with their product-line they are also more active in the 3GPP RAN1 and LTE. They may have, on the other hand, lost valuable time to market with their chips. The QualComm release ridicules this very point about the lack of performance of their chips and their subsequent failure to capture market.

From BRCM's perspective, however, it may be a win-win situation. If QualComm fails in its attempts to steer around the IP, then BRCM either gets substantial revenue and/or greater negotiating power at the cross-licensing discussion tables. Their IP stack just got a lot bigger and QualComm will have to budge on the royalties it seeks on a few of its basic patents. More importantly, this eventuality would have breached the tough walls of QualComm in this IP game and would signal more lawsuits from all the power-hungry players. On the other hand, if QualComm opts for a slower work-around without paying royalties, that may give BRCM the time to market for their chips. Vendor and operator confidence in their products however remains an unknown, though!

Do watch out for this space here as I bring more updates and views on this entire issue.

Here is a report from Fierce Wireless with some insights into the ITC ban of QualComm chipsets violating BroadCom's patents.

http://www.fiercewireless.com/story/itc-ban-detrimental-to-qualcomm-wireless-industry/2007-06-08

The analyst seems to share my opinions on QualComm's relationship with the industry. The point is that the love-hate relationship between the company and the industry has given more people a reason to rejoice than feel for it.

The move might be a huge blow to the US wireless industry and QualComm is attempting to make the same point by seeking a Presidential veto despite realizing that the probability of a veto is close to nil. On the other hand, my suspicion is that QualComm as a company would certainly have some fall-back plans to counter something this drastic. And of course, all said and done, they are likely to get the support of the service providers in any move attempting to circumvent the controversial IP. After all, the QualComm 'cool-ade' is too intoxicating for them to let go. They may have wanted to shake up things a little bit, but for their own good, they will help QualComm get its act together fast!

This is a note on something that I learnt from a colleague.

A lot of us have been annoyed at all those one-year and two-year contracts that we are made to sign when we get a new mobile connection. It can sometimes be perplexing when we are not happy with the service provided, quality of phones etc but then have to wait until the mandatory service period to get over before we can switch.

The bottomline however is that for any business to continue to exist, it needs to be a profit making proposition. And with most basic plans in the market, the carriers lose money if someone quits midway! And here's why-

When someone gets a new service, he/she gets a cool new gadget to go with it at unbelievably low prices. If the same phone were to be bought outside of a service agreement, it would cost us a fortune. So, clearly, the service provider is subsidizing the cost of the phone. The average Cost Per Gross Add (CPGA) or the cost associated with adding a new mobile-line (including the subsidy, cost of setting up etc.) is around $300. This along with the Capital Expenditure (CapEx) per user amounts to around $600. Now, with a $40 per month plan, it would take 15 months to break even! So, then doesn't a 2-year contract now make sense from a service provider perspective? That is when the Average Revenue per Unit (ARPU) is appreciable enough to make a business case. That is also perhaps the reason why most additional services/minutes cost us a lot more than the basic plan itself.

The key thing to take off this note is that the 'percentage churn' or the number of users switching service providers is an important factor for the service provider. If this number is kept low, then all power to the service provider. They will start showing profits. More so if they can keep their customers happy for more than the minimum period. Else, it is a lost cause and no business is philanthropic.

Now you know why the service providers strive for good customer care!