Wireless Industry Analyst

• 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.

• 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.
  

• 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.

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.

QualComm

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.

BroadCom

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.

The others
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.

The talk of the industry yesterday was the Bush denial to veto the ITC ban on QualComm chips entering US market. It hardly surprises me, and it should not surprise anyone including QualComm. My reasons -

1. The President is unlikely to set a bad precedent trying to encourage practices that can be perceived as monopoly. A veto would have made QualComm more brazen. In fact, I would argue further that it may have been detrimental to QualComm itself. This would have given other companies to then flagrantly violate patents with impunity. And this has the potential of breaking the very business model that QualComm thrives on.

2. Verizon, one of the biggest backers safely navigated itself out with a pact with BroadCom. This would give the big V an advantage over its CDMA competitor, Sprint and an army of phones to put up at least a semblance of fight against the iPhone.

3. It is clearly a fight between two industry heavy-weights which does not assume any national level importance. The government clearly did not buy the arguments regarding emergency calls. And the Verizon move served as enough precedence that a work-around was possible if the parties involved negotiate fair. It is not a Greek mythological war for the Gods to take sides.

The sequel talks about the implications for both parties.

BroadCom also scored another goal today in the game against QualComm. They have signed a licensing agreement with Verizon, who have agreed to pay $6 per EV-DO hand-set they sell with a maximum of $40 million per quarter. In return, Verizon have also agreed to drop all efforts to stall the ITC ban including the request for Presidential veto.

From Verizon's point of view, it comes as a relief since this would at least give them some quality phones to compete against Cingular and iPhone. They were hoping that QualComm would be able to resolve it with BroadCom, but that was not to be. From BroadCom's side too, it is a welcome development. They have, in some sense, done the service provider a favor and would now have some camaraderie with them for the future. This is doubly sweet for them as Verizon with its CDMA network shares a strong bond with QualComm. With Verizon giving up its part in the fight, this is definitely perceived as a blow for QualComm.

This being said, QualComm issued a brief statement 'welcoming' the move while avowing to continue their fight for a Presidential veto, of course without one of their primary allies. Also, clearly, the war will continue since there are other carriers in question.

And yes, don't be surprised if Sprint signs a deal tomorrow giving BroadCom more traction in the U.S. market. However, these deals are more of a make-shift arrangement and some business goodwill until a deal inked by QualComm and BroadCom.

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...