The news late last month that Qualcomm Inc. had initiated another lawsuit against Nokia Corp.-this time over GSM-related patents and before the United States’ International Trade Commission-produced mutual salvos and plenty of noise and smoke in the wireless industry.
Both companies, after initial broadsides by Qualcomm and, soon after, almost reluctant responses from Nokia, have declined further comment on the legal particulars.
But a look at their respective business models and outlooks on the industry provide some insight into the tense nature of their relationship and why the two parties’ conflicts have entered the legal and public-relations realm. High-level spokesmen for both companies agreed to speak to the bigger picture and address the suggestion that the clash reflects fundamentally different business approaches.
Jeremy James, director of corporate communications for Qualcomm, said that background was crucial. In the 1G and 2G world of AMPS and GSM, Nokia was a dominant player, according to James. In the CDMA and CDMA2000 universe, more players entered the market, each with smaller shares of pie. That trend continues with W-CDMA.
In Qualcomm’s view, this was true because early in the wireless industry, handset vendors had vertically integrated business models, from components to the end user. In the 1990s Qualcomm had its own handset business, but sold it to Kyocera Wireless Corp. in late 1999 and saw a boost in its chipset business, partly because it no longer competed directly with customers.
Since 1985, Qualcomm has spent about $5 billion on research-and-development, $1 billion of it last year, according to James.
“Because of the way we license our technology, we’re essentially aggregating R&D across the entire industry and enabling nimble, smaller companies to get into the wireless market fairly rapidly without paying royalties to the large companies that did all the development on GSM,” James explained. “That’s a horizontal approach that has produced a lot of competition that has had downward pressure on pricing. Handset prices on CDMA1000 and CDMA2000 devices have come down more rapidly than GSM handset prices did, at one-quarter of the volume. Qualcomm takes some credit for that.
“That’s the fundamental difference between Nokia’s business model and ours,” James added. “That informs a lot of what underlies some of the basic conflict between the two parties. So, it means that whomever we’ve licensed our basic IPR to, and wherever it’s being used, we need to pay close attention to that-even when we license to very large companies.”
James summarized that Qualcomm’s royalty model is standard, with the specifics hashed out with individual licensees. “Our royalties are in the low, single-digits of the wholesale price of the handset,” he said. “They’re basically the same with CDMA2000 or W-CDMA, and our view is that what is getting licensed, and what is most critical in our portfolio to have access to, are the essential patents where you basically can’t make a phone that works without using these patents. There has been an argument on the other side about the number of patents, but our view is that if you look at the 60-odd vendors who’ve licensed our W-CDMA technology, that the market has decided that our IPR is essential to these devices. And there’s a difference between a patent that tells you how to make a hinge on a flip phone vs. a patent that enables the phone to function as a phone. So, even with W-CDMA, we’d say that our patents are essential and that the market has validated that.”
Asked to compare the two parties’ business models-which a reporter initially suggested had an element of Nokia’s volume play and Qualcomm’s IPR-based approach-Bill Plummer, vice president, external affairs at Nokia, demurred.
“It’s more complex than that,” Plummer said. “It’s not a race between volume and IPR, it’s about fundamental business models. Qualcomm is trying to extend yesterday’s proprietary technology business model into today’s environment, which doesn’t fit with today’s reality. It’s not a rational model in an environment in which the proportionality of the respective IPRs has fundamentally changed. Today the industry is about more open standards.”
This speaks to Nokia’s position that its innovation in GSM and in W-CDMA has leveled the IPR playing field. “If you look back over the past 15 years, Nokia’s investments in R&D have exceeded $30 billion,” Plummer said. “Qualcomm’s investments are more in the neighborhood of $5 billion. We are a leading technology developer, particularly going into this next generation [of W-CDMA]. We have the ability to innovate and differentiate around an `openness-based’ business model. We are investing heavily in technology development and we should have the capability to get a return on our investment. That’s the new environment.”
The underlying issue, Plummer said, is that Qualcomm sees Nokia and this open-based business model as a threat, which challenges its perception of its “technological hegemony” and its underlying business model.
In CDMA technology, Qualcomm controls the ecosystem in a proprietary, monopolistic manner, according to Plummer. “Qualcomm valued and controlled innovation using IPR as a tool, and they leveraged their chipset dominance and control of the technology standardization roadmap in CDMA,” he said. “Now they’ve become accustomed to that historical role in the CDMA business. I think the challenge now is that it’s difficult for them to acknowledge that other companies-like Nokia, but others as well-have made significant contributions to the development of new technologies [such as W-CDMA] and have accumulated valuable IPRs of their own, which leads to this proportionality issue.”
“It is complex,” Plummer concluded. “It’s about the evolution of this business. The role Qualcomm has played in second-generation CDMA doesn’t apply to W-CDMA. The proportionality has changed. This serial litigation on Qualcomm’s part is a recognition that the situation has changed.”
