It’s been more than a month since arguments rested for the FTC vs. Qualcomm case. Every passing day is increasing the anxiety of people on both sides of the issue. The media is rife with the rumors, leaks, and loud calls for the U.S. Government to intervene for national security reasons and take CIFIUS-like action.
FTC vs. Qualcomm might seem like any other antitrust case, but in reality the outcome could potentially jeopardize U.S. national security. Qualcomm is the undisputed leader in technologies and R&D that power cellular systems such as 3G, 4G and now 5G. Telecommunication networks are the plumbing that connects the country, and cellular technology is its brain. Any country that wants to control its destiny should own that technology, or at the very least, have significant influence in steering the evolution of its capabilities. If the FTC case seriously damages Qualcomm, China’s Huawei will claim its place and be the global champion of cellular technology.
But, you might ask, hasn’t the government already addressed this issue by banning Huawei in the U.S.? Well, that would be akin to shutting off one faucet in a house while water is free to flow through all of the others. There is much more to cellular technology than just the network infrastructure. Let me explain.
What it takes to be a leader in the cellular technology:
To be a leader in the cellular technology, one needs deep, end-to-end system expertise. One needs years of experience designing new wireless systems, standardizing them, building and enabling a large ecosystem to commercialize them, and continuously evolving them after they launch. Very few companies possess such capabilities; most specialize in one or a few specific areas. For example, companies like Apple focus on devices, and others like Ericsson and Nokia focus on network infrastructure.
The leading companies that have complete systems expertise are Qualcomm and Huawei (Of course, there is also Samsung, I will discuss about that in a later article). Let’s take a closer look at these leaders, starting with Huawei. The rise of Huawei is worthy of a business school case-study. It has meticulously built its businesses, allegedly with strong financial and bureaucratic support from the Chinese Government. Huawei realized the importance of cellular technology and standardization, and started very early, since the 2G days. It initially focused on infrastructure products, then strategically expanded into smartphones, and subsequently developed its own platforms for modem, application processor, neural processor, even reportedly its own operating system, and other key technologies. Huawei owns virtually all key technologies in the cellular value chain and is also a force to be reckoned with in 5G standardization. No wonder Huawei is considered the crown jewel and a role model for the Chinese government’s global technology ambitions.
On the other side is Qualcomm, which to uninformed eyes might look like any other chipset supplier that can easily be dispensed with and replaced. However, upon closer inspection, one realizes that it is a systems engineering company with deep, and unmatched end-to-end wireless competence. Qualcomm has gained valuable experience leading the successful commercialization of 2G, 3G, and 4G. The intensity with which the company almost single-handedly drove the acceleration of 5G has clearly shown its capabilities. For 5G, Qualcomm co-developed the full system architecture and design from the ground up, including fundamental technologies and algorithms. Qualcomm’s R&D teams also built complete prototype systems to develop, test, and perfect the technologies that the company contributed to 3GPP to define and standardize 5G. Qualcomm, because of its unwavering focus on engineering and technology instead of glitzy consumer marketing and brand, isn’t a household consumer name unlike many of its competitors.
Some might then ask: why only Qualcomm, why can’t other U.S. giants that are much larger and have greater financial wherewithal, take on Huawei? When it comes to the mobile industry, other than Qualcomm, there might only be two other companies that could come close — Apple and Intel. Let’s look at them more closely.
Although Apple is the profit leader in smartphones, reportedly raking in almost 80% of all mobile industry profits, it is pretty thin on the cellular technology front. Instead, its strategy has been to optimize existing technologies, and bring them into its vertically-integrated devices and closed ecosystem. Apple is indeed more focused on developing proprietary technologies that improve user experience and increase the appeal of its devices. Despite being a dominant smartphone player since the 3G days, Apple hasn’t brought any groundbreaking innovations to the cellular ecosystem or cellular standards. The company is never on the leading edge of cellular technology adoption either. Specifically, with 5G, it is more than a year behind almost every other major smartphone OEM, including smaller players such as Xiaomi, Vivo, Oppo, and far behind rivals Samsung and Huawei. Short of using its bounty of more than $200 Billion to buy another wireless technology leader (which could run into serious antitrust scrutiny), Apple would find it very hard, if not impossible, to compete with Huawei in the 5G+ technology race. Even if it developed the necessary competence, Apple’s vertical integration strategy would likely make it keep all IP to itself, and not license it to others. I really don’t see the company making a U-turn and becoming the cellular technology torchbearer for the country.
Then there’s Intel, which has ruled the PC industry for many decades. It might be because of its apathy toward the cellular industry in its early days (Intel sold its division that built processors for early smartphones to Marvel), the company has never succeeded in becoming a force to reckon with. Intel’s heavy bet on WiMAX didn’t pan out, instead, putting the company years behind in LTE. Even after buying Infineon, a strong modem player of yesteryears, the company still seems to be struggling in wireless. Intel did score a major victory last year by claiming 100% of iPhone modem share, albeit only offering the performance of Qualcomm’s previous generation of modems. To date, Intel’s 5G wireless story is not promising either. It seems to be almost one year and two generations behind its peers. Apple’s recent aggressive stance in growing its modem competence doesn’t bode well for Intel either. Also, I have lots of doubts about Intel’s end-to-end system capabilities. As a result, I believe Intel is in no position to compete with Huawei.
The bottom line is, Qualcomm is the only safe bet for the U.S. to maintain its edge in 5G and beyond.
What happens if Qualcomm is weakened by an adverse FTC trial ruling?
Qualcomm’s (and the U.S.’s) fate is hanging in the balance, pending the outcome of the FTC Trial. One might wonder what would happen if Qualcomm were to lose this case. Qualcomm’s licensing business, which generates the bulk (2/3) of its profits, might be seriously impacted. Without going into hypothetical scenarios, one thing would be certain: the company’s ability to invest in fundamental cellular technology development would be severely curtailed. Its virtuous cycle of technology development and plowing profits back into future technology R&D would come to a screeching halt. U.S. dominance of cellular technology would likely rapidly decline, and eventually end. With strong market presence and the Chinese Government’s backing, Huawei would be virtually unstoppable and would exert significant influence on the definition of future of cellular technologies… and it’s doubtful that it would have the U.S.’s interests and needs at heart.
Most affected would be smaller OEMs. Without substantial resources, or access to cutting-edge technology IP and advanced, high-performance platforms from Qualcomm, they would not be able to compete in the premium tier against vertical players like Apple, Huawei, and Samsung. The premium smartphone market in the U.S. would become an even greater duopoly (Apple and Samsung) and oligopoly outside the U.S. (the former two plus Huawei). It’s no wonder that both Apple and Huawei are strong supporters of (and collaborators with) the FTC’s case.
In the end, the real losers will be consumers, who will have no choice but to bend to the whims of these increasingly powerful vertical players… vendors that have already shown a strong affinity for increasing smartphone prices.
So, for the U.S. government, the time to act is now. I hope that saner instincts will prevail, resulting in actions that will protect, preserve, and propel U.S. technology, innovation, and the country’s vital communication infrastructure.
