Friday, July 25. 2008
I am often amazed by the distrust towards companies and disdain of free markets that pervade articles in publications such as BusinessWeek, Fortune, and sometimes even The Wall Street Journal. The articles assume that businesses are by nature unethical, that free markets work for just a privileged few, and that only aggressive government intervention can safeguard the public.
Two articles about the just announced out of court settlement between wireless technology innovators Qualcomm and Nokia are good examples. In “Qualcomm plays favorites with Nokia,” Fortune Magazine writer Scott Moritz says the deal signals that Qualcomm is no longer licensing its technology on a non-discriminatory basis. And in “Why Qualcomm folded to Nokia,” BusinessWeek writer Jennifer Schenker assures us the deal is not the “win-win” outcome that Qualcomm makes it out to be.
First, here’s a little background about the dispute. Cellular telephone service was launched in the early 1980s. By the late 1980s, the industry began planning the migration to second generation (2G) cellular technologies. Europe and North America selected different standards based on the same underlying digital technology, time division multiple access (TDMA). However, a small company based in San Diego, California—Qualcomm—boldly proposed a technology that was in some ways radically different and that, the company claimed, promised significantly greater capacity along with other benefits. That technology is generically known as “CDMA” (code division multiple access).
Qualcomm failed to persuade the industry-at-large to embrace CDMA at that time, but it did manage to convince several key operators to take a closer look. Over the next few years, a series of field tests and trials convinced a number of operators and equipment manufacturers that CDMA was worth the wait. This annoyed some companies backing the already agreed upon 2G standards, and a few consultants and academics started a noisy campaign against CDMA—some going as far as suggesting that CDMA could not possibly work and Qualcomm was engaged in stock fraud.
It was a classic illustration of the saying “The pioneers are the guys with arrows in their backs.” Though Qualcomm was a successful small company, its founders were willing to risk everything for CDMA. They hoped to license the technology to larger companies, but decided to manufacture chips, subscriber units, and network equipment to ensure all of the necessary pieces were in place. Since then, Qualcomm has licensed CDMA to roughly 200 companies, and has sold its network infrastructure and handset businesses. CDMA was selected as the preferred “air interface” for third generation (3G) systems, and there are now about 500 million subscribers using various flavors of CDMA.
It’s widely believed that Qualcomm has been licensing CDMA at a royalty rate of 4.5% (applied to the selling price of devices incorporating the technology). Though this is not an onerous rate by historical standards, and it certainly hasn’t been an obstacle to market development, the mobile phone industry is very large and very cost-sensitive and there has been tremendous pressure on Qualcomm to lower its royalty rates. Going forward, I wouldn’t be surprised if Qualcomm reduces its royalty rates in exchange for other more favorable terms and conditions.
Back to the two articles…
In “Qualcomm plays favorites with Nokia,” writer Scott Moritz flatly states that Qualcomm gave Nokia “a steep discount on royalties that other phone makers won’t get.” I don’t know how Moritz can know this, but I do know why he thinks he can say it. Like many technology licensers, Qualcomm does not disclose the full terms of its agreements.
Moritz bases his assertion on a response to a question during the firm’s recent earnings call by Qualcomm President Steve Altman. Altman said Qualcomm would not automatically extend the same rate to other licensees. But he quickly added that he would look favorably on deals incorporating a similar package of terms and conditions.
Perhaps Moritz is unaware that fair, reasonable, and non-discriminatory (FRAND) licensing does not require uniform royalty rates. Or perhaps he doesn’t understand that licensers may offer discounts in return for other forms of value, such as longer duration agreements. However, I suspect Moritz was simply so determined to find a negative angle that he was willing to create one.
It is possible that Qualcomm made the final accommodation as suggested in Jennifer Schenker’s article, “Why Qualcomm folded to Nokia.” However, it’s clear that Nokia also made major concessions and this complex deal must have been in the works for some time. If Qualcomm “folded,” why did Nokia agree to pay royalties until 2023, acknowledge that Qualcomm possesses essential intellectual property (IP) for 4G, grant Qualcomm free use of related Nokia patents, and even transfer ownership of certain Nokia patents to Qualcomm? Based on that evidence, it would be just as easy to conclude that Nokia folded.
Neither Moritz nor Schenker is willing to accept the deal at face value. It is simply inconceivable to them that two big companies could reach an equitable and mutually beneficial agreement on their own. But there is reason to believe that is exactly what happened. Qualcomm and Nokia occupy different positions in the value chain, so they have different strategic goals. As the dispute dragged on, it became clear they were suffering vis-à-vis their respective competitors. To wit, Qualcomm needs the largest handset maker as one of its customers, and Nokia needs the leading 3G chipset maker as one of its suppliers.
I understand that business journalists feel they must maintain a critical posture. But it is one thing to challenge specific business strategies and tactics, and another to constantly insinuate that businesses are lying or cheating. Qualcomm and Nokia are responsible for many praiseworthy innovations, and the stories behind the two companies are quite inspiring. Unfortunately, business journalists are more interested in attributing bad motives to them than celebrating their achievements.
Tuesday, July 22. 2008
Once again, a Palestinian gainfully employed by Israel has gone on a rampage trying to kill as many civilians as possible regardless of age, sex, infirmity, or beliefs. (An article including videos of the two attacks can be found here.) Is there any way to stop bulldozer attacks? Yes, there are simple and effective technological solutions.
One is called geo-fencing. Bulldozers can be equipped with GPS receivers and programmed to only allow the machines to be operated within specific geographic boundaries. The moment a bulldozer is driven beyond those boundaries its engine is shut down. GPS technology has been used quite effectively to thwart truck thieves—primarily by enabling law enforcement to determine their exact whereabouts—and geo-fencing has been proposed in the U.S. for all trucks carrying hazardous materials, ensuring they only follow permitted routes.
An even simpler solution is radio-fencing, widely used to keep dogs from straying outside their yards. In the bulldozer application, a low-power transmitter can be set up at the construction site. The bulldozer’s engine is automatically disabled whenever the machine strays beyond the transmitter’s range. This technology also allows management to manually disable bulldozers during breaks, emergencies, or after hours.
The cost of these solutions is easily justified. Bulldozers are expensive mobile assets, and they should be tracked for that reason alone. As we have seen, they can also be used by terrorists to cause numerous casualties and immense property damage.
Like all anti-terrorist technologies, these solutions can be circumvented. Terrorists could disable engine shut-down circuits. Or they could develop gadgets that fool the system by generating false signals. But there are numerous ways to make this very difficult. At some point, the terrorists will give up on bulldozers, and look for other opportunities to ply their murderous and destructive trade.
Tuesday, July 15. 2008
I just read How the Laser Happened, physicist Charles Townes’ memoir about the development of the maser and laser. In addition to chronicling Townes’ seminal contributions to “amplification by stimulated emission of radiation,” the book provides a unique window into the process of discovery and invention. Townes reinforces some conventional ideas about the creative process while totally demolishing others.
For example, Townes recognizes the value of collaboration. However, it’s not clear that he believes individuals become more creative when they collaborate with others. Rather, he understands that ideas from multiple sources may be required to solve a complex problem. Collaboration may entail working together closely—or it may simply mean sharing ideas at a conference. Townes ends the book by concluding that discoverers and inventors must think what no one else has thought and take paths that no one else has traveled. To me, that sounds more like going it alone than collaborating.
Townes describes how at first respected scientists doubted his work. When he began developing the maser at Columbia University, both I.I. Rabi and Polykarp Kusch tried to dissuade him, arguing it was a waste of resources. One Columbia professor went even further, insisting that elementary physics precluded the maser working as Townes envisioned. Niels Bohr told Townes “But that is not possible” and John von Neumann exclaimed “That can’t be right.”
To say that most physicists came around once Townes demonstrated a working maser would be a tremendous understatement. Suddenly everyone wanted to climb on the maser bandwagon. A popular joke at the time was that maser stood for “means of acquiring support for expensive research.”
Townes denies that maser and laser development were carefully planned and managed. He attributes the inventions, instead, to the freedom granted researchers in those days to pursue their own ideas. Townes does not come right out and say that planning sometimes impedes scientific discovery, but I think that is what he means.
One of Townes’ most fascinating ideas concerns the scientific method. While most scientists like to test their ideas in the laboratory as soon as possible, Townes prefers to get the theory right first. That way, developing a device is simply a matter of correctly applying the theory. It isn’t that he considers empirical research the wrong way to do science—it’s just that it isn’t the right way for him.
Though Townes describes his method as if it were merely a matter of personal preference, there are obviously some big issues here. The orthodox view is that the scientific method requires experimentation and observation. Townes obviously believes that the underlying principles can all be worked out in advance.
This leads me to the conclusion that throughout his career Charles Hard Townes was primarily a theoretician in the tradition of Maxwell and Einstein. That is, Townes believed he could make discoveries working exclusively in the realm of ideas. Perhaps it was because he wanted to ensure his theories were proved correct that he continued on to the implementation stage. Or perhaps it was because he knew devices based on his theories would open further avenues of research.
Two things are certain. “Amplification by stimulated emission of radiation” has led to breakthroughs in fields ranging from precision time measurement to radio astronomy to fiber optic communication to eye surgery. And Townes made it happen not by following the rules, but by (gently) breaking them.
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