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.