The Wireless Wars
Wall Street Journal
April 13, 2007
The 10-year war mounted by EU bureaucrats and Europe's communications giants against America's leading wireless technology innovator, Qualcomm, is now reaching a climax. On Monday, Nokia refused to renew licenses on next generation technology following EU ally Broadcom's suit at the International Trade Commission to bar import of cellphones containing Qualcomm chips from factories in Taiwan.
A decade ago, with its single, unifying cellphone standard known as GSM, Europe led the world in mobile communications. But threatened by Qualcomm's CDMA breakthrough, the Europeans launched a ferocious political and PR offensive, hoping to scare off potential customers of the young American firm. The technology was all hype, they said; it "violated the laws of physics."
When Qualcomm proved them wrong and its mobile technology deployed across the U.S. and Korea, Europe went to plan B. They excluded the Americans from the standards process for third-generation, or 3G, technology, battled in the courts, and mandated their "new" system for all of Europe. But in fact, the new European and Japanese standard, called Wideband CDMA, was essentially a copy of the American CDMA system.
With the new mobile system flourishing -- accommodating many times more voice callers and beating the previous generation in security, dropped calls and data -- everyone finally admitted that the American company had a lock on the fundamental technologies. The Europeans and Japanese licensed the American technology, CDMA and its sibling WCDMA, assuring that it would be the future of wireless mobile communications, an industry now selling a billion handsets a year.
Today, however, with those 3G licenses coming up for renewal and a fourth generation of wireless in sight, Europe is once again pushing the political levers to control the future -- this time with the unwitting assistance of the U.S. government. Although their immediate target is U.S. dominance in cellphone technology, a collateral victim would be the U.S. broadband economy.
Until recently, the obscure International Trade Commission played a minor role in the enforcement of patents. But with a Supreme Court ruling in 2006 making it more difficult for patent holders to win federal court injunctions against violators, complainants can now turn to the ITC. Unfortunately, complainants can also use an intellectual-property dispute as a cover for enmeshing competitors in the protectionist mazes of international trade law.
And that is what's happened to Qualcomm, the titan of U.S. intellectual property in wireless, with close to 5,700 patents on the next generation of cellphones and wireless data systems around the globe. Attempting to upend the San Diego titan's well-earned dominance are Broadcom and its European "Gang of Six" sponsors.
At a recent ITC public hearing, Broadcom CEO Scott MacGregor declared that the U.S. wireless telecom system would function better if it completely capitulated to the European standard. The Broadcom campaign began in May 2001 when it purchased, from an obscure bar-code and RFID company called Intermec, a set of three flimsy patents that they are now attempting to use to block the importation of all Qualcomm wireless data chips incorporating its (Qualcomm's) state-of-the-art data system called EV-DO.
EV-DO chips not only make mobile voice-over-IP possible, but they also allow cellphones to function more like multimedia computers, carrying eight to 10 times more data than previous technology. At the ITC public hearing, Verizon Vice President Richard Lynch noted that without EV-DO, "handsets go back to being voice and text."
Not coincidentally, Qualcomm recently announced an upgrade to EV-DO that permits transmissions at up to 9.3 megabits a second, a broadband service faster than U.S. wireline services and fast enough to permit mobile TV and streaming music with simultaneous voice and VoIP calling.
The Broadcom action is part of a campaign, reaching from Seoul through Brussels and cropping up in courts from New Jersey to California, to bring down Verizon's and Sprint's aggressive expansion programs for their EV-DO networks. The EU has its sights set on Qualcomm: The Eurocrats contend that with 20% of global market share in cell-phone technology, Qualcomm is a monopolist, guilty of the sin of inventing new systems needed for successful mobile Internet data access.
At stake in the litigation is who will control the next two phases of wireless technology -- 3G and 4G. Nokia's action on licenses is part of this coordinated attack.
However, with no commercially available alternatives to the Qualcomm EV-DO chips that Broadcom wants to block, the administrative law judge who considered Broadcom's claims noted that a "significant financial burden" falling on third parties, including handset manufacturers, wireless carriers and consumers, "weighed heavily" against categorical exclusion of cellphones containing the chips, which would take at least two years to replace.
And there's the rub. Wireless has become the largest source of profits for nearly all major telcos; and a paralysis on the wireless front would reverberate throughout the American broadband economy.
Verizon's mobile phones, for example, are about two-and-a-half times more profitable than its wireline phones. For the most recent quarter, Verizon Wireless profits were $804 million, while wireline profits were $393 million. AT&T affirmed the strategic importance of wireless last year when it acquired BellSouth for $67 billion. All analysts agreed AT&T's chief interest in BellSouth was the remaining 40% ownership of Cingular, the nation's largest mobile carrier with 54 million customers. And EV-DO's own strategic importance was manifest in the Sprint-Nextel merger. According to Sprint executive Bill Elliott, the ability to migrate Nextel customers to Sprint's EV-DO network "was one of the key reasons for the $35 billion merger."
In the past, U.S. telcos used wireline phone revenues to fund their wireless expansion; now they use revenues from wireless to fund fiber-to-the-home. It is profit from its wireless network, for example, that allows Verizon to maintain its stock price and attract the capital to sustain its ambitious $23 billion program of fiber deployments expected to reach 18 million households over the next four years. Any major setback at Verizon wireless would thus likely halt Verizon fiber.
Similarly, profits from the Qualcomm-based technology used by Cingular (now AT&T Wireless) for next generation systems will be critical to fund AT&T's ambitious Project Lightspeed broadband rollout.
Broadcom's attempt to close down Qualcomm on the basis of some flimsy patents on power-management techniques seems preposterous. The entire Qualcomm system, going back two decades, depends on an exquisite dance of exhaustively patented automatic gain controls and instant power regulation. But by the magic of injunctive relief at the ITC you can shut down the entire U.S. broadband industry in favor of European rivals.
With nearly all chips made or packaged overseas, the entire U.S. information economy now depends on ersatz "imports" based on designs and innovations that nearly all originate in the U.S. and generate profits here. The bottom line: Foreign governments can manipulate U.S. companies to favor their own industrial policies by pressing protectionist buttons at the ITC, putting much of U.S. broadband, wired and wireless, into sleep mode.
Is it not the ultimate irony that this new ITC authority is based on an obscure provision of that protectionist grim reaper, the disastrous Smoot-Hawley Tariff of 1930? Surely the president and Congress can act to remove this new U.S. vulnerability -- one that springs from laws and regulations based on an obsolete vision of segregated national economies shipping products across the seas in clipper ships in exchange for transfers of gold.
Mr. Gilder is a founder of the Discovery Institute and the Gilder Technology Fund. Both Broadcom and Qualcomm are on his Gilder Technology Report list of favored companies.
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