IPR – Radio Free Mobile

iPhone 16e – Pugilistic Intent

RICHARD WINDSOR — Thu, 20 Feb 2025 04:44:16 +0000

New modem needs to succeed to re-open hostilities.

Apple has finally launched a phone that uses its own in-house 5G modem, but the real test of success will be whether anyone can tell the difference between the in-house version and the Qualcomm modem that is used in all of the other iPhone 16 models.
If the new modem works well, then the way will be open for Apple to restart its patent fight with Qualcomm but if Apple decides it needs 6G early, then it will be back to square one.
The new iPhone 16e is everything that one would expect making hardware compromises here and there to ensure that Apple can still earn an excellent gross margin on a $599 price point.
One camera, a smaller screen and no dynamic island are compensated for with stellar battery life, efficiency and the A18 chip which is present in its big brother.
This means that almost all of the software features of iOS18 will work just as well on the 16e including all the features of Apple Intelligence.
Hence, Apple is really pushing the battery life with a claim of 16 hours of video playback and up to 12 hours more battery life than older iPhones.
Here, the comparison is being made against iPhones 11, 12, SE (2^nd Gen), SE (3^rd Gen) and the 12 mini highlighting that Apple is mainly going after the users of older iPhones who are more cost-conscious.
It does not compare particularly favourably with Android as at this price point, users get a lot more hardware bang for the buck.
Instead, Apple is trying to make up the gap with software (which for older iPhone users it does) but against Android users, I think it will struggle.
The real test here is the in-house C1 modem which finally makes it to market after many years of trying.
This means that Apple thinks that it has worked out how to make a 5G modem that works just as well as Qualcomm or MediaTek when it comes to 5G, but no amount of band analysis, lab testing or specification comparison will determine whether it is good enough.
The acid test will be whether users notice any difference in connectivity compared to other devices that use Qualcomm or MediaTek modems because it is this that will determine whether the C1 and its successors can replace Qualcomm entirely.
The place where this will be noticed will be where there is poor coverage or network congestion as there is nothing more frustrating than seeing your device fail to operate when everyone else is continuing as normal.
In many ways, the iPhone16e is an experiment to see whether the C1 modem is ready to roll out across the rest of the range and if it is, then Apple will be free to restart legal hostilities over the patent royalties that it pays to Qualcomm via its contract manufacturer.
Apple gave up its fight against Qualcomm over patent royalties in 2019 because it needed a working 5G modem and at the time had nowhere else from which to source one (see here).
It also signed a relatively short patent agreement (usually 10 years) as it thought that it would have a working modem by the end of that agreement and be in a position to reopen patent hostilities.
However, the 5G modem proved much harder than expected with several false starts meaning that it is only now that Apple thinks that it is in a position to compete with Qualcomm on modem quality.
If this is successful, then I do not doubt that it will roll the C1 and successors quickly through its portfolio and refuse to sign a new patent licence when the current one expires in March 2027.
This will set the stage for yet another fight over royalties but by then 6G will be starting to make an appearance.
Crucial to the patent fight will be whether Apple decides that early access to 6G is important for its device portfolio.
I am pretty sure that when it comes to 6G, Qualcomm will be the first to produce a commercially viable modem (as it has in every generation since 3G) and so if Apple decides it needs 6G early, it will again have nowhere else to go.
Hence a decision to go with 6G early or the users noticing that the iPhone16e has inferior connectivity in difficult wireless environments could scupper Apple’s desire to have another go at paying lower royalty rates to Qualcomm.
Either way, it is still much too early to know how this will pan out, but Qualcomm is already planning for a fall in modem share from 100% today to just 20% of the models that are launched in 2026 and it has communicated this clearly to the market.
Hence, I think that Qualcomm is taking the sensible approach of planning for the worst but hoping for the best meaning that the balance of probability is that it does better than it has assumed.
However, the real question is whether Apple will be in a position to re-open its patent fight and it is the performance of the iPhone 16e that it is likely to decide the matter.
With relatively conservative long-term guidance and increasing penetration of new markets such as laptops and vehicles, I don’t think that this is going to trouble Qualcomm’s fundamentals too much.
Hence, I am quite happy to continue holding the shares.

Arm vs. Qualcomm – Noisy Crickets

RICHARD WINDSOR — Thu, 24 Oct 2024 06:57:38 +0000

More noise than bang.

Arm has served Qualcomm with a notice that cancels its contract to sell Arm IP in its products, but because the notice period ends in the middle of the trial, it is going to have no incremental impact on Qualcomm’s ability to sell chips.
Arm and Qualcomm have been embroiled in a contract dispute for some time (see here) which as always boils down to a fight over money.
The complaint is essentially over Nuvia which was a company full of highly talented engineers but no product for which Qualcomm paid $1.4bn in January 2021.
These engineers originated from Apple where they worked on its processor cores whose talents Qualcomm has now used to close, and largely surpass, the performance gap on the M-series of processors.
These engineers created the Oryon custom CPU which powers the X Elite and X Plus chips for laptops and this week was launched in the 8 Elite for smartphones and the Cockpit Elite and Ride Elite for vehicles.
Nuvia had an Arm license but, because it was a new company, it would have ended up paying a higher royalty rate to Arm when it sold its chips than Qualcomm does for similar products.
Qualcomm on the other hand has had a license to design its own cores for years and wants to use this license to ship products with Nuvia-designed cores, which will attract much lower royalties than they would have done under the old Nuvia license.
Put this in the context of Arm needing to maximize its profits and growth to generate a healthy return for public shareholders and one can begin to see where this lawsuit came from.
This lawsuit has been in the discovery phase for quite some time which is why the news flow has been quiet of late, but Arm has lit the fire of battle once again by cancelling Qualcomm’s license citing a breach of contract.
I think the timing of the cancellation has nothing to do with Snapdragon Summit and everything to do with the launch of the 8 Elite which will ship in huge volumes as soon as it is available meaning that there are large revenues to chase for damages.
The X Elite and X Plus are just getting started making a much smaller target, which to my mind explains why Arm has waited this long.
The contract cancellation has a 60-day notice period meaning that it will end right in the middle of the trial that has been set to resolve precisely this issue.
Consequently, I suspect that as a matter of procedure, the cancellation will be suspended at the beginning of the trial and will depend on the outcome.
Consequently, nothing fundamental has changed other than Arm has generated a news cycle which has annoyed Qualcomm which wants the focus this week to be on its products not its legal issues.
I think that the outcome of this trial is far from certain as, looking purely at the contracts that were in place at the time, Arm has a case as far as I can see.
Unless Qualcomm has uncovered something incendiary during discovery, I suspect that as the trial goes on, there will be pressure to settle which is what I think is the most likely outcome.
The settlement will of course be confidential, but I suspect that the royalty rate that Qualcomm will end up paying on Oryon cores will be higher than it would have been under the old architecture license but less than Arm is currently demanding.
I continue to think that this dispute is disruptive for both companies who should be working together to take the fight to the x86 and RISCV camps rather than fighting each other.
This is why it makes most sense to settle it as soon as possible as the value accretion to both by winning more share and faster from x86 and not giving it away to RISCV more than offsets the amount of money being disputed here.
Either way, I don’t think this case materially changes the investment case for Qualcomm where I remain a happy holder.

Apple – Stocking filler.

RICHARD WINDSOR — Tue, 19 Dec 2023 05:39:42 +0000

Apple will find a way out.

Apple has received an unwelcome Christmas present as it faces a ban on importing Apple Watch products in The USA as a result of infringing Masimo’s blood oxygen patents but I am pretty sure that it already has a workaround ready to go.
The ITC has issued a “limited exclusion order” against the Apple Watch Series 9 and the Ultra 2 following a January finding that these products infringe patents owned by medical device maker Masimo.
Apple can always settle with Masimo but its historically pugilistic attitude towards patent infringement usually means that it won’t settle unless it has no other choice.
This is precisely what happened in 2019 when Apple settled with Qualcomm and resumed paying royalties on the iPhone as it could not source the 5G chips it needed from anywhere else.
I suspect that this situation will hinge on whether or not the ban actually goes into force and whether or not Apple has a decent workaround ready to go.
- First, the ban is supposed to go into force on December 25^th but Apple has pre-emptively ceased online shipments and will halt sales from its stores on December 24^th.
- This pretty much ensures that the all-important Christmas sales season will have gone as planned but now it has to worry about calendar Q1 2024.
- The ban currently sits on the desk of the US President who has the power to veto it, but an intervention at this level is unusual but not unheard of.
- Assuming there is no veto, Apple will need to disable the feature in order to be able to resume shipments or issue a workaround.
- Second, The workaround. Given that the prospect of an ITC ban has been very real for 11 months, I am pretty sure that Apple has a workaround ready to go.
- In the first instance, this will involve a software update that will change the methodology of blood oxygen monitoring such that Masimo’s patents are no longer infringed.
- However, Masimo claims that to workaround its patents will require a hardware change which complicates the situation significantly as existing devices cannot be rectified.
- I think that the worst-case scenario is an update that temporarily disables the feature in USA devices.
- It is unclear whether the infringement includes hardware, but I am pretty sure that Apple will have a go with software before it makes a hardware change.
Apple is pursuing a range of “legal and technical options” which means that in addition to the workaround, it will also be seeking to have the ban stayed pending its appeal of the infringement ruling.
These are not unusual as an import ban can be very damaging to a company even if it wins on appeal.
Hence, I suspect that if Apple fails to win a stay, and the software update does not work, it will probably settle with Masimo and pay it a per-unit royalty.
Consequently, while the Series 9 and Ultra 2 may not be available during the holiday period when business kicks off again in January, Apple is likely to have found a solution to this problem.
The share price is barely registering the impact of a ban of the Apple Watch into The USA reflecting my view that Apple will find a solution before there is a meaningful halt in device shipments.
That being said at 29.9x 2024 PER, the stock is already pricing in a rosy recovery following the downturn triggered by high interest rates and inflation.
There are plenty of other places to look in the technology sector especially if one places importance on AI as a differentiator in the future.

Qualcomm vs. Apple – Black Magic pt. II

RICHARD WINDSOR — Fri, 01 Dec 2023 03:23:36 +0000

Apple fails to graduate from Hogwarts.

It looks like Apple is giving up on its attempts to design an in-house 5G modem which is a big benefit to Qualcomm not for modem sales but because Apple will not be able to start another fight over royalty rates when its current contract expires in 2026.
If Apple is unable to reopen hostilities with Qualcomm, then this increases the chance that no one else will either, putting Qualcomm’s patent business in the most secure position that it has been for many years.
Rumours from Apple’s supply chain (see here) indicate that Apple is in the process of winding down its cellular modem activity which if true, means that it will have to source modems externally indefinitely.
Given that Apple operates almost exclusively in the high-end, it will require only the best modems which puts Qualcomm in pole position given its long-term technology leadership in modems.
MediaTek is also a contender to supply Apple but given the majority of its business is not in the high-end, the fit is not as good.
The problem is relatively simple in that the cellular radios are very difficult to make and take years of practice to perfect which Qualcomm has pretty much been doing since 1985 when it was founded as Quality Communications.
The general assumption on the street is that because Apple is arguably the best processor maker in the world, it should have no trouble replicating the chips that control cellular communication.
Anyone who has been around for a while understands that when it comes to cellular radios simply being good at designing chips is not nearly enough.
Dealing with analogue radio systems, moving standards and a dizzying array of different radio frequencies is fiendishly difficult where often experience is more important than raw engineering talent.
This is what Apple failed to understand when it acquired the second-rate radio modem business from Intel in 2019 which originally came from Infineon and had been floundering for years.
Solving these kinds of problems is often referred to as a black art and when it comes to this school of wizardry, Apple has failed to graduate and seems to be giving up.
At first glance, this is a positive for Qualcomm as it will likely now be supplying modems to Apple indefinitely, but it is the strategic position that this affords Qualcomm where the real benefit lies.
In 2018 Apple made the decision (wrong in my opinion) that it had to have 5G in its 2020 iPhone 12 which meant that its US products had to support millimetre wave frequencies and Qualcomm was the only supplier that could deliver it.
At the time, Qualcomm was embroiled in the biggest patent dispute since its legendary fight with Nokia in 2007 with Apple which Apple thought it could win before it needed to source the 5G modems.
Things didn’t work out this way and it was Apple’s need to buy 5G modems from Qualcomm for the iPhone 12 that caused it to give up on its fight (see here) and sign a 6-year patent (extendable for 2 years) license on the same terms as before.
The length of this contract is unusual in that most patent licenses are for 10 years or more.
In this case, I have long believed that 6 years was the amount of time that Apple thought it would take for it to design a modem as good as Qualcomm’s putting it in a position to resume hostilities over patents as soon as the license expired.
However, Apple has gotten almost nowhere with its modem and giving up means that if it starts fighting over patents again, Qualcomm will stop supplying it with chips which is a risk that Apple simply cannot take.
If Apple is getting out of the modem business, then there is no point in time where it will be in a position to resume the fight over royalties without putting its iPhone business at risk.
This is why I believe that by far the biggest benefit to Qualcomm from Apple’s exit (if proven) is the added security that this provides to its licensing business.
This will also make it harder for others to have a go at breaking the Qualcomm licensing model which has been a regular feature of the mobile phone industry for over 20 years.
In my opinion, this puts Qualcomm Technology Licensing in the most secure position in terms of challenges to its business model than it has been for many years.
Greater security and reliability mean a higher multiple as the stock market values consistency and reliability above pretty much everything else.
As a substantial contributor to Qualcomm’s profit and cash flow, this means an upgrade to the multiple and further upside on the shares.
I have a position in Qualcomm and am very happy to sit tight.

Qualcomm vs Apple – Black Magic

RICHARD WINDSOR — Fri, 17 Nov 2023 05:35:53 +0000

Apple won’t be able to pick a fight in 2026.

As I have long suspected, Apple is really struggling to make a high-quality 5G radio chip meaning that Qualcomm could end up supplying Apple with radios well beyond 2026 when the current contract expires.
This will also make the patent renegotiation with Apple much easier as the current agreement to pay Qualcomm royalties on cellular devices also expires in 2026.
Bloomberg (see here) has spoken to a number of “people with knowledge of the project” (as I have) and learned that Apple is further behind than even I had been led to believe.
The general assumption on the street is that because Apple is arguably the best processor maker in the world, it should have no trouble replicating the chips that control cellular communication.
Anyone who has been around for a while (like me) understands that when it comes to cellular radios simply being good at designing chips is not nearly enough.
There are three main problems:
- First, Analogue: Data travels through the air as oscillating radio waves and the information is not digital but analogue.
- This is like the difference between music that is recorded on a vinyl disc (analogue) and music on a compact disc (digital).
- The analogue data is received by the antenna and then converted into digital information which the device can then use.
- To make a working radio system, one has to have a very good ability to execute in both the analogue and the digital domains.
- The problem with analogue is that understanding the laws of physics is not enough and in many cases, experience in analogue is just as important as engineering knowledge.
- This is why analogue radio is often referred to as a black art explaining why so many companies have completely failed to get to grips with this part of the radio.
- This is where Apple has come unstuck as the business that it bought from Intel which originally came from Infineon had completely failed to make a working 5G radio and had also had great difficulty with 4G.
- Very little progress appears to have been made meaning that Apple remains years away from being able to make a 5G radio that can match the performance of the one it buys from Qualcomm.
- Second, Radio Frequencies: The amount of radio spectrum available for cellular communications is quite limited.
- If the frequency is too long, you can’t get enough data into the radio wave and if it is too short, the radio wave won’t travel far enough to be able to create an economically viable network.
- This range is roughly 450Mhz – 4Ghz but even at 4Ghz, things are already getting a bit dicey on the distance the radio wave can travel.
- One of the appeals of 5G is that it is supposed to be able to deal with frequencies above 6Ghz (mmWave) which adds another layer of difficulty in terms of making the radio work correctly.
- However, the real problem is that the number of radio bands that a radio chip that works anywhere has to support is growing all of the time.
- It is fiendishly difficult to be able to simultaneously support all of these bands at the same time and do so in a small and power-efficient package.
- This and mmWave are two areas where Qualcomm really excels and Apple is years away from being able to catch up.
- Third, moving target: Radio technologies are constantly evolving and as a major contributor to the standards, Qualcomm has advance knowledge of what is likely to be included in the next releases of the standard.
- This is one factor that explains how Qualcomm has been able to come up with working chipsets for a new radio standard long before anyone else can.
- It has repeated this feat for every cellular radio standard since CDMA in the 1990s with the exception of GSM to which it did not contribute.
- This means that Apple has to both catch up with where the technology is today and ensure that it has high-quality working radios available for its devices along the same timeline as Qualcomm.
- Apple has to both run very fast and hit a moving target at the same time.
The net result is that I don’t think Apple will be close to being able to replace Qualcomm by 2026 meaning that it will be forced to extend its contract again.
These sorts of patent licenses typically last for 10 years but when Apple signed with Qualcomm in 2019 (see here), it only signed up for 6 years.
It was its requirement for a working 5G modem that forced it to back down in its fight with Qualcomm over patent royalties and sign up for a new license.
I have long suspected that Apple signed up for 6 years because this is how long it thought it would take for it to create a working 5G modem so that it could ditch Qualcomm and resume hostilities over its royalty rate.
This plan looks like it is coming unstuck because I continue to think that Apple will not have an internal working 5G modem by April 2026 meaning that it will be in the same position as it was in 2019.
This is excellent news for Qualcomm as its internal assumptions for how much share it will have at Apple (20% in FY 2026) are clearly too low and could easily still be sitting at 100% when that time comes.
Most importantly of all when it comes to patent license negotiation time, Apple will not be in a position to pick a fight and so it will have to grit its teeth and at least extend the contract for 2 years until 2028.
In 2028, everyone may be talking about 6G and then the whole cycle will repeat itself yet again even in the unlikely event that Apple cracks 5G by then.
Hence, I think Qualcomm is in a pretty safe position for at least the next 5 years making the shares look increasingly attractive as the valuation remains pretty low and the risks are declining.
I have a position in Qualcomm and remain quite happy to sit on it.

Apple & Qualcomm – Gritted teeth

RICHARD WINDSOR — Tue, 12 Sep 2023 05:38:57 +0000

Apple grudgingly extends its contract.

It turns out that cellular radio is difficult (5G particularly) as Apple has been unable to create a high-quality 5G radio of its own which has forced it to extend its contract to buy 5G modems from Qualcomm until at least 2026.
Apple’s extension means that it will purchase modems from Qualcomm in 2024, 2025 and 2026 by which time Qualcomm is assuming that Apple will have its own modem and will be able to reduce Qualcomm’s share at Apple to 20%.
This is a big disappointment for Apple as it has been working to create its own 5G modem since 2019 when it purchased most of Intel’s modem business but, clearly, it has not been successful.
Apple and Qualcomm are not the best of friends and Apple is still smarting from the crushing defeat inflicted upon it by Qualcomm in 2019 when Apple’s urgent need for working 5G modems forced it to settle its IP dispute with Qualcomm over royalty rates (see here).
This is why the new deal that it signed with Qualcomm in 2019 was only 6 years in duration as opposed to 10 years or more which is more normal practice in the industry.
Since then, Apple has been trying to build a working 5G modem that it could then use internally, design out Qualcomm and then presumably, start the whole IP battle all over again.
The problem is that cellular radio is difficult and in every generation that has followed 2G, Qualcomm has been first to market with high-quality working modems and it has taken everyone else at least a couple of years to catch up.
A large part of this is because cellular radio involves the analogue domain, where getting products right is often more about one’s experience of building radios as opposed to one’s knowledge of physics.
This is why analogue radio is often referred to as a black art and why so many companies who don’t have the requisite experience struggle to produce good working products.
Furthermore, as the industry goes from one generation to the next, less and less radio spectrum is available which is why the 5G standard is flexible in the size of frequency blocks it can use and can also support frequencies above 28Ghz.
This means that the radio environment has become more and more complex with every generation greatly complicating other components such as antennas, digital to analogue converters and power amplifiers.
Qualcomm has been building all of these things for over 30 years and its abilities are evidenced by the fact that it has routinely been first to market with high-quality working products of the latest generation.
Apple is a relative newcomer to this space and bought what I consider to be a second-rate asset from Intel in order to give itself a leg up.
Unfortunately, this has not gone nearly as well as hoped and Apple is clearly still without a reliable 5G modem which has forced it to extend its contract with Qualcomm until at least 2026.
This means that Apple will be unable to integrate the modem into the applications processor meaning that its devices will be slightly larger and consume slightly more power than they otherwise would.
Fortunately, Apple’s applications processors are so good that they make up for this deficit meaning that battery life and size have not been a problem for the iPhone in any way.
The net result is that Qualcomm’s short to medium-term revenues and profits are going to be higher than previously expected but the market is still not willing to give Qualcomm much credit for this.
This news triggered a 3.9% rally in the shares which is pretty meagre given that Apple will now be a customer until 2026 and possibly much longer.
The other issue is that cellular modems are constantly evolving and before long everyone will be talking about 6G meaning that to get rid of Qualcomm, Apple has to hit a moving target.
I think that this will be very difficult, and I suspect that there is a pretty good chance that Apple will be forced to continue buying modems from Qualcomm after 2026.
This also delays the inevitable resumption of hostilities between Apple and Qualcomm as Apple can’t risk losing access to Qualcomm’s 5G modem as a result of refusing to pay IP royalties as it did in 2017.
When this happens it will cause great volatility in the shares, but I think that this is now very unlikely to occur before 2027 which is when the 2-year extension to its 6-year patent license (signed in 2019) will expire.
Apple will almost certainly exercise the 2-year option in 2025 as it will still be needing to buy 5G modems from Qualcomm in 2025.
Hence, there is now a good 3-year window with little uncertainty from Apple although there is still the lawsuit with Arm to contend with.
Consequently, once the current inventory correction in smartphone chips has stabilised, Qualcomm will have a good base from which to build and the outlook for it in sectors outside of smartphones is good.
Stable smartphones and expansion in other device categories represents a credible growth story that is currently being ignored.
The shares are now trading on an 18% discount to value peers such as MediaTek and TSMC and a 75% discount to high-flyers like Nvidia.
This is unusually good value and so I have taken a half position in the shares with the expectation of increasing should the shares weaken further.

Arm vs. Qualcomm – Trouble in paradise

RICHARD WINDSOR — Thu, 01 Sep 2022 05:36:35 +0000

RISC-V is the only beneficiary of civil war.

Arm has launched a strange-looking lawsuit against Qualcomm that looks like an attempt to earn higher royalties from one of its biggest customers or a move by Apple to delay and hinder the development of a competing product for its M series of processors.
Arm has filed a complaint against Qualcomm that it says is to “protect Arm, our partners and the unparalleled ecosystem we have built” but to me looks like a straightforward contract dispute.
Arm’s issue is with Qualcomm’s subsidiary Nuvia whose license to use Arm IP expired in March 2022 and not been renewed.
However, Nuvia continues to develop Arm-based processors in what looks like a breach of contract.
Nuvia is now part of Qualcomm which clearly believes that the license that it already has to develop Arm-based processors also covers Nuvia.
At a high level, this complaint makes no sense because Arm gets paid royalties when chips ship and when Nuvia designs ship in silicon, they will be Qualcomm chips and Qualcomm will pay the royalty under the licenses it already has.
However, Nuvia is a relatively new Arm customer whereas Qualcomm is one of its oldest and largest licensees and so it is possible that the terms that Qualcomm has are much better than those that Nuvia was able to negotiate.
Hence, the royalties that Arm will earn may well be less under a Qualcomm license than they would have been under a Nuvia license which could be why Arm is taking action.
Another possibility, albeit remote, is that Arm is being egged on by Apple.
Apple arguably has the best processors available in the market today with its M-series and will be keen to ensure that competing products are slow to come to market.
Furthermore, the fact that 22 of Apple’s rivals were willing to voice support for Qualcomm’s acquisition of Nuvia is an indication of just how important it could be long term (see here)
Apple has already tried to slow the progress of Nuvia by filing a lawsuit against one of its founders (see here) and I am pretty sure that it will be quite happy to see Arm have a crack at the whip.
This lawsuit marks an unusual note of discord within the Arm ecosystem and the only real winner here is RISC-V.
The attempted acquisition of Arm by Nvidia lit a fire underneath the tail of a moribund RISC-V which is now attracting investment and gobbling up share at the low end of the market.
RISC-V remains a very small competitor to Arm that has yet to have any significant impact on its revenues, but the threat is growing and annoying Qualcomm in this way is likely to push it to allocate more resources to RISC-V.
This is the last thing that a company about to float on the public markets needs to have dominating the discussion around its outlook.
It would seem that a relatively simple solution to this would be for Qualcomm to dissolve the Nuvia legal entity and fully absorb it into Qualcomm as this would greatly weaken the argument that Qualcomm’s Arm license does not apply to Nuvia designs.
At the end of the day, I don’t think that this is going to delay Nuvia in any way and I suspect that an agreement of some description will be reached long before there is any trial.
Consequently, the only real beneficiary here is RISC-V as I don’t think this disagreement will materially alter the outlook for either Arm or Qualcomm.
Qualcomm, MediaTek and TSMC remain my preferred plays in semiconductors given their relatively low valuations but good growth trajectories.

Huawei – Nowhere to run pt. XXVIII

RICHARD WINDSOR — Wed, 17 Mar 2021 06:21:30 +0000

Patents are no panacea.

Huawei may be down, but it is far from out as it is now putting its efforts into replacing the revenues it is losing from US sanctions in other ways.
I have to hand it Huawei as its management are fighters who executed extremely well to delay the impact of the sanctions and now are turning their battle-hardened experience in other directions.
These include providing network equipment to fish farms and mines but the one I think it is really pinning some recovery hopes on is patents.
Unfortunately, I think that this a triumph of form over substance.
Huawei has already filed two patent infringement suits against Verizon (see here) over its alleged use of 12 patents in the areas of video communication and computer networking.
It now intends to take this one stage further and assert its 5G patents against handset makers charging around 0.5% of the wholesale price which will be capped at $2.50 a unit.
Huawei has declared that it has 3,007 5G patent families and has a total of 100,000 patents which is higher than anyone else, but this does not necessarily mean that any of this paper has value.
To accompany this push Huawei has also published a white paper extolling its R&D prowess and when it comes to the implementation of 5G in base stations it has a point.
This is not because it has more 5G patents than anyone else but because those who have looked at its 5G infrastructure solution have found it to be the best, better even than one-time leader Ericsson.
This is why Nokia is now spending all the money it is earning and all the money it will save from its new cost reduction program on catching up because there is a big opportunity to replace Huawei outside of China.
However, when it comes to its ability to extract royalties from handset makers for its 5G patents, there is another story to be told.
This is because I have long believed that merely counting the number of patents held is a deeply flawed method of assessing the value contribution to a technology.
The issue is best described by what I have long called “the seats and drinks trolley problem”.
This issue also came to light in 2007 and 2008 when Nokia and Qualcomm were fighting tooth and nail over 3G IP and patent counting was used to de-emphasise Qualcomm’s contribution to the standard.
The best way to understand this flaw is to use the analogy of an aeroplane.
In order for a passenger aeroplane to fulfil its function (transporting people), it requires engines, ailerons and wings but also seats and drinks trolleys.
Hence the IP for all of these items will be deemed essential to the standard.
However, the IP for the engines, ailerons and wings is much more essential than the seats and the drinks trolleys because the aircraft is still able to fly without seats and drinks trolleys.
It is this distinction that I think that patent counting misses and why I suspect that the Asian companies (Huawei in particular) are massively over-represented in the SEP count.
This is for two reasons:
- First, similarities to 4G: 5G is actually very similar in many ways to 4G and was only created as a separate standard in order to reduce latency and optimise transmission at millimetre wave frequencies.
- For example, 5G uses the same OFDM coding system that 4G does meaning that the overlap is far greater with 4G than 4G had with 3G and so on.
- Hence, a lot of the core IP that allows the 5G standard to “fly” is very similar to 4G and may even be replicated.
- In the 4G patent count, Huawei and Samsung, in particular, have a much smaller share raising the question of how they came from so far behind in a similar standard to lead 5G.
- One answer could be that they have developed IP that looks more like seats and drinks trolleys rather than engines and consequently, their contribution is less valuable than it appears.
- Second, Apple: in the most recent patent war, Qualcomm and Apple were engaged in by far the most bitter dispute until Apple suddenly caved in and agreed to pay Qualcomm’s fees and use its 5G chips (see here).
- I am pretty certain that Apple would have sourced its 5G chips from anywhere else if it would have allowed it to have a working 5G solution for the millimetre wave spectrum that is being used by a number of US carriers.
- This would have allowed it to carry on fighting Qualcomm and still have a working 5G product for the USA.
- The fact that it felt it had to use Qualcomm is a strong indication that when it comes to working product, Qualcomm (and I suspect Nokia and Ericsson) has a much stronger position in 5G than patent counting gives them credit for.
Hence, I am far from convinced that patent counting is an accurate reflection of reality.
Consequently, I think Huawei will have great difficulty in earning any meaningful revenues from its patents from handset makers.
The one exception is Apple with which signed a patent license in 2015.
However, I think that was more about Apple being keen to maintain a good relationship with the Chinese government (where it sells a high number of iPhones) as opposed to recognising the value of Huawei’s patent portfolio.
There is some history of the Chinese government intervening on Huawei’s behalf (Salmon fishing in the Faroe Islands) and Apple presents a soft target with its shipments to China.
Furthermore, Apple has a history of fighting tooth and nail when it thinks that the price being charged for patents is too high and so I suspect it is paying Huawei a token amount.
The net result is that Huawei is unlikely to be able to replace lost profits from smartphones and infrastructure with patent revenues and that consequently, the outlook remains as bleak as ever.
I think that in infrastructure the main beneficiary is Nokia (in which I hold a position) and Xiaomi, Oppo, Vivo and Samsung in smartphones all of whom still have unfettered access to smartphone components.
Tough times are about to get much tougher.

Huawei – Nowhere to run pt XVII.

RICHARD WINDSOR — Tue, 09 Jun 2020 08:22:10 +0000

Patent counting is not an indication of reality.

The notion that the number of patents that one holds is a refection of one’s contribution to a technology is deeply flawed and in the case of Huawei, most of the evidence points to the contrary.
Hence, I don’t think that having a large patent count is going to help alleviate the serious problems that Huawei currently faces.
A 2019 GreyB study assessed the 5G patent pool (see here) and found that Huawei holds the most 5G-related patents (13,474), ahead of Qualcomm (12,719), Samsung (9,299), Ericsson (8,116), LG (7,694) and Nokia (5,554).
The researchers then assessed which patents they deemed to be essential and concluded that of the 12,002 patent families that were declared to be essential to the 5G standard, only 1,658 met their criteria.
Of these 1,658, Huawei holds 19%, Samsung 15%, LG 14%, Nokia 12%, Qualcomm 12% and Ericsson 9%.
This is being taken as an indication that Huawei, Samsung and LG control the standard and that the older players who controlled the IP for generations 1 to 4 are dropping away in terms of their relevance.
The key here is how the researchers determined what is essential and what is not.
GreyB’s stated methodology for this is as follows:
- “We determined essentiality for each patent family as a Core SEP or not by checking any specifications declared to be relevant by the patent holder to the SEP and compared the specific sections of these to compare overlap of the patent claims with those sections. If partial or no overlap was found, we then broadened our comparison to the wider group of all other specifications to repeat this process”
My best estimate of what this means is that GreyB compared the claims against the 5G standard and where there was overlap between the claim and the standard, this was deemed to be essential.
The problem with this analysis is what I have long called “the seats and drinks trolley problem”.
This issue also came to light in 2007 and 2008 when Nokia and Qualcomm were fighting tooth and nail over 3G IP and patent counting was used to de-emphasise Qualcomm’s contribution to the standard.
Patent counting is fundamentally flawed and the best way to understand this flaw is to use the analogy of an aeroplane.
In order for a passenger aeroplane to fulfil its function (transporting people) it requires engines, ailerons and wings but also seats and drinks trolleys.
Hence the IP for all of these items will be deemed essential to the standard.
However, the IP for the engines, ailerons and wings is much more essential than the seats and the drinks trolleys because the aircraft is still able to fly without seats and drinks trolleys.
It is this distinction that I think that this analysis has missed and why I suspect that the Asian companies are over-represented in the SEP count.
This is for two reasons:
- First, similarities to 4G: 5G is actually very similar in many ways to 4G and was only created as a separate standard in order to reduce latency and optimise transmission at millimetre wave frequencies.
- For example, 5G uses the same OFDM coding system that 4G does meaning that the overlap is far greater with 4G than 4G had with 3G and so on.
- Hence, a lot of the core IP that allows the 5G standard to “fly” is very similar to 4G and may even be replicated.
- In the 4G patent count, Huawei and Samsung, in particular, have a much smaller share raising the question of how they came from so far behind in a similar standard to lead 5G.
- One answer could be that they have developed IP that looks more like seats and drinks trolleys rather than engines and consequently, their contribution is less valuable than it appears.
- Second, Apple: in the most recent patent war, Qualcomm and Apple were engaged in by far the most bitter dispute until Apple suddenly caved in and agreed to pay Qualcomm’s fees and use its 5G chips (see here).
- I am pretty certain that Apple would have sourced its 5G chips from anywhere else if it would have allowed it to have a working 5G solution for the millimetre wave spectrum that is being used by a number of US carriers.
- This would have allowed it to carry on fighting Qualcomm and still have a working 5G product for the USA.
- The fact that it felt it had to use Qualcomm is a strong indication that when it comes to working product, Qualcomm (and I suspect Nokia and Ericsson) has a much stronger position in 5G than this study gives them credit for.
Hence, I am far from convinced that this study is an accurate reflection of reality.
Non-self citations (number of times a patent is cited by others) is an alternate method to measure a patent’s value but I have not seen a study of this done for 5G and this method is also beset with issues albeit less than straight patent counting.
Hence, I don’t think patent numbers will help Huawei much when it comes to its struggles with US (and increasingly the West) as it will have to prove that its IP really is essential which is easier said than done.
2020 and 2021 look like they will be extremely difficult years for Huawei as revenues both at home and overseas are at great risk.
However, if there is a reconciliation between the USA and China at a high level resulting in the promised (but increasingly unlikely) phase II trade deal then much of this would go away.
This is an increasingly unlikely outcome meaning that Huawei may quickly become a Chinese company selling Chinese products for Chinese users in China only.
Nokia and Ericsson are in the front line to benefit.

Huawei – Olive or thorns?

RICHARD WINDSOR — Fri, 13 Sep 2019 06:48:59 +0000

Huawei extends an olive or thorn branch?

No one is sure what to make of Huawei’s offer to license its 5G technology to a Western (read American) player and I think it likely that this innovative attempt to solve its problems will not go anywhere.
In an interview with the Economist (see here), Ren Zhengfei, founder and CEO of Huawei has offered a one-time license to all of Huawei’s 5G technology.
Mr. Ren envisages that this would involve a one-time payment and offer perpetual access to Huawei’s 5G patents, technical blueprints, production know-how and most importantly, source code.
The licensee would have the ability to modify the source code in any way it sees fit meaning that any backdoors or pieces of code that the licensee doesn’t like can be removed and replaced.
Effectively this would enable the creation of a Western version of Huawei’s basestation business that could go and compete against Nokia, Ericsson and even Huawei itself.
Huawei is clearly very confident of its scale advantage and holding onto that because no company in its right mind wants to enable competition that will put pressure on its prices and drive margins down.
Presumably, this competitor would be North American which with the demise of Nortel, Lucent and Qualcomm’s infrastructure business has no base station vendor.
Hence, it would have access to the lucrative North American, Australian and potentially EU markets where Huawei is currently not able to compete.
If, and that’s a big if, this is accepted it could go along way towards reducing the suspicion with which Huawei is currently viewed, resulting in a resumption of supply of the Google ecosystem to its handsets (see here) as well as the ability to compete in markets where it is currently barred.
I suspect that is the main reason behind this move is time as waiting for the USA and China to conclude a trade deal could involve a very long wait indeed.
Huawei is the entity that is taking the most damage from the current stand-off and while the USA can hang around for the best deal, Huawei clearly cannot and needs to do what it can independently.
This deal also says a few things about Huawei’s 5G position:
- First, standard-essential intellectual property (SEP). This offer is a tacit admission that despite claiming to have the strongest and most important patent position for 5G, none of it is essential to the 5G standard.
- If Huawei’s IP was standard-essential, then everyone would have already licensed it as, by definition, one would not be able to make a handset or a base station without it.
- This move strongly implies that Huawei’s IP is all about how the standard is implemented, which may be no less valuable, but it is far more difficult to prove its value.
- It also implies that Huawei’s strength remains in taking technology created by others and making it smaller and cheaper.
- This runs contrary to the image that it has been trying to create over the last few years.
- Second, despite the bravado, Huawei is in pain: Huawei put a pretty brave face on its H1 19 results as increases in market share in China offset a steep drop off in the rest of the world but the seriousness of the situation will become obvious in H2 2019.
- Falling revenues overseas is almost certain to push Huawei into heavy loss-making territory when it comes to smartphones, meaning that it will have to start making cuts.
- In order to avoid this, it needs to recover its market share position before irreversible damage is done which means a rapid solution to its problem of not being able to source software from Google.
The hawkish end of the spectrum will say that even having source code will not help much because there is so many lines of code that looking for backdoors will be like looking for a needle in a haystack.
Furthermore, I doubt that anyone will pay the $10s of billions that Huawei seems to be expecting.
It says that it has invested $2bn over a number of years in developing this IP but how this is suddenly worth 5x what Huawei paid for it is a bit of mystery especially as none of it is essential to the 5G standard.
With the sacking of John Bolton, the White House may now take a less hawkish view of China and Huawei but even then, I think Huawei may have difficulty in getting anyone to take it up on its offer.
This is because I have long believed that Huawei is the focus of sanctions because the USA wants to use it as a bargaining chip in its much wider trade dispute with China.
Hence, anyone who undermines that position may find themselves being tarred with the same brush as Huawei and suffering similar consequences.
This is an innovative idea from Huawei but I don’t think it is going to go anywhere.