Crazy Story: Qualcomm Had to Sell Half Their Company to Their First Customer!

1. 0:00 – 0:10

   Qualcomm’s early CDMA patent timeline—and the built-in expiration clock

   1. BGBen Gilbert0:00

      So Qualcomm founded 1985, patent issued 1986, or applied for in 1986.

   2. DRDavid Rosenthal0:07

      Which is worth remembering, so it'll expire in 2006.

2. 0:10 – 1:10

   A surprising detour: building a satellite network for truck fleet communications

   1. BGBen Gilbert0:10

      Uh, that's right. That's right. Looking ahead, foreshadowing. Uh, Qualcomm doesn't enter the wireless industry until 1989. What happens in the interim? [chuckles] This is, this is the next Walmart. Oh, it's so good. You literally just can't make this stuff up. Uh, so they get approached to bid on another contract, the fledgling Qualcomm does, from a company called OmniNET, [lips smack] which has this idea that they think the Qualcomm folks are gonna be perfect to implement. They want to make a mobile satellite network specifically to connect commercial semi-trucks on the roads in America, and, uh, network them up to the distribution centers for retailers [chuckles] and other, uh, people who, uh... companies who ship a lot of things in the US. This is right in their wheelhouse. Qualcomm and, and Irwin are like: "Great, we're gonna bid on this contract."

3. 1:10 – 1:28

   Walmart becomes an early marquee customer—and a tech advantage amplifier

   1. BGBen Gilbert1:10

      They win it, they start working with OmniNET, [lips smack] and they make it work, and one of the very first customers is, of course, Walmart-

   2. DRDavid Rosenthal1:19

      Great idea

   3. BGBen Gilbert1:20

      ... which implements it on their own proprietary fleet of trucks-

   4. DRDavid Rosenthal1:22

      Ah.

   5. BGBen Gilbert1:23

      - building further their technical advantage over just about every other retailer in America.

4. 1:28 – 1:49

   Why the original satellite plan fizzled—and OmniNET becomes the focus

   1. DRDavid Rosenthal1:28

      And at this point, they've walked away from the satellite contract, right? They, they sort of like-

   2. BGBen Gilbert1:32

      Yeah, they wa-- The, the, the Hughes satellite thing, that, that actually just never happened.

   3. DRDavid Rosenthal1:36

      So they developed this technology, they patent it. They were like: "Oh, but there's no money here 'cause the g- the contract got, uh-

   4. BGBen Gilbert1:41

      Yeah, the FCC was like: "Yeah, satellite, Jurassic Park phone's not gonna be a thing."

   5. DRDavid Rosenthal1:45

      Right. So instead, they're focused on this OmniNET-

   6. BGBen Gilbert1:48

      So they focus-

   7. DRDavid Rosenthal1:49

      - deal

5. 1:49 – 2:34

   From Linkabit relationships to OmniTRACS: merging with OmniNET to ship a product

   1. BGBen Gilbert1:49

      ... on this, and they also have, like, a lot of the business, you know, relationships already from the previous iteration of what they were doing at Linkabit, including with Walmart and many of the other large companies and retailers. Um, uh, I believe it's Schneider, uh, Trucking-

   2. DRDavid Rosenthal2:05

      Yep

   3. BGBen Gilbert2:05

      ... um, becomes one of the-- actually, the first customer, I think, for that. Um, so, uh, they work on building that. It becomes pretty clear, like, this is gonna be the interim main product. Uh, Qualcomm and OmniNET merge in 1988. They raise $3.5 million in funding as part of that. They bring the product to market at the end of 1988 as OmniTRACS. People might have heard of it. [chuckles] Uh, it was part of Qualcomm for a long time before I believe it ended up getting spun out to private equity.

   4. DRDavid Rosenthal2:34

      Mm.

6. 2:34 – 2:56

   Instant scale: OmniTRACS hits $32M revenue in year one (but with heavy COGS)

   1. BGBen Gilbert2:34

      Um, and in 1989, in the first year of business for OmniTRACS, they do $32 million in revenue. [chuckles] In 1989. [chuckles]

   2. DRDavid Rosenthal2:43

      Which is w- something like- it's like inflation-adjusted $100 million.

   3. BGBen Gilbert2:47

      It's a lot of money, and there's a lot of demand for this product.

   4. DRDavid Rosenthal2:49

      In the first year of the product launch.

   5. BGBen Gilbert2:51

      Year one. Um-

   6. DRDavid Rosenthal2:52

      [lips smack] Now, there's a lot of cogs, like, this isn't SaaS revenue-

   7. BGBen Gilbert2:55

      No. Yeah, yeah

   8. DRDavid Rosenthal2:55

      ... we're talking about.

7. 2:56 – 4:06

   Crossing the enterprise chasm: from “technology” to full-stack “solutions”

   1. BGBen Gilbert2:56

      Um, and w- there's particularly a lot of cogs because one of the things they learn from doing this, and one of the reasons the companies merge, they first, kind of like the Linkabit days, you know, they... Remember, Walmart was their customer for the Linkabit satellite, you know, thing. Walmart is very happy to integrate and implement technology themselves. Most other customers are not. So they go around and they're like, you know, pitching this to trucking companies and retailers and the like, and, and most of them are being like: "Well, this is, like, cool, but, um, we're not gonna operate our own dispatch centers and messaging, like-

   2. DRDavid Rosenthal3:28

      We try to have as small an IT department as possible.

   3. BGBen Gilbert3:30

      Yeah, we use this technology, so-

   4. DRDavid Rosenthal3:31

      Why on earth are you asking us to do all this work and just handing us this pile of technology?

   5. BGBen Gilbert3:35

      Yeah. So Irwin, uh, is like: "Well, what if, um, what if we just operate it for you, and we provide a whole full-stack solution? We don't sell you a technology, we sell you a solution." [chuckles]

   6. DRDavid Rosenthal3:48

      Which is like every enterprise company that you ever-

   7. BGBen Gilbert3:50

      Done.

   8. DRDavid Rosenthal3:50

      You know a company has become enterprise-y when they cross the chasm, and their website no longer has, like, Products, Pricing, About, and it changes to Solutions.

   9. BGBen Gilbert4:00

      Yeah, Solutions. [chuckles]

   10. DRDavid Rosenthal4:01

       [chuckles]

   11. BGBen Gilbert4:01

       They, they, they, uh, make the, uh, business discovery of solutions.

8. 4:06 – 5:17

   The crazy financing: Qualcomm sells half the company by merging with its customer

   1. DRDavid Rosenthal4:06

      We all should say, like, this is a tremendously dilutive financing event. Th- this is Qualcomm saying: We need money so badly to fund the development of OmniTRACS for this, this customer, OmniNET, that the most attractive option for us is to sell half the equity in our company. So everyone gets diluted 50% by merging with the customer themselves in order to get just a few million dollars to continue funding this effort. It's a pretty different time than today, where you go raise a seed round, and you sell 5, 10, 20% of your business for two-

   2. BGBen Gilbert4:43

      I don't know too many seed rounds that are happening for a 5% dilution these days, but, [chuckles] uh-

   3. DRDavid Rosenthal4:47

      I bet you-

   4. BGBen Gilbert4:47

      But they were. [chuckles]

   5. DRDavid Rosenthal4:48

      They were. And so it's a s- it's a very-- it's crazy to think the position that they were in, where everyone was looking at Irwin, and he was like: "Hey, I think this is literally the best path forward in order for us to get the few million dollars we need to get-

   6. BGBen Gilbert5:00

      Yeah, and I think some people were pretty bitter about this.

   7. DRDavid Rosenthal5:02

      I... Totally. And you can imagine, too, it's not like an idea. Like, they had done a bunch of work already. This was going to happen. They were going to go to market. They were just a couple of years away from making $100 million in inflation-adjusted dollars, and yet they had to give up half the company.

9. 5:17 – 5:26

   A cash-flow engine that funds the real mission: returning to the CDMA ‘big idea’

   1. BGBen Gilbert5:17

      Yeah, they literally were a couple of years away from making actual 100 million because the business doubles every year for, like, five years from a $32 million base.

   2. DRDavid Rosenthal5:26

      Wow!

10. 5:26 – 7:21

    Why CDMA wasn’t obvious: real-time processing constraints and the Moore’s Law bet

    1. BGBen Gilbert5:26

       Like, freaking awesome. So now that this is in place, they're like: "All right, we have both a cash flow spigot that we can use, and now, like, a base of business that we can finance and, like, borrow against and raise equity against to pursue the real big idea in our original patent." And, uh, you know, here's, here's the other just, you know, brilliant thing. What happened originally was not a fact. There were other people who knew about code division multiple access. Um, you know, other, other folks could have been in a position to patent this and pursue it, but at the time, nobody believed it could actually work-

    2. DRDavid Rosenthal6:01

       Yeah

    3. BGBen Gilbert6:01

       ... because you needed such sophisticated processing power-

    4. DRDavid Rosenthal6:05

       Yes

    5. BGBen Gilbert6:05

       ... on both the endpoints, on the base stations and the endpoints, to actually make this work. Like, it sounded completely freaking crazy.

    6. DRDavid Rosenthal6:13

       It needs to happen in real time. I mean, people need to have conversations without a perceptible delay, and you are-... cutting a con- you're, you're first doing the a- uh, the analog-to-digi- digital encoding, where you're taking their voice, and you're actually turning it into a digital signal. You're cutting it up into a bunch of packets. You're encoding those packets with every user's unique code. You're sending it over the airwaves to your most local cell tower. That cell tower is relaying it across a variety of other cell towers to where the other person on the end of the conversation is having the call, and then the whole pipeline is happening in reverse-

    7. BGBen Gilbert6:46

       On the handset.

    8. DRDavid Rosenthal6:47

       On the handset.

    9. BGBen Gilbert6:47

       And so this is the thing, like maybe-

    10. DRDavid Rosenthal6:49

        In real time

    11. BGBen Gilbert6:49

        ... you could believe you could do this processing on the, on the base stations, on the infrastructure side. But, like, the idea that, like, in a car, like something powered by an internal combustion engine, like in a car or, or heaven forbid, not a car, like a mobile phone, like a Zach Morris phone, that, you know, somebody would hold in their hand, um, that you could do this on something like that was crazy in 1986. But the Qualcomm guys, they know about Moore's Law-

    12. DRDavid Rosenthal7:12

        Yeah

    13. BGBen Gilbert7:12

        ... which, like, most people didn't know about at that time, and they're like: "Yeah, I'm pretty sure you give it one or two more, you know, turns of the crank on Moore's Law here, and, like, I think we could maybe do this."

11. 7:21 – 8:09

    A repeatable innovation pattern: forecasting capability at the moment of shipping

    1. DRDavid Rosenthal7:21

       There are so many things that we've talked about in the last... I mean, on Acquired generally, but especially in the last year, where their success came from correctly forecasting-

    2. BGBen Gilbert7:30

       Moore's Law

    3. DRDavid Rosenthal7:30

       ... where Moore's Law would be at the time that they shipped their product.

    4. BGBen Gilbert7:33

       Yeah.

    5. DRDavid Rosenthal7:34

       So knowing that something was possible, A-

    6. BGBen Gilbert7:35

       At the time of shipping.

    7. DRDavid Rosenthal7:36

       Yes.

    8. BGBen Gilbert7:36

       Like, it's not possible today, but when we're gonna ship this, which is still gonna be several years in the future, it will be possible then.

    9. DRDavid Rosenthal7:43

       It's amazing.

    10. BGBen Gilbert7:43

        Like, so cool, and, like, the fact that it's just, like, there were so few people that knew that then, and like, ah, crazy.

    11. SPSpeaker7:50

        [singing] Who got the truth? Hmm. Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth? [upbeat music] Who got the truth now? Hmm.

Episode duration: 8:09