Qualcomm

David Rosenthal 0:00 I walked in, and the first thing I saw was the bottom of the big crane boom arm with the weights, and I was like: "Why are there Olympic weights here?" [laughing]

Ben Gilbert 0:08 [laughing]

David Rosenthal 0:08 And then I was like: "Oh, because we've got a professional boom arm camera. This is amazing."

Ben Gilbert 0:14 All right, let's do it.

Speaker 0:16 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

Ben Gilbert 0:32 Welcome to season eleven, episode six of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

David Rosenthal 0:47 And I'm David Rosenthal, and I am an angel investor based in San Francisco.

Ben Gilbert 0:51 And we are your hosts. There's an incredible property of the universe where electromagnetic signals can be broadcast and travel through space at the speed of light to be received at a different point in the universe. Now, a tiny fraction of these frequencies are detectable by humans as visible light. Some other frequencies can be dangerous, like X-rays or gamma rays, but there's a part of the spectrum that is not detectable to humans, and it's not harmful at modest doses, that can be used to transmit invisible messages all around us all the time, without any of us having any idea.

David Rosenthal 1:30 It's like magic.

Ben Gilbert 1:31 Yeah. [chuckles] These frequencies have been used for over a century to broadcast TV and radio shows, presidential messages, and important news updates. In the last fifty years, humans have gotten tremendously clever at purposing some parts of the RF spectrum to be used for cell phones. But the story of how we got from transmitting small messages on a single frequency to having billions of humans concurrently sending megabytes or gigabytes of data every minute, has been an incredible journey of invention and entrepreneurship. The company most responsible for the mind-bending system of how it all works today is Qualcomm. And today, we will dive into their entire history and strategy, unpacking their products, which, to the outside observer, is really best described as a layered series of magic tricks.

David Rosenthal 2:21 And spoiler alert for listeners, this is an incredible story. I had no idea before we dove into the research, like-

Ben Gilbert 2:28 Yeah, me neither.

David Rosenthal 2:28 This one is up there with, like, Nvidia, TSMC. There is so much stuff you can't make up in this story. It's incredible.

Ben Gilbert 2:34 Largest fabless chip company in the world.

David Rosenthal 2:37 Indeed.

Ben Gilbert 2:38 The other thing we should say, listeners, uh, this was super fun to do this episode live, in person, in Lisbon. Our huge thank you to the Solana Foundation for hosting us at Solana Breakpoint. Many longtime listeners will know Austin Federa from the Slack. He was kind enough to invite us, and, uh, and really fun to do it there, especially given Solana's tie to Qualcomm, with Anatoly having worked there for over ten years.

David Rosenthal 3:02 Indeed.

Ben Gilbert 3:03 Well, for our presenting sponsor this episode, we are back with Fundrise. CEO Ben Miller has more to share with us on how they came across the idea for their new growth tech investing arm, the Fundrise Innovation Fund.

David Rosenthal 3:15 I think people have loved, throughout the season, hearing the Fundrise story itself and how you guys raised a hundred and fifty-five million dollars from the retail investing public without actually going public yourself. Can you remind everyone how you did that, A, and then, B, how you're now opening this up to every private company?

Speaker 3:37 When we started Fundrise in 2012, like, the mission was to give individual investors direct access to real estate because we saw when money's intermediated, problems happen. Intermediaries don't have the same interests as the owners. And so we scaled that business of democratizing real estate investing, having sort of a direct-to-consumer model. And then when we went to raise, we said: "Well, why don't we walk our own talk? Why, why don't we raise money directly from the individual investors in the same way we do for real estate?" And that was 2017. It was extremely uncertain, like, no one's ever done it before, and we didn't know if it was gonna work. And so we launched it. We think we raised seventeen million dollars in the first, like, twenty-four hours, it was, like, very successful. And we said: "Okay, aha, this is the future. [chuckles] This is the way to do it." And we scaled up, raised a hundred and fifty-five million dollars from thirty-five thousand investors for Fundrise itself, for the tech company, not just for the real estate. So we said: "What's the next thing? We should do it for other tech companies, and we should wrap it in a structure that-- so that all the company has to do is what they normally do with an institutional investor, right? One company on your cap table, but behind it is, like, a mutual fund with millions of investors." And if you're a private company, you should want to have retail investment from the masses as soon as possible, 'cause it's gonna increase your brand awareness, it's gonna smooth your transition to public markets, and it's gonna get you a lot of customers.

Ben Gilbert 5:11 Our thanks to Fundrise. If you want to join the over three hundred and fifty thousand people investing with Fundrise, you can click the link in the show notes, and if you're a founder who wants to get in touch about the Innovation Fund participating in your next round, email notvc, that's notvc@fundrise.com. After this episode, come talk about it with us. There are thirteen thousand other smart, kind people in the Slack, acquired.fm/slack. Without further ado, on to our live show at Solana Breakpoint. And listeners know that this is not investment advice. David and I may have investments in the companies we discuss, and this show is for information and entertainment purposes only.

David Rosenthal 5:51 Well, one small bit of ado before we dive into the story is we owe a big thank you to Dave Mott-... the author of the incredible book, The Qualcomm Equation-

Ben Gilbert 6:04 Yep.

David Rosenthal 6:04 -which is not well known, but is the definitive history of Qualcomm, and ranks right up there with among the best business books that, business histories that we've used as a source on Acquired throughout the whole history of the show. It's awesome. Uh-

Ben Gilbert 6:17 And the book's not even really published under, like, a real publisher. It's published under an industry association. There's no audiobook, there's no Kindle. You have to read the physical book.

David Rosenthal 6:25 Yeah, it's-- you, it's amazing. I literally, the other day, texted Ben a photo that I noticed on the back cover, [chuckles] and Ben, of course, had seen it, too, uh, of one of the blurbs. I'm gonna, I'm gonna read it here now. It says: "Dave Mach helps uncover the single most important business story, single most important business story that has yet to be told, how Qualcomm came to rule the wireless industry. Think of it as a recipe book of, for one of the most innovative and leveraged business models of all time."

Ben Gilbert 6:56 Right.

David Rosenthal 6:56 Whose words does that sound like, Ben?

Ben Gilbert 6:58 That sounds like a deep business model thinker and someone who, uh, who truly appreciates capitalism at its finest.

David Rosenthal 7:03 And is willing to go find the rare gems, the rare diamonds in the rough. That is written and said by none other than Bill Gurley-

Ben Gilbert 7:11 [chuckles]

David Rosenthal 7:11 -of Benchmark Capital, for this almost unknown book. I bet it's gonna be a lot more known after this episode.

Ben Gilbert 7:17 Yep.

David Rosenthal 7:19 Well, Dave starts the book, and it's such an apt place to start, with a quote by Edwin Land, who I was not familiar with until recently, when David Sender on the Founders podcast familiarized us with Edwin. Edwin was the founder of Polaroid and Steve Jobs' hero, uh, and he had this quote that Dave starts this book with: "True creativity is characterized by a succession of acts, each dependent on the one before and suggesting the one

David Rosenthal 7:49 after." So with act one of the Qualcomm story, we start in Austria, here in Europe, in the mid-1930s, in the pre-World War II era, as Hitler and Mussolini and the Nazis were rising to power. [inhales] And we start-

Ben Gilbert 8:08 Also, is this the first time we've been able to say, "Here in Europe," on Acquired? [chuckles]

David Rosenthal 8:11 Uh, it is the first time. It is the first time. Uh, and we start... You might think, if you know anything about Qualcomm history, you think of mid-'30s, you're like, "Oh, I didn't know Irwin Jacobs, co- co-founder and CEO of Qualcomm, was born in Europe." He was not. He was born in New Bedford, Massachusetts. We start with somebody very different. We start with one of the most famous film actresses, Hollywood film actresses, of all time, a woman named Hedy Lamarr. And-

Ben Gilbert 8:41 Side note, the fact that we're starting with Hedy Lamarr on the story of how modern telecommunications came to be is so cool. I remember we reached out to the NZS Capital folks and said, "Hey, l- you know, do you have any great resources on, on Qualcomm?" And they sent back this excerpt of, "You should go read up on Hedy Lamarr." I was like: Are they trolling me right now?

David Rosenthal 9:00 Yeah. You cannot make this stuff up. This is, like, why we do this show. So Hedy was an incredible-- She was, like, just an incredible human being. She was world-famous, incredibly talented actress, incredibly beautiful. She would later be billed, like the way MGM, she was one of the MGM starlets, marketed her, was as the most beautiful woman in the world. She was also a genius. So she starred in Samson and Delilah, Ecstasy, Zigfield Girl, many, many more. Uh, but what most people at the time, even up until her death, did not know, and certainly her husband at the time, in Austria in the mid-1930s, did not know, was that she had incredible powers of observation and was way more intelligent than anybody else around her. So this said husband, he's quite the character, uh, his name was Friedrich Mandl, and he was not a good dude. Uh, he was a Nazi arms dealer, which made him very rich at the time, which is probably how he met Hedy, and they became married. Hedy, though, uh, probably unknown to Friedrich and certainly unknown to his business associates, including Hitler and Mussolini, Hedy was, uh, Jewish. [chuckles] And, um, so Friedrich would bring his beautiful, you know, film actress, world-renowned film actress bride, to his business meetings, you know, with the Nazi military powers, and, uh, Hedy was listening in to everything- [chuckles]

Ben Gilbert 10:33 Mm.

David Rosenthal 10:33 -that was going on. And as, uh, the situation deteriorated, in 1937, she disguised herself as a m- as one of her maids and escaped to Paris, and then from Paris, made it to the US, went to Hollywood, and lived in Hollywood for most of the rest of her life. Um, when she came to the US, though, she knew, like, an incredible amount of inside information about the Nazi war effort. [chuckles]

Ben Gilbert 11:00 Yep.

David Rosenthal 11:00 And she was incredibly motivated because obviously, she was from a Jewish family. She hated the Nazis, hated her former husband, uh, and wanted to contribute. And specifically, she knew that the Nazis were working on, uh, and using to great effect, a radio jamming technique for radio-guided torpedoes that would be dropped from airplanes to attack Nazi submarines.

Ben Gilbert 11:27 It's also pretty amazing, at this point in history, that we had, as humans, the capability to radio guide the torpedo, and the torpedo, you know, gets propelled, and you could guide it using radio frequencies d- deciding which way to turn the rudder. I did not know that technology existed in the '30s.

David Rosenthal 11:43 Th- this is crazy. Like, the computer does-- the digital computer doesn't exist yet. The concept of digital doesn't exist yet, 'cause we're gonna get to that in a minute. [chuckles]

Ben Gilbert 11:50 Right.

David Rosenthal 11:51 Uh, this is all being done essentially with FM radios. Uh, and so Hedy wants to contribute to the, uh, Allied war effort.

Ben Gilbert 12:00 And when you say with FM radios, therefore pretty easy to jam. If you know that someone's broadcasting on, you know, Jammin' ninety-two point three, and, uh, you start another signal on ninety-two point three, you disrupt their signal, and they're not able to hit their target with the weapon.

David Rosenthal 12:14 Totally. So Hedy [chuckles] teams up with her new Hollywood neighbor-... a composer, a music composer, named George Antheil, bear with us here, I, I promise this is getting to Qualcomm, [laughing] uh, who is a film music composer. And they, with her ideas and his musical prowess, they develop a concept that they patent, and they get issued a confidential patent that stays confidential for decades in the US military.

Ben Gilbert 12:43 By the way, this, I believe, did not become declassified until 1981.

David Rosenthal 12:49 Wow.

Ben Gilbert 12:49 That's how long it was buried-

David Rosenthal 12:50 Wow

Ben Gilbert 12:50 ... inside the US government.

David Rosenthal 12:51 It was issued in 1942, so four decades that this history was completely unknown. Uh, they develop a novel technique to defeat RF frequency jamming by using frequency hopping, and what they describe becomes the origin of something called spread spectrum technology. So if you're familiar at all with, like, the wireless world or Qualcomm or anything, you hear spread spectrum, and you're like, "Oh, that sounds familiar." Spread spectrum technology, this is the first, like, description of it in a technical document and a patent by these two, like, incredibly unlikely people. Uh, and, and-

Ben Gilbert 13:28 And, and what it basically means is any way that you're gonna transmit a single message across a variety of spectrums, so rather than just on... I'm gonna keep saying jam in 92.3 to ground it in radio. Uh, but instead of just broadcasting on one frequency, they came up with this idea to hop, so change frequencies during different points in the message to evade anyone trying to jam the signal and move to a different frequency.

David Rosenthal 13:54 And the reason she teamed up with a music composer for this is that the way you make this happen is you have incredibly precise time syncing on, in this case, the two ends, but in, you know, wireless use case, all endpoints of the communication channel, incredibly precise syncing so that all endpoints know when to hop frequencies. And you're hopping frequencies, like, dozens or hundreds of times a second, and this can defeat jamming. This is great for cryptography. This is great for sending coded messages. It turns out this was not on anybody's radar, pun intended, at the time. It turns out that this is also the most efficient way to use radio bandwidth.

Ben Gilbert 14:36 But let's put a pin in that for now, and first, let's go back to this specific use case of we want to transmit from a plane to a torpedo, and we want to be hopping around to different frequencies, and we want to change that at incredibly precise times, so the transmitter knows to change the frequency, and the receiver knows to start receiving the message on a new frequency at very specific points in time. The concept of digital hasn't been invented-

David Rosenthal 15:01 Yeah. [chuckles]

Ben Gilbert 15:01 ... so how are we doing this, David?

David Rosenthal 15:03 Totally. [laughing]

Ben Gilbert 15:03 What's the technology used to synchronize a schedule of frequency hops between a torpedo and an airplane?

David Rosenthal 15:11 So here's where if this were a, you know, Hollywood movie, like one of Hedy's films, this single-handedly would've, like, defeated the Nazis and all that. [chuckles] Unfortunately, the reality is there, there was no digital computing at the time. It, it, it wasn't possible. The US military tried very hard during World War II to make this happen, the whole Allied military. Um, they couldn't make it work because, like, think about what you're trying to do here, and that vacuum tubes and analog computing was what was happening at the time. You would literally need to put, like, ENIAC on a torpedo and drop it from the sky- [chuckles] ... to make this happen. Uh, that was not feasible.

Ben Gilbert 15:45 It's worth sharing h- how their prototype worked, though. So the way that they prototyped this, He- Hedy, in the, you know, 19- early 1940s, is they took two player piano scrolls that had the, the same basically song, and they mapped each note to a new frequency, and they put the same player piano in the receiver- the same scroll in the receiver that they did on the transmitter, and they pressed play on the player piano song at the same time. So it would know exactly where to hop around.

David Rosenthal 16:16 Yeah, so there were 88 frequency hops in their technical description of the patent [chuckles] 'cause there are 88 keys on a piano. So I guess literally you wouldn't be dropping ENIAC from the sky, you'd be dropping a piano from the sky [laughing] to make this work.

Ben Gilbert 16:26 Yes, like a cartoon.

David Rosenthal 16:27 [laughing]

David Rosenthal 16:28 Oh, totally. Okay, so that is the origin, the you-can't-make-this-up origin of spread spectrum technology. That's act one. Act two, we stay in World War II. Around the same time, but a few years later, there is a young PhD grad, PhD grad, from the Massachusetts Institute of Technology, the august Massachusetts Institute of Technology, who was working on code breaking for the Allies, very famously, at Bell Labs and at the Institute for Advanced Study in Princeton, New Jersey, where he intersects with luminaries like Albert Einstein, John von Neumann, Alan Turing. We're not talking about any of those three folks, but by process of elimination, you can probably figure out who we are talking about. We're talking about Claude Shannon, uh, literally the father of information theory, uh, one of the fathers of computer science, and the inventor of the concept of digital, of the bit of information. Like-

Ben Gilbert 17:30 Yep

David Rosenthal 17:31 ... digital did not exist before Claude. So during the war, all of this effort culminates in what he publishes after the war, his, his master work, A Ma- A Mathematical Theory of Communication, which defines a bit, the new, uh, field of information theory, ushers in the digital era for the world. And combined with the other folks who we mentioned, Einstein, Turing, von Neumann, uh, and Bell Labs' work on transistors during the war, these things come together to create the modern era of humans and the digital computer.

Ben Gilbert 18:09 Yep.

David Rosenthal 18:10 So we've described, like, the Hollywood part. We described here in act two, Claude Shannon, you know, birth of computing, all that.

Ben Gilbert 18:17 A- and it's worth maybe sharing a little bit about information theory. If... Can I take a second, David?

David Rosenthal 18:21 Of course.

Ben Gilbert 18:22 All right, so I had heard people reference information theory or communications theory, um-... dozens of times over the years, and every time I'd open up the Wikipedia page, I'd see a bunch of complicated math equations. Uh, and you quickly wanna get to like, okay, but what is this? Why does everyone keep describing it as so important? And I think there's a pretty key concept that was an aha moment for me, which is all communication must happen through a medium. There's no communication that happens through nothing. You need some way to send signal from a transmitter to a receiver, and the method by which you communicate, the way you send signal, is governed by that medium. And so what I mean by that in particular is, let's use the analogy of, uh, a conversation. Well, if you're in a super loud room, then your message needs to be very loud, and it needs to sort of not be very noisy. It needs to be a super clear, super loud message because there's a lot of noise in the room. Whereas if you're in a really quiet room, then you can have kind of a, a message with a bunch of noise. Imagine someone talking, but there's a bunch of static. Well, that's okay if the medium itself, the room that you're communicating in, doesn't have a lot of noise itself. So there's this, this relationship between how noisy a message can be and how noisy the medium is that you're communicating in. And I, I think this is this very interesting aha moment, where what he basically deduces is, uh, there is a theoretical limit to the amount of signal that you can pump through any given medium based on how noisy the medium is and based on the level of entropy or randomness in the, um, in the, the message that you're trying to describe. So when I say entropy, l- let's say, David, you're expecting me. You think there's a ninety-nine percent chance that I'm coming to deliver the message to you: I just had breakfast. Well, if it's a, in a really loud, noisy room, and, you know, there's, uh, I'm, I'm sick, and I'm coughing, and I tell you I just had breakfast, because you were expecting it, it's fine if it's in a really garbage medium. But if you have no idea what I'm about to tell you, and it could be everything from, like, uh, "Hey, uh, you're fired," to, "I j- I just had breakfast," a- and, and you have no idea, like, we need to have that in a pretty pristine environment with really nice volume or gain on the signal. So that's sort of the high-level concept of, of information theory and more specifically of, um, uh, Shannon-Hartley theorem describing, uh, the, the relationship between signal and medium.

David Rosenthal 20:51 Yeah. Super, super cool stuff. Um, the... So where this all comes together in act three of our story here, which is gonna be a little longer 'cause we're gonna get into Qualcomm as part of this, uh, is one Irwin Mark Jacobs, an American born in 1933, as we mentioned, in scrappy New Bedford-

Ben Gilbert 21:16 Bedford

David Rosenthal 21:16 ... Massachusetts, which used to be, I believe, the wealthiest town in America during the whaling era-

Ben Gilbert 21:21 Yes

David Rosenthal 21:21 ... as we discussed during Standard Oil or Berkshire? I think it was Berkshire, actually, that we discussed.

Ben Gilbert 21:25 It was Berkshire because forty-five years before Irwin Jacobs was born in New Bedford, the, uh, Hathaway Manufacturing Company-

David Rosenthal 21:36 That's right

Ben Gilbert 21:36 ... was started.

David Rosenthal 21:37 In New Bedford.

Ben Gilbert 21:37 In New Bedford.

David Rosenthal 21:38 That's right.

Ben Gilbert 21:38 Before it merged with Berkshire and before, of course, Warren Buffett.

David Rosenthal 21:41 Even, even by, uh, 1933, New Bedford was not the New Bedford- [chuckles]

Ben Gilbert 21:46 [chuckles]

David Rosenthal 21:46 ... of the whaling era, shall we say. So Irwin is a pretty amazing American story. So he grew up in, like, a very middle-class family in this super scrappy, uh, area of the country. Um, his dad worked a bunch of jobs, uh, and ended up running a local restaurant called the Boston Beef Market. Irwin was highly gifted in math and sciences as a kid going through school. He wanted to study math and science and probably would have wanted to study engineering if he, like, knew it existed [chuckles] in college. Uh, but his high school guidance counselor famously told him that there's no future for math and science in New Bedford, and frankly, his high school guidance counselor was probably right. [chuckles] Uh, so Irwin, though, had very good grades growing up, and the guidance counselor encouraged him to go to the world-famous Cornell School of Hotel Management so that he could learn the hospitality management business and come back and work in the family business at the Boston Beef Market. [chuckles]

Ben Gilbert 22:53 Which he did.

David Rosenthal 22:54 Which he did-

Ben Gilbert 22:55 Like, the founder-

David Rosenthal 22:55 Go to ho- the School of Hotel Management

Ben Gilbert 22:57 ... This engineering genius, this, like, American pioneer of the wireless and communications industry, that is what he went to college for.

David Rosenthal 23:05 And he would later credit the year and a half that he spent in the hotel management school at Cornell before transferring to electrical engineering. He would credit that year and a half with really helping him start first Linkabit, his first company, and then Qualcomm, get out of academia and s- and become an entrepreneur because he actually learned about, like, business accounting, [chuckles] the real-world applications, and found that, like, he kinda loved that, too.

Ben Gilbert 23:29 Yep.

David Rosenthal 23:30 Um, a- amazing. So after a year and a half at Cornell in the hotel management school, he learns about engineering and is like: "Oh, you can make money with math and science." [laughing]

Ben Gilbert 23:39 [chuckles]

David Rosenthal 23:39 "This is actually, like, in demand. Maybe not in New Bedford, but, like, in the rest of America." And, uh, so he goes to the dean at Cornell. He tells this story, and he's like, uh: "Hello, sir. You know, I- I, sophomore at Cornell, uh, I would like to transfer from hotel management to electrical engineering." And the dean's like: "Oh, you mean electrical engineering to, to hotel management, right?" [chuckles] He's like: "No, no, no, no, no. Hotel management to electrical engineering."

Ben Gilbert 24:03 "No, I wanna do the harder one."

David Rosenthal 24:04 "I wanna do the hard stuff." [chuckles] Uh, after the dean, like, picked himself up off the floor, he, uh, he allowed it, uh, perhaps with a degree of suspicion, um, which he need not have because Irwin is another genius in this string of geniuses. Um, he would graduate, go on to a PhD at MIT, which he would do in three years, finishing his PhD in 1959, studying under none other-... then Claude Shannon himself, who after the war, returned to MIT as a professor.

Ben Gilbert 24:36 It's pretty interesting 'cause so many of these stories that we tell, there's an, an immense element of genius. No question, Irwin Jacobs and Jensen at, at Nvidia and Steve Jobs, geniuses. And also-

David Rosenthal 24:50 There were, like, ten people in the world-

Ben Gilbert 24:52 Well

David Rosenthal 24:52 ... who knew this stuff at the time, and they were among them.

Ben Gilbert 24:54 Uh, yeah, it's, it's the m- most incredible right place, right time in history, too, because without studying under Claude Shannon, the father of information theory, it's extremely unlikely that Irwin Jacobs becomes the Irwin Jacobs he went on to be.

David Rosenthal 25:09 Totally. And then, without what's gonna come later and Hedy Lamarr, [chuckles] that he would start Qualcomm. Ah, amazing. So Irwin is so-- young Irwin is so talented that, um, after he finishes his PhD in three years, you know, mere, like, five years removed from being a hotel management major at Cornell, and Shannon and MIT ask him to stay on as a professor at MIT, like, immediately, um, which he does. He spends five years teaching at MIT, during which he teaches the first course, like, for students, uh, on digital communications in the world, I believe. You know, like, applying Shannon's theories to, like, disseminate amongst, like, practical engineers being trained at MIT.

Ben Gilbert 25:55 Yep.

David Rosenthal 25:55 Um, he and a fellow faculty member write the first textbook on digital communications that is still in use today. You can still-- Like, it is the bible of digital communication theory. Uh, you can buy it on Amazon, uh, and written by, by Irwin, distilled, you know, from the father himself, of Claude Shannon. Um, he spends five years teaching there, and then in 1964, he takes a sabbatical and heads out to California to do a sabbatical at JPL,

David Rosenthal 26:26 at Jet Propulsion Labs, working on the US space program, uh, and communications with, with satellites in the US space program at the time, where he intersects, fatefully, with another recent MIT electrical engineering PhD grad, one Andrea, or Andrew, as it was anglicized, Viterbi, a Jewish immigrant from Italy, who got his PhD from MIT in 1957, who was working at JPL, and they become fast friends. So fast friends, in fact, that when Irwin returns back to Boston, to cold, snowy, [chuckles] uh, bleak Boston, near his upbringing in Massachusetts, uh, after his sabbatical, Irwin then gets a call shortly thereafter from one of his former professors at Cornell that a new engineering school in San Diego is being started, the new UC San Diego, and there's an opportunity for Jacobs to come out and start the electrical engineering department at UCSD. He says, "Well, I really enjoyed my time out there. I've got this great friend, Andy. Let's do it!" [chuckles] I would make the exact same decision. So he and his family, Irwin and his family, move out to UCSD, and while he's out there, he continues doing his contracting work with defense contractors and JPL and the US space program.

Ben Gilbert 27:54 And this is sort of one-off at the-- at, at this time. I mean, he's, like, doing it under his own name. He hasn't really started a company. It's just kind of Irwin doing contracting.

David Rosenthal 28:02 Totally. He is, like, the first, you know, like, electrical engineering professor at UCSD. That's his full-time job, but because he's in such close proximity to everything going on at JPL and NASA and the like, um, he's doing that on a kinda like one day a week-ish. And one day, he and Andy and another professor from UCLA are up at NASA Ames in Mountain View, doing consulting work up there. They're flying back, and they're all kinda lamenting. They're like, "This is super cool that we're doing this. We're making more money than academia. We're helping our country. We're participating in the space race, um, but it's kinda hard to, like, balance all this stuff that we're doing."

Ben Gilbert 28:38 Yep.

David Rosenthal 28:38 And they're like: Hey, what if the three of us band together and form a company, kind of a shell company, to just kinda manage this consulting work that we all get? We could probably get some, you know, efficiencies here, maybe hire an assistant, help us out, that kind of stuff. And they say, "Great! You know, we don't intend this to be a real company. We're not gonna make any products or anything. This is just to manage our, our consulting." Um, uh, they sort of tongue-in-cheek decide to call it Linkabit, like linking a bit. [chuckles] Uh, a very, like, academic joke. Uh, so who, who is this third partner in Linkabit? Um, he ends up not kinda gelling with the other two, uh, leaves shortly thereafter. His name is Len Kleinrock, and I read that the first time, and I was like...

Ben Gilbert 29:26 I've heard that name before.

David Rosenthal 29:27 I know that name. [chuckles]

Ben Gilbert 29:28 And I'm gonna guess ninety-nine percent of listeners haven't heard that name, but if you're you and me, and all we do all day is study tech history and, you know, the history of the internet, that name should ring a bell.

David Rosenthal 29:36 Yeah. Well, you know, at first, you, you read this history, and you're like: Man, bummer for Len. He missed out on founding Qualcomm. Well, he actually ended up okay because instead of founding Qualcomm, he founded the Internet. [laughing]

Ben Gilbert 29:49 He literally was the, the... I think, the founding engineer on the ARPANET project-

David Rosenthal 29:53 Yes

Ben Gilbert 29:53 ... at DARPA.

David Rosenthal 29:54 You know what? Many people were involved in the ARPANET project-

Ben Gilbert 29:56 I guess I meant ARPA? I don't know if it's-

David Rosenthal 29:57 Uh, ARPA, ARPANET.

Ben Gilbert 29:58 Yeah.

David Rosenthal 29:58 ARPANET, which was the precursor to DARPANET, which was the precursor to the Internet. Len and one of his grad students at the time at UCLA, like, the next year, right after this has happened, this is all happening at the same time, they sent the first message on ARPANET ever, like, the first internet transmission ever from UCLA to Stanford. He's one of the core founding fathers of the Internet. So he ended up doing okay. He probably didn't make as much money, [chuckles] but-

Ben Gilbert 30:26 Not probably

David Rosenthal 30:26 ... uh, he will be remembered in history. Pretty amazing. Um, so Andy and Irwin-... They're mostly continuing to work on NASA and Navy defense projects in San Diego, because, of course, San Diego is a US Navy town. Um, and most of what they're doing is working on satellite communications. Uh, if you know anything about satellite communications, the bandwidth that you have available to you is very, very narrow. [chuckles]

Ben Gilbert 30:53 Yep.

David Rosenthal 30:54 And you need to be very, very efficient with your communications.

Ben Gilbert 30:58 And that's still true to this day. I mean, any, any, uh, company in the sort of emerging space economy, it's a totally different engineering problem than you're used to today. Because if you ship code up to your satellite and you find a bug, it's, like, very expensive and very slow to go get enough bandwidth and actually make sure you have the right time window to update the code on the satellite. So it still kinda works the way that computers worked 30, 40 years ago.

David Rosenthal 31:24 Yep. And so they're tr- you know, it, it wasn't them, like, this was the military. There was this... They got exposed to this, trolling around to find the most best, most efficient ways to use this narrow bandwidth channel that they had. And what ends up getting used but this old patented spread spectrum technology [chuckles] from the World War II era, invented by Hedy Lamarr and George Antheil.

Ben Gilbert 31:47 And the, the timing is perfect, because the time of Linkabit is this sort of early '80s, where the p- uh-

David Rosenthal 31:55 Early '70s.

Ben Gilbert 31:56 Oh, Linkabit's early '70s.

David Rosenthal 31:57 Early, yeah, late '60s, early '70s.

Ben Gilbert 31:58 So they have 15 years of Linkabit before-

David Rosenthal 32:00 Oh, yeah. Oh, yeah, there's a long-

Ben Gilbert 32:02 Ah.

David Rosenthal 32:03 Linkabit is involved... Oh, we, uh, you, you might not know, I've got some good surprises for you.

Ben Gilbert 32:07 All right.

David Rosenthal 32:08 So they start doing more and more of this. Um, Irwin's exercising the, like, hotel management sorta side of his brain as he's doing this. He finds that he really enjoys it. Um, they start bringing on other professors, other grad students into Linkabit to kinda build this sort of, like, army of the greatest, you know, information theory and wireless signal minds in the country.

Ben Gilbert 32:35 All for defense contracting.

David Rosenthal 32:36 Almost all for... I don't think they were doing any commercial work at this point. I think it was all NASA and defense.

Ben Gilbert 32:42 Yep.

David Rosenthal 32:42 Um, and almost all satellite work. Uh, and so they start building the company, that eventually, in 1971, there's so much going on, Irwin decides he's gonna take a sabbatical from UCSD and spend a year just organizing the company. He ends up never going back to UCSD, [chuckles] ever. Because, uh, during that year, they get the idea, I believe it was during this year, maybe they had started to have inklings of it before, that, um, you know, it, it's really nice, they've got all this technical talent, they're consulting on these projects that defense contractors mostly are the prime bidders for. They're like: Wait a minute, those guys are making all the money. We're doing all the differentiated, like, engineering work here. What if we started bidding on some contracts ourselves? We'd probably make a lot more money as, like, a kind of product, like, you know, contract-focused services company ourselves, rather than just as a sub-consultant-

Ben Gilbert 33:43 Yeah

David Rosenthal 33:43 ... on these projects.

Ben Gilbert 33:44 If... And that, that lesson persists to this day, too. If you can pull off being the prime contractor to the government on a, a big contract, that's- the economics are much better than if you get subcontracted by one of the primes.

David Rosenthal 33:55 So, well, and, like, oh, man, if you can be a prime... I mean, the primes back then, primes being prime defense contractors, they're still the primes today. Like, that is a gravy-

Ben Gilbert 34:03 Lockheed, Boeing

David Rosenthal 34:03 ... train that, like- [chuckles] yeah, Raytheon, Lockheed, Boeing, all these companies. Um, so of course they start doing this, but, like, there's a reason the primes then are the primes now. Linkabit is not gonna be a prime, then or ever. [chuckles] Uh, so they need to-- if they're gonna do this, they need to move into the commercial sphere. So this is, this is, like, one of these just, like, so good... It's, it's like history was, like, made for Acquired. Do you know what the first, like, contract project that Linkabit did was? I- if you knew, you would just be like-

Ben Gilbert 34:35 No, I don't

David Rosenthal 34:36 ... smiling so wide right now. So they hear about... Remember, their expertise is in satellite communications. They hear about a regional retailer. [chuckles]

Ben Gilbert 34:49 No! Did they do Walmart's satellite network?

David Rosenthal 34:53 Yeah, they did.

Ben Gilbert 34:54 What?

David Rosenthal 34:54 Yeah. They hear about this eccentric founder of this small, [chuckles] Midwestern regional retailer, that for some reason wants to beam himself talking every day to all of- you know, from HQ to all of the local stores of this- uh, local outlets of this retailer. Linkabit's first project is doing the satellite communication system for Walmart.

Ben Gilbert 35:17 That's wild. Listeners, for anyone who didn't listen to our Walmart episode, Walmart, uh, was for a very long time, the most innovative retailer on the planet. I mean, ba- until Amazon, basically. And o- one of the illustrations of this is, in the late '70s, and then continuing into the early '80s, when they actually lit it up, they invest- they invested tens of millions of dollars into building a private satellite relay, because the bandwidth available on the Internet was insufficient for them at the time.

David Rosenthal 35:44 Oh, there was no Internet. It was just the ARPANET.

Ben Gilbert 35:46 Or the-

David Rosenthal 35:46 It was the Kleinrock dude, or-

Ben Gilbert 35:47 Whatever. Uh, uh, phone lines. The, the, the public WAN, effectively-

David Rosenthal 35:50 Yeah

Ben Gilbert 35:51 ... or a precursor to WAN, was insufficient to, you know, send the store data that they had actually been collecting and want to tabulate the results on a daily or weekly basis, but also this, like, crazy-

David Rosenthal 36:01 Yeah, Sam wanted to broadcast out the-

Ben Gilbert 36:03 Sam

David Rosenthal 36:03 ... you know, the Saturday. [chuckles]

Ben Gilbert 36:04 Yeah. [chuckles]

David Rosenthal 36:05 Oh, Phoenix, so great. Hey, wait, there's more Walmart to come a little later in the episode.

Ben Gilbert 36:10 Uh-huh.

David Rosenthal 36:10 Stay tuned, uh, literally. [chuckles] So, um-

Ben Gilbert 36:15 God, you just crack yourself up.

David Rosenthal 36:16 I know, it's- [laughing] This is funny. We'll, we'll probably cut this from the actual episode. We get- occasionally, we get these reviews, uh, for Acquired, or, like, comments-

Ben Gilbert 36:24 [laughing]

David Rosenthal 36:24 ... that, like, one host is, like, really normal, and the other host is just like-

Ben Gilbert 36:29 Laughs at his own jokes

David Rosenthal 36:30 ... a complete crazy person. [laughing] And I'm like: Well, you know, at least they remember me.

Ben Gilbert 36:35 Look, we are who we are.

David Rosenthal 36:37 Yeah, yeah.

Ben Gilbert 36:37 Uh, nothing's changing. It's seven years in, we're not... Yeah.

David Rosenthal 36:39 I promise you, it's not an act. [laughing]

Ben Gilbert 36:41 [chuckles]

David Rosenthal 36:41 Ask my wife. Uh, okay, so the next thing that they get into is, um, uh-... because they're in, they're in video, they're, they're, they're in satellite, they're in video now with Walmart, uh, and they're doing these, you know, two-way communications. They build the video scrambling system for pay TV on cable systems. So it used to be before the Linkabit solution for m- uh, multiple access cable systems, um, if you, like, were even mildly technical or could, like, play around with, like, a Allen wrench, [chuckles] you could d- you could get HBO or any of the early pay TV channels for free. Uh-

Ben Gilbert 37:21 Yeah, the, the, the catchphrase there is security by obscurity.

David Rosenthal 37:24 Yeah, exactly.

Ben Gilbert 37:24 They would just try and, you know, find one clever thing that consumers weren't likely to figure out by unscrewing their box and, you know, moving one wire or something, and yeah.

David Rosenthal 37:34 So Jacobs and Viterbi and all the, the brain trust at, at Linkabit, they, they solved that problem.

Ben Gilbert 37:39 Wow!

David Rosenthal 37:39 Uh, and they, uh, HBO uses them, and then all the other, all the other, um, uh, big pay TV channels.

Ben Gilbert 37:45 I think that's the inspiration behind the HBO, uh, opener by the way.

David Rosenthal 37:50 Yes! The, the scrambled-

Ben Gilbert 37:51 'Cause it's like descrambling and now bringing you this... Ah.

David Rosenthal 37:55 So great. That's Irwin and Andy right there. Um, so in 1980... They do this for the whole decade of the '70s. Um, in 1980, the, uh, Linkabit, the company, gets acquired by a East Coast radio technology company called MACOM, I think is how it's was pronounced. It used to be actually MACOM, and then it, you know, this, like, weird '80s branding stuff, they changed the brand to M slash A dash COM. [chuckles] Microwave Communications, I think. Um, anyway, they sell the business for twenty-five million bucks in, um, 1980, which like-

Ben Gilbert 38:30 Nice early win.

David Rosenthal 38:31 Not bad for some former academics, twenty-five million bucks in 1980 dollars, like, that's awesome.

Ben Gilbert 38:36 And, and they had a lot of people at this point. I think there was, like, over a thousand employees.

David Rosenthal 38:40 It grew within... I, it was on its way there, but then it grew over the next five years within MACOM to that big. So I don't think it was... It grew to fifteen hundred people eventually.

Ben Gilbert 38:48 Okay.

David Rosenthal 38:49 Like, this is a big freaking business. Like, you can imagine, the things we're talking about, like [chuckles] a lot of other retailers started using, you know, satellite networks. A lot of other cable TV, [chuckles] you know, channels wanted to use these to like... And there were other products that they were building. Like, this is a huge, like-

Ben Gilbert 39:02 Yeah.

David Rosenthal 39:02 Basically, they made a big mistake selling the company. Um, you know, they, they hadn't listened to Acquired. They didn't have all the lessons.

Ben Gilbert 39:08 They wouldn't have had Qualcomm if they didn't sell the company.

David Rosenthal 39:11 Uh, well, that's true. They made absolutely the right decision in selling Linkabit then. [chuckles] Uh, so they stay with MACOM for five years, and then there's a leadership change at MACOM, and, like, this is an East Coast technology company. So they all leave in 1985, and they sit around for a couple months, and, you know, they're like, "Like, we made more money than we ever, like, dreamed we would. We got to be part of so many cool things, but, like, we're still young, and, like, the wireless communications industry is kinda just getting started."

Ben Gilbert 39:45 Yep.

David Rosenthal 39:45 And this is 1985, so, uh, the cellular telephone industry exists at this point.

Ben Gilbert 39:53 It had just started. We had the... You know how we, we're on 5G now, and everybody remembers the iPhone 3G, that, that second phone, and the Edge network that, that the first iPhone launched with was, uh, uh, 2G. It was a little ad- advancement on 2G. This was 1G.

David Rosenthal 40:07 This was 1G, which was analog. No digital yet in, in cellulars. Analog cellular.

Ben Gilbert 40:13 And cellular had just been an innovation. I mean, this notion that rather than, you know, communicating over long distances, we were actually going to put cell towers so that you only needed to communicate with your local tower, and that, that could be relayed, and you had this sort of cellularification of all the geography that you needed to cover. Um, that was new, and it's funny how today we, we don't even think about what the word cellular means, but that was the most recent innovation at the time.

David Rosenthal 40:41 Yeah, it's cra-- So, you know, Irwin and Andy, like, they're, they are first-rate aca- academics, you know, as hopefully we've told the story here, like, among the most brilliant minds in the world. But they're also, like, especially Irwin, like, incredible businesspeople, market analysts. Like, they're very aware, like, the products they developed at Linkabit, they're aware that this market is coming, and, and the reason they're so aware, like, technically, it exists now, cellular, it's all car phones at this point in time-

Ben Gilbert 41:09 Yep

David Rosenthal 41:09 ... because the way it works is it was essentially, it was just like the torpedoes back in the day. It was e- essentially a FM radio broadcaster that you would wire up into-

Ben Gilbert 41:22 Super high power

David Rosenthal 41:22 ... your car. Super high power. You needed, like, a lot of freaking power.

Ben Gilbert 41:25 You had to put it in a car for what you're talking about, and because you couldn't, like... The, there was not a battery available to, uh, have-

David Rosenthal 41:32 You needed a running internal combustion engine to make this thing work.

Ben Gilbert 41:35 To power this thing.

David Rosenthal 41:36 Yes.

Ben Gilbert 41:36 On the-

David Rosenthal 41:37 On the endpoints. [chuckles]

Ben Gilbert 41:38 Yes.

David Rosenthal 41:38 On the endpoints. Um, and bandwidth was super limited, and, like, these systems were thousands and thousands of dollars, in early '80s dollars. And despite all that, the consumer demand for car phones was insane. Like, in, like, this was just, like, you know... There were wait lists years long for consumers to get car phones installed, and the fledgling carriers at the time, like, they only had so much bandwidth they could fit because literally, it's, you know, there's no [chuckles] you- there's no, um, efficient use of channels. It's just like the torpedoes back in the day. Uh, like, they couldn't keep up with all the demand. I, I remember when my parents, who were lawyers, like, they had car phones in the '80s. Did your parents have one?

Ben Gilbert 42:25 Uh, no, my great uncle had one. But it is interesting thinking about, you know, when you're listening on an FM radio, you have ninety-nine point one, and then you click up on the dial, and it says ninety-nine point three, and then you click up, and it says ninety-nine point five, and you can't even have point two, point four, point six, because that's too close. There would be interference. So you start thinking about... And this isn't e- exactly right. I'm gonna oversimplify this a little bit, but you start thinking about, well, geez, how many slots are there-

David Rosenthal 42:50 [chuckles]

Ben Gilbert 42:51 ... to communicate?... in this analog way with a cell tower near me, what can a cell tower handle? Hundred phones, two hundred phones, five hundred phones? Either way, it's not gonna scale.

David Rosenthal 43:01 Not, not like much more than a hundred.

Ben Gilbert 43:02 Yeah.

David Rosenthal 43:03 Yeah. I mean, you think about how many radio stations there are, [chuckles] like, it's not much more than that. Uh, so, you know, the Linkabit folks, Irwin and Andy, they, they see this, they know, and they're like, "Oh, [chuckles] this industry is in its infancy. We see this amazing demand. We are literally the best- We know there's a better way to do this. We know you can do this digitally. We know you can do it way better. We know how to do it the best." So they found a new company in July of 1985 with seven tot- seven in total, Andy, Irwin, and five other of the best Linkabit engineers. They meet at Irwin's house, and they decide to start this new company, and they name it Qualcomm.

Ben Gilbert 43:46 Quality Communications.

David Rosenthal 43:47 Which is short for Quality Communications, which I had no freaking idea, [laughing] until we did the research. But then you're like, oh-

Ben Gilbert 43:54 Duh

David Rosenthal 43:54 ... Quality Communications. [chuckles]

Ben Gilbert 43:56 Yep.

David Rosenthal 43:56 And then when you know all this history, it makes sense. Like, they are the highest quality, you know, but they, they know how to do quality communications. This is a communications company, and they can provide quality that nobody else can.

Ben Gilbert 44:06 There's so many companies named this way, too. These things become these household brands, and then it's, it's like you don't even think about what the original meaning was.

David Rosenthal 44:12 Totally. Totally. Because, like, the industry was still so early, and, and, and you think for a minute about what is involved in building out a cellular telephone network, there is enormous CapEx. Like, you know, laying, like, cable, we've talked a little bit about the cable industry history on Acquired. Like, that required enormous CapEx. Like, this is, like, literally putting towers in the ground, putting base stations on them, building these thousand-dollar mobile phones. It requires a lot of money to participate in this.

Ben Gilbert 44:42 It's money, and it's a bunch of competencies because not only when you-- are you thinking about the real estate for the tower and putting in the tower and putting the base stations on the tower, well, then you need to figure out, well, how are those towers... What's the protocol? What's the technical method that it's communicating with phones and making sure that the phones have all the correct hardware? And it's not just antennas, it's very specialized chips. And so then you're like: Okay, well, do we need to then make phones, and do we need to build a consumer brand, and do we need to market to consumers?

David Rosenthal 45:13 Yes. [chuckles]

Ben Gilbert 45:13 Do we need to be our own carrier? Do we sell to carriers? There's a way to sort of, like, bite and try and eat the whole elephant here. Or you could say, "Okay, we're just gonna try and be one small part of this, 'cause we have an idea for how to make this better." But if you're just doing one small part of it, in-inventing the means by which the, the technical method that the phones communicate with the towers, there's a bunch of stakeholders that you've gotta get on board with your thing: carriers, the government in terms of licensing spectrum, phone manufacturers, chip makers, base station makers. So there's this really interesting-

David Rosenthal 45:45 Pretty good

Ben Gilbert 45:46 ... crux that they're at, at this point of the company, where they're saying, "We know we can do this better. We have a specific idea about how to make this better," which we'll get to in a second. Uh, but they're-

David Rosenthal 45:56 We can't do it yet

Ben Gilbert 45:56 ... really trying to figure out how much of the elephant to try to eat themselves.

David Rosenthal 46:00 And this story, you know, this, um... hopefully, this first, you know, forty-five minutes of the episode was interesting, with, [chuckles] you know, fun telling this, like, crazy World War II, Hollywood, you know, history of all the technical aspect that comes to this. The business history of Qualcomm, just like Bill Gurley said on the blurb of this book, i-i-it is one of the most brilliant strategic executions of entering a market, uh, period, you know, like, writ large, ever. Like, this is on par with Nvidia, i-if not-

Ben Gilbert 46:28 Yeah

David Rosenthal 46:28 ... honestly, more brilliant.

Ben Gilbert 46:30 It seems more difficult, 'cause if you were to-

David Rosenthal 46:32 Way more difficult

Ben Gilbert 46:32 ... pitch me this idea a priori, as an investor, I would tell you immediately no, because I see fifteen different needles, all of which you must thread perfectly, a story that's entirely path-dependent, so you're not gonna get one thing until you get the previous thing, and that was a needle that you were threading. So the likelihood of success is unbelievably low.

David Rosenthal 46:51 And yet, [chuckles] here we are talking about Qualcomm. So they knew two things at the outset of founding. One, this is a massive opportunity that they eventually wanted to pursue, was bringing their expertise to bringing cellphone, terrestrial cellphone networks into the digital era and building the dominant guerrilla company in this soon-to-be massive industry. And two, they knew they couldn't do it yet. So they actually started in the same fashion that Linkabit did. They're like, "Okay, we're gonna bootstrap up by doing consulting work."

Ben Gilbert 47:24 Yep.

David Rosenthal 47:25 So one of the first consulting projects they do is with Hughes, you know, like, one of the defense primes, Hughes, like Howard Hughes. [chuckles] Like, um, uh, pretty awesome, uh, on a proposal to the FCC for a mobile satellite network. They're like, "All right, well, we'll learn about consumer mobile, you know, telephony services-

Ben Gilbert 47:43 Yeah

David Rosenthal 47:43 ... uh, enter the market. We'll work on the satellite network."

Ben Gilbert 47:45 And we're talking, like, Jurassic Park sat phones.

David Rosenthal 47:48 Yes.

Ben Gilbert 47:48 You know, that, that- [chuckles]

David Rosenthal 47:49 Yes, that is exactly- [chuckles] yeah

Ben Gilbert 47:50 ... Like, big honking thing, super expensive, but, like, when you really need it, it's nice that there exists a sat phone network.

David Rosenthal 47:57 Yes. So while they're working on this, they're, like, working on, like, okay, how can we, like... We're the experts at, you know, um, optimizing, uh, satellite communication channels for efficiency. They come up with an application of spread spectrum to use multiple access, uh, multiple conversations to access the same channels at the same time-

Ben Gilbert 48:17 Yep

David Rosenthal 48:17 ... that they, uh, call, that they, they use a technique called CDMA, code division multiple access.

Ben Gilbert 48:26 Which the first time you hear this phrase sounds like complete jargon, like meaningless, a-and, and then you stare at the Wikipedia article for a while to try and unpack each one. So we'll break it into parts. Multiple access, well, that's, that's fairly straightforward. Rather than being broadcast, so like a TV network, we have multiple endpoints that all wanna communicate with each other using whatever the same communication medium is. So rather than using-... one single frequency to all try to pile on there at the same time, which of course, wouldn't work in that analog world that we were talking about. Uh, I wanna call you on ninety-two three, you wanna call Bob on ninety-two point three, my mom wants to call my dad on ninety-two point three. You quickly get into a situation where, like, everything's just colliding with each other. So multiple access on just a- a single analog frequency doesn't work, so you gotta divide up and say, "Everybody gets their own frequency," and that's sort of the, the, the way that, uh, um, the way the world evolved. So you mentioned code division.

David Rosenthal 49:24 Yeah.

Ben Gilbert 49:25 Before we get to code division, can we talk about a different type of division?

David Rosenthal 49:29 Yes, uh, we certainly can.

Ben Gilbert 49:32 So before we get to the CD in CDMA, code division, let's-- So we've, we've got the multiple access part, bunch of, bunch of people trying to communicate using the same medium. Um, well, the things that we were talking about before, everybody gets their own frequency, that was called FDMA, frequency division multiple access, so a pretty straightforward way that you might divide up the airwaves in order to have multiple conversations. And the way the telecommunications industry works is... Remember I opened the episode by saying it's basically a layered set of magic tricks? This is sort of the, the next iteration on top, and if you say, "Okay, rather than sending analog signals, what if we were sending digital signals?" So if I'm talking to David, there's a lot of sort of pauses. About half the conversation is actually empty air, and if two folks out in the audience are talking to each other, a lot of your time is actually empty air. So we don't both need the entire frequency all the time, and if we are communicating using a digital signal instead of an analog signal, then actually we can parcel up the information into digital packets.

David Rosenthal 50:35 And just rotate the time of when different packets are being sent.

Ben Gilbert 50:38 Right. So, you know, uh, the very crude example is, if we're at a dinner party, I can have my conversation for thirty seconds in a room, and then, you know, uh, uh, I pause, and I stop talking. A different conversation can happen for thirty seconds. Of course, that's too crude, and that's far too long. In a time division network, what you'd basically do is say, "I get some digital packets for these milliseconds, then the next milliseconds, you get your digital packets, then the next few sec- few milliseconds, someone else gets their digital packets, and we'll keep round-robining it between the twenty conversations that, that we're all having." And when it gets reassembled on the other side by some other phone or something, uh, it-

David Rosenthal 51:15 Thanks to transistors and digital technology, this can all happen fast enough that, like-

Ben Gilbert 51:20 You don't notice

David Rosenthal 51:20 ... you don't even notice.

Ben Gilbert 51:21 Yeah. You're, you're like, "Oh, the signal maybe sounds a little compressed. It's not as good as if we're talking to each other actually face-to-face," but there's no, like, weird blips or pauses in the conversation. Even though we're all borrowing different time slots on the same frequency, it actually sounds pretty smooth to me.

David Rosenthal 51:38 Yep.

Ben Gilbert 51:38 So, so that's the next iterative invention.

David Rosenthal 51:39 This is a case where Europe was way farther ahead than the US.

Ben Gilbert 51:43 Yeah.

David Rosenthal 51:43 Europe was basically ready to implement this time division, multiple access, digital standard in Europe for European cell phone technology, and that was driven by Ericsson, the big European, um, uh, infrastructure provider.

Ben Gilbert 51:56 So, so I think, like, just to pause and reflect, big innovation going from maybe twenty, thirty, fifty X, like, you, you get a lot more capacity by saying instead of just one person gets a frequency at any given time, you now get a whole bunch of people who can use that frequency because the signal's digital, because of time division. This is the movement from frequency division, multiple access, FDMA, to time division, multiple access, or TDMA.

David Rosenthal 52:21 And it's actually, you said thirty, fifty, maybe now that kinda is, but, like, back then, it was three to five X. Really, I think the right analogy is, like, um, it is time sharing. Time sharing is what it is, and it's kinda like the old computing model of, like, time sharing on a teletype on a mainframe. That's what's going on here.

Ben Gilbert 52:38 Yep. And so f- over to Qualcomm, so they're, they're thinking about doing this, this satellite communication thing, and remember, Irwin studied with Claude Shannon, so he's always thinking about what is the most efficient way to use all the way up to the theoretical limit of how much signal can be communicated in a given medium at a given time. And he's sort of looking at TDMA, and they're like, "Ah, I think there's something even more efficient than this, and we need something more efficient than this for this satellite network."

David Rosenthal 53:09 And these guys were all around the beginning of the internet.

Ben Gilbert 53:12 Yes.

David Rosenthal 53:13 And, like, you think about... If you know anything about how the internet works-

Ben Gilbert 53:15 And packet switching networks generally

David Rosenthal 53:17 ... under the hood, packet switching, it's not time sharing. [chuckles]

Ben Gilbert 53:19 No, it is. Everybody compresses their data as much as they possibly can into a digital packet. They fire it off, and it bounces around a series of, of places until it hits the other side, gets decoded, and hopefully, the protocol is written collect- correctly, where as you're sort of opening your packets and, and sequencing them all in the right way, it seems perfect and how the message was originally intended to be when it was encoded in the first place.

David Rosenthal 53:43 And you said the magic word, decoded, and that's what these guys figure out. They're like, "Duh, we'll just use code," and then, like, everybody will send all the conversations, all at the same time, all across all the different channels. We'll maximally efficiently use all the spectrum allocated, and we'll just append a little code to the beginning of each digital conversation, and it'll get reassembled on the back end.

Ben Gilbert 54:07 So-

David Rosenthal 54:08 Which is basically the same way the internet works.

Ben Gilbert 54:09 Yeah. So to break that down further, so you've got this really interesting situation now where all messages are encoded digitally, and I, I keep, like, going back to this analogy that they use in the telecommunications industry, uh, of the dinner party. So rather than, uh, the sort of frequency, the FDMA model of everybody's in their own room, having their own conversation, you know, that's not super efficient, or TDMA, which is you put five or ten people in a room, but they need to wait their turn to have their conversation. Well, what c- code division basically is, the, the, as the analogy goes, is, well, everybody can communicate in whatever room they want. They're all just communicating in their own language, and the person that they're communicating to understands that language. So they can sort of listen and, and disregard noise that's coming in from people having-

David Rosenthal 54:57 It's like you were saying, if I'm expecting your message to be-... I had breakfast this morning, and then, like, I don't care how much noise is in the system.

Ben Gilbert 55:04 You don't care how much Spanish-

David Rosenthal 55:05 Either know you said that or you didn't say that.

Ben Gilbert 55:06 Right. You're like, "I'm disregarding all the Spanish, and I'm just listening for English that sounds something sort of like describing someone's state of breakfast."

David Rosenthal 55:13 Yeah.

Ben Gilbert 55:14 And that's an oversimplification. If, if you really wanted to sort of dig into it, what, what you're basically doing is, uh, you run any given packet through, like, literally an, an encoding. So maybe my encoding is one zero zero one zero. So you detect-- so you encode whatever the packet of information is, you run it through, sort of add it to one zero zero one zero, and then you end up with this signal that you can sort of stack on top of other messages. So imagine a digital signal, like a digital wave, where all of our messages are layered on top of each other, so the top of the peaks of some of the wave are extra high, and the troughs are extra low for others, and when it all arrives all together on the other side, the other side knows how to decode all of our messages. So it individually subtracts all of our messages, which are layered all on top of each other, off the very same digital signal, until it basically has all of our messages spread apart. It disregards any of the ones that doesn't match the code that I'm looking for, that I'm listening for, and it says, "I'm-- I just care about the message that came from Ben," which was one zero zero one zero, or whatever code I just made up, uh, and that-

David Rosenthal 56:22 And it reassembles it?

Ben Gilbert 56:23 The, the shtick for CDMA.

David Rosenthal 56:26 And what these guys do, just this brilliant, like... They saw it, they had the background, they had the engineering. They, they, like, everything, right place, right time, and the business sense. They developed this, and they freaking patent it. [chuckles] In 1986, well before, years before Qualcomm gets actually directly involved in the cellular industry at all, they patent the method and technique for code division multiple access applied to terrestrial cellular networks in 1986, in US Patent Number four million nine hundred and one thousand three hundred and seven, which is one of the most valuable patents in history. [laughing]

Ben Gilbert 57:08 Yep.

David Rosenthal 57:08 Unreal! Like, literally, they played such a long game, and they threaded needle after needle after needle, and that was just the first.

Ben Gilbert 57:15 And, and when you think about why that is so valuable, when you really distill down what the CDMA patent is, it was the very first time that you could say: Well, rather than thinking about one d- one specific frequency, just imagine you have all the frequencies available to you, and everybody can, all the time, broadcast their message on whatever the next available frequency is, and we have the technology to just figure it out on the other side. Oh, and by the way, you don't even need to do it with super high power, so it's good for battery life and, and that sort of thing. Because since it's encoded-

David Rosenthal 57:46 You don't need an, an internal combustion engine to power this thing.

Ben Gilbert 57:48 Right. The other side knows what it's looking for. So this is the equivalent of there's a bunch of people whispering in a gigantic house to each other, all in different languages. So it's this, like, way more efficient way to use a given medium to have the absolute maximum amount of conversations or signal transmission in that medium.

David Rosenthal 58:09 Okay, so Qualcomm founded in 1985, patent issued 1986, or applied for in 1986.

Ben Gilbert 58:17 Which is worth remembering, so it'll expire in 2006.

David Rosenthal 58:20 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, 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." 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-

Ben Gilbert 59:29 I had no idea

David Rosenthal 59:30 ... which implements it on their own proprietary fleet of trucks-

Ben Gilbert 59:32 Ah.

David Rosenthal 59:33 - building further their technical advantage over just about every other retailer in America. [chuckles]

Ben Gilbert 59:38 And at this point, they've walked away from the satellite contract, right? They, they sort of like-

David Rosenthal 59:42 Yeah, they wa- the, the, the Hughes satellite thing, that, that actually just never happened. [chuckles]

Ben Gilbert 59:47 So they developed this technology, they patent it, they were like: "Oh, but there's no money here 'cause the g- the contract they had up-

David Rosenthal 59:51 Yeah, the FCC was like: "Yeah, satellite, Jurassic Park phone's not gonna be a thing."

Ben Gilbert 59:55 Right. So instead, they're focused on this OmniNET-

David Rosenthal 59:59 So they focus-

Ben Gilbert 59:59 deal

David Rosenthal 59:59 ... 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-

Ben Gilbert 1:00:15 Yep

David Rosenthal 1:00:15 ... 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 three-point-five million dollars 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.

Ben Gilbert 1:00:44 Mm.

David Rosenthal 1:00:44 Um, and in 1989, in the first year of business for OmniTRACS, they do thirty-two million dollars in revenue. [chuckles] In 1989. [chuckles]

Ben Gilbert 1:00:53 Which is w- something like- it's, like, inflation-adjusted a hundred million dollars?

David Rosenthal 1:00:57 It's a lot of money, and there's a lot of demand for this product.

Ben Gilbert 1:00:59 In the first year of the product launch.

David Rosenthal 1:01:01 Year one. Um-

Ben Gilbert 1:01:02 Now, there's a lot of cogs, like, this isn't SAS revenue-

David Rosenthal 1:01:05 No, yeah, yeah

Ben Gilbert 1:01:05 ... we're talking about.

David Rosenthal 1:01:06 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, kinda 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."

Ben Gilbert 1:01:38 Right. We try to have as small an IT department as possible.

David Rosenthal 1:01:40 Yeah, why is this technology so-

Ben Gilbert 1:01:41 Why on earth are you asking us to do all this work and just handing us this pile of technology?

David Rosenthal 1:01:45 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." [laughing]

Ben Gilbert 1:01:58 Which is, like, every enterprise company that you ever-

David Rosenthal 1:02:00 Duh.

Ben Gilbert 1:02:01 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.

David Rosenthal 1:02:10 Yeah, Solutions. [laughing] They, they, they, uh, make the, uh, business discovery of solutions.

Ben Gilbert 1:02:16 We also should say, like, this is a tremendously dilutive financing event, that 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 five, 10, 20% of your business for two-

David Rosenthal 1:02:54 I don't know too many seed rounds that are happening for a 5% dilution these days, [chuckles] but, uh-

Ben Gilbert 1:02:57 But you-

David Rosenthal 1:02:58 But they were. [chuckles]

Ben Gilbert 1:02:58 They were. And so it's a, 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- "

David Rosenthal 1:03:10 Yeah, I think some people were pretty bitter about this.

Ben Gilbert 1:03:12 I- Totally. And you could 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.

David Rosenthal 1:03:27 Yeah, they literally were a couple years away from making actual 100 million because the business doubles every year for, like, five years from a $32 million base, like-

Ben Gilbert 1:03:36 Wow!

David Rosenthal 1:03:36 ... 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 and 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-

Ben Gilbert 1:04:11 Yeah

David Rosenthal 1:04:11 ... because you needed such sophisticated processing power-

Ben Gilbert 1:04:15 Yes

David Rosenthal 1:04:15 ... on both the endpoints, on the base stations and the endpoints, to actually make this work. Like, it sounded completely freaking crazy.

Ben Gilbert 1:04:23 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-

David Rosenthal 1:04:56 On the handset.

Ben Gilbert 1:04:57 On the handset.

David Rosenthal 1:04:57 And so this is the thing, like maybe-

Ben Gilbert 1:04:59 In real time

David Rosenthal 1:04:59 ... 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 Zack 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-

Ben Gilbert 1:05:22 Yep

David Rosenthal 1:05:22 ... 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.

Ben Gilbert 1:05:31 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-

David Rosenthal 1:05:40 Moore's Law

Ben Gilbert 1:05:40 ... where Moore's Law would be at the time that they shipped their product.

David Rosenthal 1:05:43 Yeah.

Ben Gilbert 1:05:44 So knowing that something was possible-

David Rosenthal 1:05:45 At the time of shipping.

Ben Gilbert 1:05:46 Yes.

David Rosenthal 1:05:46 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.

Ben Gilbert 1:05:53 It's amazing.

David Rosenthal 1:05:53 Like, so cool, and, like, the fact that it's like, there were so few people that knew that then, and, like, ah, crazy.

Ben Gilbert 1:05:59 Well, listeners, for our second sponsor of this episode, we are talking about Brex, and we're doing something a little bit different. Our friends over at Brex are big fans of the community and asked what we could do for the community. So if you become a Brex customer because of hearing about them on Acquired and using the link in the show notes, that's brex.com/acquired, when you sign up, they will send you a free Acquired T-shirt, and that also goes for anyone who signed up earlier this season.

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David Rosenthal 1:08:19 Thank you, Brex. So in September of 1988, all these factors, you know, they've got the financing capability to take a swing at this. They see a path with Moore's law to it being technically feasible. They've got the patent. [chuckles] They're literally the only ones that can do this, and then the market timing. So in September 1988, the US Cellular Telecommunications Industry Association, or CTIA, as most people know it, and then, uh, its related entity, the TIA, the Telecommunications Industry Association, they release performance requirements, uh, the spec for performance requirements for the planned upgrade of the US's cellular networks from the analog 1G networks to the new digital 2G networks.

Ben Gilbert 1:09:06 And this is just the US one. Europe has its own standards body.

David Rosenthal 1:09:09 Europe's already well on its way.

Ben Gilbert 1:09:10 Yep.

David Rosenthal 1:09:11 GSM, Ericsson, TDMA, it's all happening here in Europe.

Ben Gilbert 1:09:14 Yep.

David Rosenthal 1:09:15 Um, the Qualcomm folks, of course, they eagerly anticipate the release of this spec, and they look at it, and they're like: Oh, my God, this could not have been written better.

Ben Gilbert 1:09:23 It's, it's written for us. It's perfect.

David Rosenthal 1:09:24 This is a dream. It's written for us. They realize two things. One, of course, TDMA is the, the front-runner and Ericsson and all that to, like, you know, do the US, too, 'cause they're successfully doing it in Europe.

Ben Gilbert 1:09:32 And, and not only is it, it being done in Europe, it makes sense to adopt in the US, too, because it's kinda nice to have a global standard and because it's quite believable. Like, okay, one big thing I have to believe is we're switching to digital. I can believe that. Another big thing I have to believe is that you're able to use the same frequency for several conversations at once through cutting up, you know, d- different time windows. Okay, I can believe that, but gosh, how much new stuff are you trying to invent all at the same time?

David Rosenthal 1:09:58 And ShowMe can-

Ben Gilbert 1:09:58 Anything further than that feels like I gotta take a leap of faith.

David Rosenthal 1:10:01 And ShowMe can work, and Ericsson's well on the way to, like, pilots proving, showing it works. This actually works.

Ben Gilbert 1:10:05 They're big companies.

David Rosenthal 1:10:06 Yeah.

Ben Gilbert 1:10:06 They've succeeded before. They're the right vendors that everyone trusts.

David Rosenthal 1:10:09 So the spec that the CTIA publishes, the Qualcomm guys, they just must've just been, like, beaming ear to ear. Uh, they realized that TDMA, because of the capacity limits of TDMA, it's not gonna meet spec. Like, you can have the best implemention- implementation of TDMA, it's not gonna allow for enough compression to actually meet the spec that the US wants to hit.

Ben Gilbert 1:10:30 So here, th- this is, uh... I've been, I've been, like, waiting to bring this thing up. So at this point in history, the US standards body ha- is correctly forecasting the incredible popularity of cell phones in the US, so they, they're setting a really high bar for the amount of phones that need to be able to use this network. Um, and the reason that they have, uh, since changed their tune is, in 1980, this is a fun bit of trivia, AT&T, who has been the incumbent for 100 years on all things telecommunications, commissioned McKinsey & Company to predict-

David Rosenthal 1:11:04 [chuckles] McKinsey

Ben Gilbert 1:11:04 ... cell phone-

David Rosenthal 1:11:05 It all goes back to McKinsey always.

Ben Gilbert 1:11:06 Always. To predict the cell phone usage in the United States in the year 2000, so flash forward 20 years in the future, the consulting group argued that cellular te- telephony would be a niche market.

David Rosenthal 1:11:19 Ah, yes, of course.

Ben Gilbert 1:11:20 They forecasted 900,000 people would be subscribed to a cellular telephony network in the year 2000.

David Rosenthal 1:11:27 I think I have 900,000 cellular connections personally. [laughing]

Ben Gilbert 1:11:31 [laughing] So, as you know, that number was off, uh, by over 100x.

David Rosenthal 1:11:36 [chuckles]

Ben Gilbert 1:11:36 There were 109 million people, not 900,000, 109 million subscribed in the year 2000. So i- it does make the point that in 1980, it was super not obvious. Like, you had some of the smartest people in the world, both in domain depth at AT&T and just good business model thinkers at McKinsey, wildly misforecasting this. And to illustrate how big the miss was, AT&T eventually bought McCaw Cellular for $12.6 billion to become AT&T Wireless, which is the AT&T we actually all know today, and catch up in mobile telephony.

David Rosenthal 1:12:10 Right.

Ben Gilbert 1:12:10 So th- this, like, 2G spec that was written is, is right around the time that a, a lot of the people in the industry are starting to realize, like, "Uh-oh, were we super wrong in what we all thought just a few years ago the potential of this thing was?"

David Rosenthal 1:12:24 So that's like, you know, back to the original Edwin Land quote starting the episode of, like, creativity, like, one act following another, you know, enabled by it, suggested, suggesting the next... Like, this is the next, like, needle they thread, you know, domino that falls-

Ben Gilbert 1:12:37 Yep

David Rosenthal 1:12:37 ... of TDMA didn't hit the spec. [chuckles] And they could kind of foresee this, you know, um, 'cause they knew what the demand was, and they knew TDMA wasn't gonna be able to do it. So, um, [chuckles] here's the next... This, this is cool. Like, I didn't expect to get into kinda like geopolitics on this, but, um, the one great thing... You know, the US has, like, a ton of bureaucracy and regulation, like, all of this being, like, you know, case in point. But one incredible-

Ben Gilbert 1:13:01 I think this took five years to eventually-

David Rosenthal 1:13:04 Well, and, like, these standards bodies and, like, all, like... This, this is not the free market, like, by any means. But the, the one difference in the US process for all this versus the European process, and it was the difference that made all of the difference, was the US government said, "The industry associations, you guys can set the specs and all that, and that can be official, but it's not mandatory."... So like in Europe, it was, like, mandatory.

Ben Gilbert 1:13:32 Mm.

David Rosenthal 1:13:32 Like the TDMA, which GSM was based on, like, mandatory. That's it. [chuckles] And plenty other countries, you know, mandatory. In the US, it was like, "This is the s- industry standard, and, like, we recommend that any mobile carrier follows it. But if you wanna do your own thing, like, as long as it meets the performance spec, you can use whatever technology you want."

Ben Gilbert 1:13:53 And importantly, standards bodies are decoupled from government agencies.

David Rosenthal 1:13:57 Yeah.

Ben Gilbert 1:13:57 So the FCC allocates spectrum, but the standards bodies are literally just industry consortia-

David Rosenthal 1:14:01 They're industry associations, yeah.

Ben Gilbert 1:14:02 And, and they need to exist because there's so much coordination between all the different manufacturers, and carriers, and companies involved, that, like, you need to have a standard, otherwise, the innovation doesn't happen, uh, because no one knows what to build against, and no one can sort of effectively collaborate enough.

David Rosenthal 1:14:19 So once all this, you know, the, the standard comes out, Qualcomm immediately, like, goes to Washington. Like, Irwin and Andy and everybody, they go, they go to, they go to DC, and they're like, "Hey, just to make sure, we just wanna, like, be crystal clear, can you confirm to us that even though this other thing is the standard, if a given carrier, mobile operator, wanted to use something different, as long as it used a spec, like, that's cool, that's not illegal, right?" And they're like, "Yep, that's the case." They're like, "Okay, cool, thank you. [chuckles] We'll be back." [laughing] And, um, so that was, like, the next needle they thread. They're totally undaunted. They go and they're like, "Great, we can go pitch individual carriers on using CDMA as a technology." So they start a sales process. This is now the beginning of 1989. They start a roadshow. They go out pitching this new novel CDMA standard versus the TDMA industry standard, and this starts what is known... Literally, I tweeted this the other day. In the Wikipedia entry for all this, this is, like, canonically known as the Holy Wars of Wireless. [laughing]

Ben Gilbert 1:15:24 [laughing]

David Rosenthal 1:15:24 And, uh, there's so much telecom nerdery, but like-

Ben Gilbert 1:15:27 And it really is holy-

David Rosenthal 1:15:27 It really is holy wars.

Ben Gilbert 1:15:28 'Cause it's about belief. So many people were just like: "I don't believe you that CDMA will work."

David Rosenthal 1:15:33 And, uh, y- you know, it was literally only the Qualcomm folks who thought it would work. Um, [lips smack] and not just, you know... I, I'm reminded of the Don Valentine, like, I knew the future. Based on all-- They didn't know the future per se, but based on all their experience, they were very, very confident that it would work and it would win, despite the seemingly overwhelming odds, because they knew a secret, which was that at the end of the day, as long as there was not government-enforced standardized regulation, they knew that economics would win-

Ben Gilbert 1:16:09 Yes

David Rosenthal 1:16:09 ... in the market. And there are so many benefits of CDMA versus TDMA. We've covered some of them. Um, you know, one of, one of the other ones is that, like, the voice quality is actually much better than TDMA. Like, it's all... Like, there's a whole litany of benefits.

Ben Gilbert 1:16:22 Security is much better. I mean, it was originally created for the government to beam stuff up and down to satellites. Another huge one is it literally i- if you're operating a cell network, and you can have more subscribers per unit of infrastructure, it's literally cheaper. So you're, you're gonna-

David Rosenthal 1:16:38 Yeah, what is it gonna be?

Ben Gilbert 1:16:39 It's a lower-cost technology.

David Rosenthal 1:16:40 This is the thing. So there's one benefit that actually matters. All the others are, like, nice to have on a feature spec. There's one benefit that is gonna allow them to be super sure they're gonna win, which is that it is, like, an order of 3 to 5 X more efficient to operate.

Ben Gilbert 1:16:58 Unfortunately, they originally pitched 40 X.

David Rosenthal 1:17:00 Yeah, [chuckles] right.

Ben Gilbert 1:17:01 That's, that's the standard that everyone was benchmarking.

David Rosenthal 1:17:03 Oh, that was versus animal, uh, versus analog, I think.

Ben Gilbert 1:17:05 Okay.

David Rosenthal 1:17:05 It's 3 to 5 X more than TDMA.

Ben Gilbert 1:17:07 Yeah.

David Rosenthal 1:17:07 So that meant if you were a carrier and you went with this crazy CDMA thing, and it actually worked, you could fit on a given set of spectrum that you were operating with, you could fit 3 to 5 X more subscribers, 3 to 5 X more monthly revenue-

Ben Gilbert 1:17:23 Yep

David Rosenthal 1:17:23 ... on that same fixed cost base than your competitors who are using TDMA. And if you know anything about, like, if we've learned anything on Acquired about economics of industries, and power, and Hamilton Helmer and all that, like, if you have a scale advantage, like, or you have a power advantage of differential profit margins versus your competitors, you are gonna run the table on your competitors in any given market-

Ben Gilbert 1:17:44 Yes

David Rosenthal 1:17:44 ... if you do this.

Ben Gilbert 1:17:45 If, if a customer is worth more to me than they're worth to you, and we can offer them the same value, they're... I, I'm gonna win-

David Rosenthal 1:17:52 Yeah

Ben Gilbert 1:17:52 ... in the long run.

David Rosenthal 1:17:52 'Cause you can just lower prices and get all the customers [chuckles] and make more profits along the way.

Ben Gilbert 1:17:56 And there's, uh, uh, uh... We've only sort of scratched the surface on this episode of reasons to doubt that code division was the right technology. There were all these other crazy hoops they had to jump over. One of them is the, the near-far interference problem.

David Rosenthal 1:18:10 Oh, yeah. Oh, yeah, this is like-

Ben Gilbert 1:18:11 Like, if you think about it, so, like, let's keep the whispering analogy going. The code division idea is that we can all talk really quietly and use the smallest amount of power and the smallest amount of sort of gain in our signal, uh, to communicate with each other. So it's much more efficient than these, all these other, um, high-gain, high-power, high-volume signals that everyone else is trying to, to use. Well, if I'm using a really low-gain signal and I'm far from my, my, the base station, from the cell tower, uh, that's an issue because the people who are really close are gonna sort of drown me out. Imagine we're all whispering, but I'm miles away. Well, you're gonna hear the person whispering right next to you. So, you know, we're very early days in powerful chips, powerful power management, um, and you've got Qualcomm pitching the industry that they're gonna do this, and people are like: "Wait, but you have to turn down the gain on anybody really close to the towers and turn up the gain on anybody really far from the towers, and you have to know in real time and adjust in real time all of that. So you have to be good at power management chips. Also, how are you going to know how far away someone is from the tower?" And they're like: "Well, we'll be able to just, uh, observe the signal-... that is coming back from the tower, or perhaps do it on the tower, observe the signal coming from the phone itself, and we will, in real time, determine if it needs to go up or down. And this is blowing people's minds in the mid-'80s. They're like, "Are you crazy?"

David Rosenthal 1:19:38 They're like, "Oh, don't worry, we got that."

Ben Gilbert 1:19:40 [chuckles] In real time, you're gonna modify a signal based on what you're currently hearing from that signal, and then Qualcomm comes in way over the top and says, "Oh, also, there's this new thing called GPS that is coming out, and we're gonna start-

David Rosenthal 1:19:53 Which they knew about from the military

Ben Gilbert 1:19:54 ... basing the technology on GPS, so we know how far away someone is from the cell tower based on GPS, which doesn't really exist yet." Like, there's all these impossibilities with-

David Rosenthal 1:20:05 So cool

Ben Gilbert 1:20:05 ... this system that theoretically is better, but we've never witnessed any of the building blocks that are going to go into it actually work in practice yet.

David Rosenthal 1:20:13 Back to the magic thing, like, just the technological magic that went into this. At every stage of the way, they're like: "Yeah, we got this. Figure it out." [chuckles]

Ben Gilbert 1:20:22 [chuckles]

David Rosenthal 1:20:22 And they patent every single piece of this.

Ben Gilbert 1:20:26 Yep.

David Rosenthal 1:20:27 Every single piece. [chuckles] Like, uh, un- unreal. The first patent we talked about is the most valuable, but, like, there is a whole string of, you know, dozens, hundreds, thousands of other patents that come after this-

Ben Gilbert 1:20:38 Yep

David Rosenthal 1:20:38 ... that are just incredibly valuable. So they start the roadshow pretty quickly in February of 1989. Uh, one of the largest carriers in the Southern California area, PacTel Wireless, is interested 'cause they get it, like, this economic argument, like, it's... You know, basically, they're like, "All right, if this works, like, yeah, you got us." [chuckles] Um, so they put up a million dollars to fund a prototype. They're like: "Okay, prove to us that this works. Build a prototype." Qualcomm, for the rest of the year, works on this. November of 1989, they host a demo, you know, with the PacTel money, but they invite the whole rest of the industry in San Diego. Uh, and there's [chuckles] famously a little hiccup where, like, they're about to... You know, uh, Irwin's giving, like, a big speech, introducing it, then they're gonna do the actual demo. They've got vans driving around the city, and then, like, a base station back at Qualcomm HQ, uh, and they're gonna make it all work. Um, he's giving the intro speech, and one of the engineers is, like, frantically waving in the back, like, "Keep talking, keep talking!" They had to reboot the GPS system. [laughing]

Ben Gilbert 1:21:35 [laughing]

David Rosenthal 1:21:35 And so, like, he's, you know... Anyway, he makes a little quip of, like, "As a former professor, it was easy for me to keep talking." He's told this story, like, a million times. Anyway.

Ben Gilbert 1:21:42 There, there is something funny, too, about this original demo, where they, they're not a consumer m- uh, hardware manufacturer yet. They've never built a phone. They're, they're a bunch of academics and consultants and, you know, the, the, uh, electrical engineers. And so for this demo, the, the cell phone that they build basically looks like a mini fridge with, like, a handset hanging off of it.

David Rosenthal 1:22:02 Yeah.

Ben Gilbert 1:22:02 I mean, they build the most-

David Rosenthal 1:22:03 There's a photo of it in the book

Ben Gilbert 1:22:04 ... huge cabinet. [laughing]

David Rosenthal 1:22:04 It's awesome. It's awesome. Uh, we'll come back to building handsets in a sec. Um, so it works, and then, like, PacTel's like: "Great, we're in." Uh, and then some of the other-

Ben Gilbert 1:22:14 Which PacTel, by the way, would eventually get rolled up into Verizon.

David Rosenthal 1:22:17 Yeah.

Ben Gilbert 1:22:17 I think they're basically Verizon's West Coast operator at this point.

David Rosenthal 1:22:20 Yep. Um, uh, some of the other industry folks who come, they're like: "Well, this is impressive. It works, but, like, San Diego is a pretty forgiving environment for cellular technology. Like, this is a very, like, geographically easy city to operate wire- for in terms of wireless signals. Prove to us that this can work in, like, an urban jungle environment." And, uh, Qualcomm's like: "Okay, how about New York?" [laughing] And they're like: "Well, we'll see you there." So in February of 1990, they do a successful demo in Manhattan, in New York City. On the back of that, they sign, uh, NYNEX, NYNEX Mobile, which is one of the largest, uh, New York carriers. Um, and then in August, they sign Ameritech, which is one of the largest-

Ben Gilbert 1:23:01 Chicago, I think.

David Rosenthal 1:23:02 Chicago, yeah. Uh, I think in a big chunk of the Midwest.

Ben Gilbert 1:23:05 Midwest.

David Rosenthal 1:23:05 Um, uh, and then they make another brilliant move. They start going international. So, like, here in the US, there's all this, like, forward momentum that's already happened with the 1G analog services and, you know, the TDMA and all that. They're like: What if we go out to countries where it's just tabula rasa, like clean slate, and we pitch this as, like, the obvious best technology? And famously, South Korea, back to the [chuckles] like government-mandated standards, the South Korean government is like: "Yep, this is clearly the best," government-mandated, all... You know, they were building out the first cellphone networks in San Kor- in South Korea that were gonna be these digital, you know, next-gen networks.

Ben Gilbert 1:23:41 Yep.

David Rosenthal 1:23:41 All CDMA, all Qualcomm. Uh, South Korea, for a time, was, I think, close to forty percent of Qualcomm's revenues-

Ben Gilbert 1:23:49 Wow!

David Rosenthal 1:23:49 ... 'cause the whole country, like... [chuckles] And it was one of the, you know, most advanced mobile countries, um, all just using Qualcomm.

Ben Gilbert 1:23:55 There's lots of benefits to the free market and freedom and, uh-

David Rosenthal 1:23:59 There's also benefits to, uh-

Ben Gilbert 1:24:00 rights of individuals

David Rosenthal 1:24:00 ... regulatory and government capture. [chuckles]

Ben Gilbert 1:24:02 Yes, yes. Coming in over the top with an edict is also beneficial.

David Rosenthal 1:24:05 Yeah. [chuckles] Um, in, uh, December of 1991, on the back of all this, they go public. Uh, there is a paltry sixty-eight million dollars in their IPO. Uh-

Ben Gilbert 1:24:15 Like a Series B.

David Rosenthal 1:24:16 Yeah, totally. [laughing]

Ben Gilbert 1:24:18 [laughing]

David Rosenthal 1:24:18 A twenty twenty-one Series B. [laughing] So, um, finally, in 1993, the, uh, US industry associations, the CTIA and the TIA, does actually adopt CDMA as a second standard officially. It's like, "Okay, now you have our blessing," and it's like: "Well, it doesn't matter, we already got, like, half the industry signed up with us anyway. You know, thanks for nothing." Um, at that point, Qualcomm does a secondary offering. They raise another hundred and fifty million on the public markets. A couple years later, they do, or maybe like a year later,

David Rosenthal 1:24:48 they raise another five hundred million on the public markets. Um, so they're very well-capitalized. And why are they raising all this money? Back to the Omnitracs and, like, this, you know, solutions discovery of, like, enterprise. You know, the people that they're pitching as their core customers, the wireless carriers, they are sophisticated operators, but there's a whole ecosystem of technology providers to them, and they already, uh, except in the case of South Korea, um, you know, they already have built out, like, towers, infrastructure. They've gotta replace all that. And so, you know, it's a big ask. Even with the economic advantage, it's a real big ask for a PacTel or, you know, NYNEX or any of these folks.

Ben Gilbert 1:25:27 Oh, if, if you're PacTel, you're like: "It sounds great to me that you are going to have this much better standard and this much better technology," um, but-

David Rosenthal 1:25:36 Are you gonna replace my towers? Are you gonna replace my base stations? Are you gonna replace all of my customers' handsets? Like-

Ben Gilbert 1:25:42 Right. Like, all of our customers buy phones from phone manufacturers, so are those phone manufacturers signed up?

David Rosenthal 1:25:48 Yeah, right. This- it quickly becomes a, uh-... rat's nest of, uh, industry dependencies. You know, Qualcomm, they're like this, you know, still relatively small San Diego, you know, technology startup. They can't do all this stuff. So they do start signing some partnerships with both base station infrastructure providers and handset makers. They sign Nokia, big win, big European manufacturer as a, as a partner. But they realize, you know, to do this whole solution, like specifically, there's kind of four parts to making a CDMA wireless network work. We've talked about all of them, but just to enumerate them here, you need the core IP and technology that we've talked about. You know, Qualcomm's got that for sure. You need the infrastructure, the CDMA, like base stations that go on the towers-

Ben Gilbert 1:26:30 Yeah

David Rosenthal 1:26:30 ... you know, all that, like the back ends, the switching, all that. You need that infrastructure needs to be CDMA. The old stuff's not gonna work with it. The TDMA stuff's not gonna work with it. Um, you need the handsets for consumers to work. Same deal, it's gotta be CDMA. And then probably most importantly, in order to make those two sets of infrastructure work, you need the silicon, the semiconductors that go into them.

Ben Gilbert 1:26:53 Yep.

David Rosenthal 1:26:53 And so somebody's gotta do all four of those things. Uh, you know, like all four of those things need to happen. Qualcomm's for sure got number one covered. The question is, who's gonna do two, three, and four? Qualcomm's like, you know, they sign- start signing partners, but they're like, "You know, we really need to spur adoption. I think we kinda gotta do everything ourselves."

Ben Gilbert 1:27:11 We need to offer the complete solution.

David Rosenthal 1:27:13 The complete solution, and this is a major undertaking. This is why they raise all this money in the public markets, um-

Ben Gilbert 1:27:20 Whi- which is quite interesting because despite... I mean, none of us are buying Qualcomm phones today. Like, qu- no, Qualcomm-branded phones.

David Rosenthal 1:27:28 Yeah.

Ben Gilbert 1:27:28 So-

David Rosenthal 1:27:28 Today, spoiler alert, Qualcomm today is the largest fabless semiconductor company in the world. [chuckles]

Ben Gilbert 1:27:34 Isn't that crazy? Bigger than Nvidia.

David Rosenthal 1:27:36 Bigger than Nvidia, and they don't make handsets-

Ben Gilbert 1:27:37 And, and bigger than Apple

David Rosenthal 1:27:38 ... and they don't make infrastructure. [chuckles]

Ben Gilbert 1:27:39 I think.

David Rosenthal 1:27:40 Bigger-

Ben Gilbert 1:27:40 B- bigger than Apple.

David Rosenthal 1:27:41 Oh, yeah, yeah. For sure-

Ben Gilbert 1:27:42 In terms of numbers of orders they're placing with chip foundries-

David Rosenthal 1:27:46 Yeah

Ben Gilbert 1:27:46 ... Qualcomm is the biggest.

David Rosenthal 1:27:47 Yeah.

Ben Gilbert 1:27:47 So-

David Rosenthal 1:27:48 How do you get from there to here? [chuckles]

Ben Gilbert 1:27:49 So they did need to run this really interesting playbook where even though it wasn't going to be the thing that they necessarily did long term, in order to get their solution adopted, they had to do it in the moment.

David Rosenthal 1:27:59 They'd strap it up. So they do a- another just brilliant move. They create two joint ventures. Uh, I believe, I believe both of them, I know the handset one, but I believe both were fifty-one percent owned by Qualcomm-

Ben Gilbert 1:28:13 Yeah

David Rosenthal 1:28:13 ... forty-nine percent owned by the partner. On the infrastructure side, they partner with Northern Telecom, Nortel, to do a JV to manufacture CDMA base station, uh, equipment. And then, in another wonderful Acquired full circle moment-

Ben Gilbert 1:28:29 They call up our friends in Japan.

David Rosenthal 1:28:30 They call up our friends in Japan, who, at the time, their US manufacturing headquarters was based in San Diego-

Ben Gilbert 1:28:39 That's convenient

David Rosenthal 1:28:40 ... California. Very convenient. Our friends-

Ben Gilbert 1:28:43 Sony.

David Rosenthal 1:28:44 I guess, uh, Akio Morita was running it-

Ben Gilbert 1:28:46 Yeah

David Rosenthal 1:28:46 ... at that point in time.

Ben Gilbert 1:28:47 Yep.

David Rosenthal 1:28:48 The Sony Corporation to partner in a JV to make handsets. So I, I actually had a Qualcomm handset back in the day.

Ben Gilbert 1:28:55 You did?

David Rosenthal 1:28:55 Probably a-

Ben Gilbert 1:28:55 Like one of those little flip phones?

David Rosenthal 1:28:57 Yeah. Uh, well, the, oh, that was a lawsuit with Motorola. [chuckles]

Ben Gilbert 1:28:59 Right.

David Rosenthal 1:28:59 No, no, I had a brick phone.

Ben Gilbert 1:29:00 Ah.

David Rosenthal 1:29:01 Um, like a small brick. Not a Zack Morris brick, but a small brick. [chuckles]

Ben Gilbert 1:29:03 [chuckles]

David Rosenthal 1:29:04 Um, it was a Qualcomm phone.

Ben Gilbert 1:29:05 Oh.

David Rosenthal 1:29:05 That was made by the JV with Sony.

Ben Gilbert 1:29:07 Oh.

David Rosenthal 1:29:07 That was a Sony phone-

Ben Gilbert 1:29:08 Ah

David Rosenthal 1:29:08 ... um, with Qualcomm branding. Uh-

Ben Gilbert 1:29:10 But they're doing all this to s- to be able to answer yes when a carrier-

David Rosenthal 1:29:14 Yeah

Ben Gilbert 1:29:14 ... is coming to them and saying: "Well, great, we'll be CDMA, but question mark, question mark, question mark." Qualcomm is, uh, Qualcomm's like, "Yep, yep, and yep, we make all that stuff."

David Rosenthal 1:29:22 Yep, yep, yep, yep.

Ben Gilbert 1:29:23 "You should feel safe adopting us."

David Rosenthal 1:29:25 IP, infrastructure, handsets, silicon that goes into both, we got all of it. So we just talked about one, two, and three.

Ben Gilbert 1:29:32 And these-

David Rosenthal 1:29:33 We didn't talk about the silicon.

Ben Gilbert 1:29:33 And to be clear on the silicon, people know the Snapdragon brand today. This is not Snapdragons. This is not systems on a chip, CPUs. This is not a competitor to Apple's A15. This is literally the silicon to power the radios, and just that.

David Rosenthal 1:29:50 And this-

Ben Gilbert 1:29:50 It's to do the encoding, decoding, power management of literally just attenuating the airwaves to send CDMA-encoded telephony back and forth.

David Rosenthal 1:30:01 You, you're making it sound, um, uh, trivial, but this is actually... This is, um, this is the final-

Ben Gilbert 1:30:10 I'm not making it sound trivial.

David Rosenthal 1:30:11 Well, that's-

Ben Gilbert 1:30:11 I'm not making it sound trivial. [chuckles]

David Rosenthal 1:30:12 I mean, I couldn't do it.

Ben Gilbert 1:30:13 You do it. [chuckles]

David Rosenthal 1:30:13 Yeah, right. You do it. [laughing]

Ben Gilbert 1:30:16 [laughing]

David Rosenthal 1:30:16 This is the final just brilliant masterstroke in this long series of brilliant masterstrokes that Irwin and, and Qualcomm, you know, did at this time. I don't know any other chain of just brilliant, brilliant strategic decisions, one after the other. If this had been ten years earlier, they would've had to do the same thing with silicon. They would've had to partner with Intel or, you know, AMD or somebody-

Ben Gilbert 1:30:37 Yep

David Rosenthal 1:30:37 ... TIA or TI, Texas Instruments, you know, someone.

Ben Gilbert 1:30:40 One of the real men that had fabs.

David Rosenthal 1:30:41 One of the real men [chuckles] that had fabs. Of course, we're referring to, um, AMD founder? CEO?

Ben Gilbert 1:30:46 I think so.

David Rosenthal 1:30:47 Jerry... Jerry, forget his last name.

Ben Gilbert 1:30:49 Who once said that real men have fabs-

David Rosenthal 1:30:51 Yeah

Ben Gilbert 1:30:51 ... and of course, was proven desperately wrong over the-

David Rosenthal 1:30:54 Right. They would've had to do the same thing they did with Sony and Nortel on the semiconductor side, and maybe, you know, they could've had some value capture from the Qualcomm IP, but they would've had to partner to make this stuff. But thanks to our acquired superhero, Morris Chang, fabless semiconductors in 1989, 1990, 1991-

Ben Gilbert 1:31:15 Just starting to become a thing

David Rosenthal 1:31:15 ... are just starting to become a thing.

Ben Gilbert 1:31:18 So they could design their own chips without having to actually have a foundry in-house to make them, and they could outsource that to TSMC.

David Rosenthal 1:31:24 They could actually do all the important value-added work. Like, it's totally... It's, it's a freaking Ben Thompson smiling curve in this industry. If you go from, you know, one to four of the IP, the two manufacturing, and then the semiconductors, all the value, all the differentiation in this industry is in the IP and the semiconductors, and the manufacturing is a commodity.

Ben Gilbert 1:31:48 Yeah.

David Rosenthal 1:31:48 And Qualcomm would've been a great company if they had just captured the first. They captured the first and the last. They got-... all of the value, like all of the value, and it's just- and, and, and, you know, like we talked about on the Nvidia episodes, it was equally crazy and like future-seeing to know that fabless was a thing, that foundries were a thing, to be willing to work with foundries.

Ben Gilbert 1:32:11 Yep.

David Rosenthal 1:32:12 Um, and Qualcomm did it.

Ben Gilbert 1:32:15 It's like, how many times is this company gonna be in the right place at the right time?

David Rosenthal 1:32:18 And, and just to, you know, the, the silicon-

Ben Gilbert 1:32:21 And know it.

David Rosenthal 1:32:22 Yeah, and right, and right! [chuckles]

Ben Gilbert 1:32:23 Sees it.

David Rosenthal 1:32:24 And the, um, you know, uh, we're gonna talk more about silicon and Qualcomm as, as we go here, um, but, you know, just to, to, you know, paint the punchline here, uh, today, Qualcomm's total revenue is, what, close to forty billion annually, I think?

Ben Gilbert 1:32:39 Yep.

David Rosenthal 1:32:39 Of which eighty-five percent is their semiconductor business.

Ben Gilbert 1:32:44 Yep.

David Rosenthal 1:32:44 So, like, without-

Ben Gilbert 1:32:45 Thirty-seven billion of their forty-four billion of revenue is selling semiconductors.

David Rosenthal 1:32:49 So but for this strategic decision, eighty-five percent of today's Qualcomm revenue would not exist. Like, and they are the largest fabless semiconductor company in the world, bigger than Nvidia, who's number two.

Ben Gilbert 1:33:02 It's crazy.

David Rosenthal 1:33:03 Totally crazy. And it makes sense, they started a couple of years before Nvidia, so [chuckles] you know, compounding, it's a thing.

Ben Gilbert 1:33:08 That's right.

David Rosenthal 1:33:09 Um, so they pulled this whole freaking thing off. It's just crazy. There's nothing more to say than it's just one of the most impressive business stories I have ever heard. Um-

Ben Gilbert 1:33:20 CDMA gets adopted as a major, uh, 2G standard for the next set of phones that come out.

David Rosenthal 1:33:26 Fifty-seven percent market share in the US in 2G, uh, hundred percent market share in countries like South Korea. They end up getting... I should know this. I, I- either hundred percent or massive market share in China-

Ben Gilbert 1:33:39 Yep

David Rosenthal 1:33:39 ... which is adopting, you know, mobile cellular for the first time, and, like, there's just so much- so the first- 1995 is the first year that these networks go live in the US and, and internationally. [chuckles] Qualcomm does, uh, three hundred and eighty-three million dollars in revenue in 1995. In 1996, they do eight hundred and fourteen million dollars in revenue. [chuckles] Uh, oh, my gosh, but here's the, here's the crazy thing. So here's another, like, just wild, you can't make this stuff up. Uh,

David Rosenthal 1:34:09 you would think Wall Street would love the stock. [chuckles] That Wall Street bets would be going nuts for this stock, uh, the equivalent at the time. Not at all the case. The stock is, like, basically flat. Wall Street kind of hates it because the manufacturing operations and the JVs require so much capital, and they're tying up all the profits-

Ben Gilbert 1:34:29 Yeah

David Rosenthal 1:34:29 ... of the company.

Ben Gilbert 1:34:30 It gets- the stock gets punished basically all the way up until January of 1999, and a few interesting things happen. Are you okay jumping to '99?

David Rosenthal 1:34:38 Yeah, great, let's- I was going there anyway.

Ben Gilbert 1:34:40 So a few interesting things happen in '99. One, uh, Qualcomm starts to realize it's a pretty serious drag on our business to have this super capital-intensive m- manufacturing operations. We're funneling all this money that could be free cash flow for the business or could let us reinvest in new R&D into making phones and making base stations. We gotta do something about this. So in March of '99, they sell their infrastructure business, the base stations, to Ericsson, which was-

David Rosenthal 1:35:08 Which is amazing

Ben Gilbert 1:35:08 ... formerly one of their competitors.

David Rosenthal 1:35:09 Their big competitor.

Ben Gilbert 1:35:11 Uh, their-

David Rosenthal 1:35:12 As part of a licensing deal of all the laws- or a, a settlement deal of all the lawsuits that popped up between-

Ben Gilbert 1:35:18 Yep

David Rosenthal 1:35:18 ... the two companies along the way. They're like, "Oh, great, we'll sell you our manufacturing division." [chuckles]

Ben Gilbert 1:35:23 The, the, this- I mean, and this is basically them looking and saying, "I don't think we need that to bootstrap our strategy anymore. I think at this point, we've got enough momentum that we don't need to make our own base stations. We don't need to make our own cell phones." So, uh, a thousand of the ninety-five hundred Qualcomm employees become Ericsson employees. Uh, then they look over at their mobile phone business.

David Rosenthal 1:35:44 One, one fun little, um, uh, not fun at the time, but fun now, little, um, footnote on that sale to Ericsson. [chuckles] The, um, the employees that got transferred as part of that were so freaking pissed-

Ben Gilbert 1:35:57 I bet

David Rosenthal 1:35:57 ... that they lost their Qualcomm stock options, [chuckles] and they got Ericsson.

Ben Gilbert 1:36:00 Oh.

David Rosenthal 1:36:00 And I don't think they even got equity at Ericsson at all. Uh, they actually filed a class action lawsuit against Qualcomm to, like, get their stock options back.

Ben Gilbert 1:36:07 I mean, over the next eighteen months, the stock would basically be Tesla stock.

David Rosenthal 1:36:11 Yeah.

Ben Gilbert 1:36:11 Like, that's the- this crazy moment that we're about to talk about. December 1999, Kyocera buys Qualcomm's mobile phone business, so they now officially just sell chips-

David Rosenthal 1:36:22 And they-

Ben Gilbert 1:36:22 ... that they call QTC-

David Rosenthal 1:36:24 Yeah

Ben Gilbert 1:36:24 ... the Qualcomm CDMA Technologies Group. And then they've got a second group, QTL, which is Q- Qual- Qualcomm Technology Licensing. So-

David Rosenthal 1:36:31 It's just one info.

Ben Gilbert 1:36:32 The business model is now set. They make silicon, they make-

David Rosenthal 1:36:37 IP

Ben Gilbert 1:36:37 ... licenses. [chuckles] They make, uh, they sell very high-margin revenue licenses to their patent war chest. That's the business model for the future. They no longer have this drag on them.

David Rosenthal 1:36:48 And they sell relatively high-margin semiconductor designs-

Ben Gilbert 1:36:52 Yep

David Rosenthal 1:36:52 ... 'cause they don't fab any of the semis.

Ben Gilbert 1:36:54 And when they're selling these designs, they're not just saying, "Here's a chip. Give me five dollars for it." They're saying, "How much you sell those phones for? Yeah, we'll take five percent of that." And you say, "What? What if I wanna raise prices on my phones?" And Qualcomm says, "Yep, you'll still pay us five percent of that." And you're like, "What do you mean? I'll just go somewhere else." And they're like, "Where are you gonna go?" [chuckles] "We own all the patents."

David Rosenthal 1:37:16 We own all the patents. Yeah.

Ben Gilbert 1:37:17 "And by the way, in addition to paying us five percent of the phones, I think you should pay us to license these patents too." And all the customers go, "What?" And Qualcomm goes, "Where else are you gonna go?" [laughing] So-

David Rosenthal 1:37:30 Oh, you make them sound so evil.

Ben Gilbert 1:37:32 I mean, they did invent it all, so they do have a right to monetize it, but this-

David Rosenthal 1:37:37 And Apple did, and the DOJ did, uh, not the, the FTC sued them for antitrust.

Ben Gilbert 1:37:42 Well, spoilers.

David Rosenthal 1:37:42 We'll get to that. Uh, the punchline of all this, after the December of '99, offloading of the handset business to Kyocera, which is actually a, a Japanese, uh, company. I also had Kyocera phones growing up. Um... [tsks]

Ben Gilbert 1:37:56 Well, you bought all the good ones.

David Rosenthal 1:37:57 I got all the good ones. [chuckles] Well, you were on, uh, you were on a Cingular-

Ben Gilbert 1:38:00 Cingular

David Rosenthal 1:38:01 ... network, right?

Ben Gilbert 1:38:02 I was on Cingular, which was a GSM network-

David Rosenthal 1:38:04 Wow

Ben Gilbert 1:38:04 ... which became e- which got bought by AT&T Wireless, but-

David Rosenthal 1:38:06 It doesn't matter. It all becomes CDMA anyway-

Ben Gilbert 1:38:08 Eventually

David Rosenthal 1:38:08 ... in a sec, as we will see. Um-... in the year 2000, after this sale, the height of the tech bubble, you know, uh, this is like on the Benchmark episodes, we're talking about Eba- eBay, eBoys, Benchmark's making billions of dollars, Yahoo's going nuts. Like, it's the, it's the internet bubble, it's the tech bubble.

Ben Gilbert 1:38:27 And people are looking around, they're like, "What powers the internet, and what's gonna power the next generation of the internet?"

David Rosenthal 1:38:32 The single best performing stock for the [chuckles] entire year 2000 is Qualcomm. It appreciates-- the Qualcomm stock appreciates 2,621%-

Ben Gilbert 1:38:47 [laughing]

David Rosenthal 1:38:48 ... the 366 days of the year 2000? I think it was a leap year. Yeah, I, I, it's, um, yeah, unreal, 26.2X [chuckles] in the public markets in one year, the best-performing stock of the craziest year until [chuckles] 2021-

Ben Gilbert 1:39:07 Last year

David Rosenthal 1:39:08 ... until last year-

Ben Gilbert 1:39:08 And-

David Rosenthal 1:39:08 -in the stock markets.

Ben Gilbert 1:39:09 However, you would have had to know just the right moment to sell because it did not stay up there for very long.

David Rosenthal 1:39:15 No.

Ben Gilbert 1:39:16 It would crash down over the next year, such that it be- and, uh, 18 months, such that it became only a 4X from its, uh-

David Rosenthal 1:39:25 Wow

Ben Gilbert 1:39:25 ... pre-1999 high. But if you bought it on the way up, you lost, like, a lot.

David Rosenthal 1:39:29 I'll take only a 4X on my 2021 investments- [laughing]

Ben Gilbert 1:39:31 [chuckles]

David Rosenthal 1:39:31 -uh, all day long these days. Um, yeah, pretty great. So, you know, that's, that's like the core just crazy business story of Qualcomm. To, to take it from there to today, the next generation of cellphone networks, 3G, uh, which Ben and I probably vi- vi- vividly remember, probably many folks listening-

Ben Gilbert 1:39:51 Yep

David Rosenthal 1:39:52 ... do, too. Um, 3G, you know, there, that's when there was a lot of debate, especially in the US, about GSM versus CDMA and all, you know, and I'll think of like, uh, uh, naively, you would think at the time, like, "Oh, well, all the folks who are going GSM, like, that's bad for Qualcomm." GSM switched to CDMA [chuckles] anyway, so, like, all, basically all of 3G was CDMA.

Ben Gilbert 1:40:13 In Europe-

David Rosenthal 1:40:14 It was just different flavors

Ben Gilbert 1:40:15 ... and in the US, just-

David Rosenthal 1:40:16 Yeah

Ben Gilbert 1:40:16 ... w- worldwide. I mean, they, they just ran the table.

David Rosenthal 1:40:18 Yeah. And, and the reason for that was 3G was all about data speeds, broadband internet data speeds, and CDMA was just, like, the vastly superior technology for-

Ben Gilbert 1:40:27 Uh, totally. You didn't have to, you didn't have to encode anything from analog to digital. When you're talking into your phone, you've gotta encode the signal. But if you're downloading a website, or you're sending an iMessage, or you're sending a tweet, all that's digital information anyway, so it's already packets. It, like, it lends itself perfectly to CDMA's digital required infrastructure.

David Rosenthal 1:40:46 Totally. Um, then in 2005, Irwin, uh, retires as, uh, as CEO, um, I believe, and also as, as, as chairman, um, of Qualcomm. And interestingly, his son, one of his four sons, uh, Paul Jacobs, takes over and becomes the company's CEO. Paul actually has a PhD in electrical engineering as well.

Ben Gilbert 1:41:07 Yep.

David Rosenthal 1:41:08 Um, spent his whole career at Qualcomm, rose through the ranks, um, becomes the CEO.

Ben Gilbert 1:41:13 So an important thing-- remember I put a pin in the idea that 20 years from 1985, when they filed that first patent, something else would happen? So Paul Jacobs becomes CEO. Also, in 2005, Qualcomm buys Flarion Technologies for $600 million. Now, Flarion did some interesting... Like, they had some interesting products, but they had a lot of patents that would become essential for 4G. So when we talked to some industry analysts about this, one view was, and I quote, "It was to refill the pot of missiles that Qualcomm promises not to fire at their customers if they pay additional money." So the key set of technologies here were OFDMA, which is- w- we're not gonna get into it, but it was sort of-

David Rosenthal 1:41:57 That's what 4G becomes. It's sort of-

Ben Gilbert 1:41:59 4- 4G was based on OFDMA instead of CDMA, orthogonal frequency-

David Rosenthal 1:42:04 Division multiplexing.

Ben Gilbert 1:42:05 Yeah. We're not gonna dive into it-

David Rosenthal 1:42:06 Right

Ben Gilbert 1:42:06 ... but it was more efficient than CDMA. CDMA, while w-, it was the, definitely the knight in shine- shining armor versus the previous set of technologies, it didn't quite hold up to the claims or the future-proofing of sort of its evolution path that, that-

David Rosenthal 1:42:21 Which makes by this point in time, it's a 20-year-old technology.

Ben Gilbert 1:42:23 Totally.

David Rosenthal 1:42:24 Like, um-

Ben Gilbert 1:42:25 So, so but what we do see here now is after the Flarion acquisition, Qualcomm is able to continue their same exact business model because all of the patents that would be required for 4G and LTE and all that going forward, they own a lot of those, too.

David Rosenthal 1:42:38 Yeah. It's interesting, you know, um, so the Paul, uh, the Paul Jacobs era of Qualcomm from 2005 to 2013, I think, '13, '14, so somewhere about a decade.

Ben Gilbert 1:42:49 Yep.

David Rosenthal 1:42:49 Um, you know, I think it's, like, very viewed in a very mixed light. Um, his big strategic initiative was getting Qualcomm into IoT. IoT didn't really become a thing, at least at that time-

Ben Gilbert 1:43:00 Well-

David Rosenthal 1:43:00 ... in the sense. I mean, maybe-

Ben Gilbert 1:43:01 Starting to work now, but-

David Rosenthal 1:43:02 Yeah, it's starting to work now, but, like, not, not in the time-

Ben Gilbert 1:43:04 Yeah

David Rosenthal 1:43:04 ... everyone thought it did. Um, [lips smack] and it was kind of like a lost era for Qualcomm, but, you know, when you look back on it, um, two things that actually, like, were really great then, one was that acquisition and getting... 'Cause, 'cause initially, Qualcomm was, was fighting OFD- OFDM-

Ben Gilbert 1:43:22 Yeah

David Rosenthal 1:43:22 ... and trying to have CDMA still be the standard for 4G. Eventually, they did pivot and, and get into OF- OFDM. So that was kind of a, you know, an initial wrong move, but then a, then a pivot and a save. Um, but two, that's when they start building the Snapdragon, uh, you know-

Ben Gilbert 1:43:36 Yeah

David Rosenthal 1:43:36 ... and, you know, mobile systems on a chip and CPUs and taking on more of the processing on the early predecessors to smartphones, and that would just put them in such a good position for the modern smartphone era.

Ben Gilbert 1:43:47 They, they sell the high-end Android chip today. I mean, the world has sort of standardized around Apple makes the A-series chips for your iPhone, and if you're buying a high-end Android phone, it's a Qualcomm, whatever. I don't know all the model numbers, but Series 8, Gen 1 or something is the Snapdragon that-

David Rosenthal 1:44:03 Snapdragon.

Ben Gilbert 1:44:04 Yeah.

David Rosenthal 1:44:04 And they now brand everything Snapdragon.

Ben Gilbert 1:44:06 They do, which makes teasing some of this apart very confusing 'cause y- they've just slapped the Snapdragon label on so much that you're like, "Wait, but that's just an RF antenna. How come it says Snapdragon?" And they're like, "Yeah, faked you out!"

David Rosenthal 1:44:18 Right.

Ben Gilbert 1:44:18 Like, "That's the whole point of calling everything Snapdragon."

David Rosenthal 1:44:20 I mean, I guess to be fair, like, the-... silicon engineering and the chip design is so comple- even for like, oh, just an RF antenna, like-

Ben Gilbert 1:44:29 Yeah

David Rosenthal 1:44:29 ... that is like a million times more complex than like any processor in a phone ten years ago. [chuckles]

Ben Gilbert 1:44:34 Yeah.

David Rosenthal 1:44:34 So, um, it is truly differentiated work that they're doing. Um, but that was, you know, obviously a huge win, and I, you know, to the point, I think today, Qualcomm makes on average about $20 for every smartphone sold in the world, including Apple iPhones. [chuckles]

Ben Gilbert 1:44:54 Yes. So let's, let's get into that.

David Rosenthal 1:44:56 Yeah.

Ben Gilbert 1:44:56 So I, I've got the timeline from here. So, uh, going to 2009, this is when, like, all the litigation really starts to happen, and people's flip from, "Qualcomm, we think really highly of you, and you're a pioneer of technology and true inventors," which they are. They still spend a ton of the company's revenue and reinvest that into R&D. But where they really start to be known by their customers and the media and the ecosystem as value capture pioneers. And so, [chuckles] uh, they lose a, a lawsuit-

David Rosenthal 1:45:30 Value capture pioneers. [laughing]

Ben Gilbert 1:45:32 [laughing]

David Rosenthal 1:45:32 That's a new- we should make... That's another Acquired T-shirt, value capture pioneer. [chuckles]

Ben Gilbert 1:45:36 Or what's the w- phrase that I use for Apple? Maximally extractive over their ecosystem.

David Rosenthal 1:45:41 [chuckles]

Ben Gilbert 1:45:41 Uh, so Qualcomm loses a lawsuit with Broadcom in 2009, has to pay $900 million. In 2012, uh, Paul Jacobs w- at the helm, makes a, a, a really bad bet, uh, maybe it was a good bet, but bad outcome, on a reflective display technology called Mirasol.

David Rosenthal 1:46:00 Oh, oh, I remember.

Ben Gilbert 1:46:00 They spun up a $2 billion fab to make it. Um, well-

David Rosenthal 1:46:04 They actually made a fab?

Ben Gilbert 1:46:05 Yeah.

David Rosenthal 1:46:05 Uh-

Ben Gilbert 1:46:05 There's ultimately zero customers for this next gen- the promise was cool.

David Rosenthal 1:46:08 Real companies don't have fabs.

Ben Gilbert 1:46:09 It was supposed to be like a screen that looks like a magazine page, but they were never really able to reproduce the, the, the image quality properly.

David Rosenthal 1:46:17 That's right. I was working at the Wall Street Journal at this time and like, oh, man!

Ben Gilbert 1:46:21 That was the future. Uh, 2013-

David Rosenthal 1:46:22 Turns out the iPad was the future.

Ben Gilbert 1:46:24 Yes. Steve Mollenkopf comes in and becomes CEO, or I suppose, gets promoted, uh, to become CEO. Very technical leader, um, sort of-

David Rosenthal 1:46:32 He was COO before.

Ben Gilbert 1:46:33 Was COO before. Uh, but the problems, uh, problems... They keep growing revenue, they keep doing well as a company, but the, the ecosystem issues for them and ecosystem reputation continues. So in 2015, uh, they enter into not just an issue with other companies, but now with nations. So they have a licensing dispute with China. You have an activist investor who comes in that same year, Jana Partners, to try to split up the licensing and the chip business.

David Rosenthal 1:47:00 Mm.

Ben Gilbert 1:47:00 The, that activist investor is kind of saying, "Why do these need to be the same company? The licensing business is printing cash. It has-

David Rosenthal 1:47:07 And at this point in time, many semiconductor companies have split out the actual, like-

Ben Gilbert 1:47:11 Yep

David Rosenthal 1:47:12 ... chip operations and the IP. Like, a lot of old semiconductor companies are basically just litigation companies [chuckles] at this point.

Ben Gilbert 1:47:19 Yeah. So that's the Broadcom model.

David Rosenthal 1:47:22 Yeah.

Ben Gilbert 1:47:22 So it's interesting to say, okay, what is Broadcom at this point? Broadcom is actually a company called Avago, where the CEO of that ha- uh, basically made a bet and said, "I think the semiconductor industry is no longer experiencing growth. I think that industry should be harvesting profits," 'cause I think, I think it's predicated on Moore's law decelerating. But basically saying, "I don't think that this industry should be reinvesting as much in R&D anymore because it's a, it's a settled frontier, and what should be happening is we should be rolling up these companies." So Avago buys Broadcom, takes Broadcom's name, buys some other stuff like LSI Logic.

David Rosenthal 1:48:02 LSI Logic! Oh-

Ben Gilbert 1:48:04 I think-

David Rosenthal 1:48:04 ... big, uh, Sequoia win.

Ben Gilbert 1:48:05 Don Valentine's-

David Rosenthal 1:48:07 Yeah

Ben Gilbert 1:48:07 ... one of his ver- first very few investments.

David Rosenthal 1:48:10 Yeah, yeah, yeah.

Ben Gilbert 1:48:10 Um, [lips smack] and, and, and really, the, the Broadcom strategy is to roll up the semiconductor industry, uh, squeeze them-

David Rosenthal 1:48:19 Well

Ben Gilbert 1:48:19 ... as much as possible. In fact, they're basically a private equity firm. Broadcom is borrowing lots and lots of debt to make the acquisitions that they're making, and then squeezing them for profitability. So John-

David Rosenthal 1:48:33 You got my favorite piece of, um, Broadcom history trivia, that Avago, the sort of core of the, you know, what Broadcom is, um, actually started its life as Hewlett-Packard's chip division. [chuckles] Uh, what a sad state of affairs.

Ben Gilbert 1:48:49 Yep. 2015, uh, the company shakes off Jana Partners and doesn't split out the two businesses. I think that was the right call, and I'll tell you why in, in Playbook. Um, but we were talking about Broadcom. 2018, Broadcom comes in and tries to do a hostile takeover at a $117 billion valuation, and, uh, interestingly, it was financed by $106 billion of debt.

David Rosenthal 1:49:13 Wow.

Ben Gilbert 1:49:13 So that company, for the rest of its life, I mean, that-

David Rosenthal 1:49:16 Wow

Ben Gilbert 1:49:16 ... that would basically just be Qualcomm servicing the debt. So interestingly, the Trump administration got involved and said it would be a national co- security concern and blocked the deal. And while that may have been true for the reason that the Singapore-based Broadcom was sort of joined at the hip with Huawei, and this-

David Rosenthal 1:49:36 It did a lot of business with Huawei.

Ben Gilbert 1:49:38 This, I think, ends up being a big win for Qualcomm's lobbyists.

David Rosenthal 1:49:44 Mm.

Ben Gilbert 1:49:44 I think they had great relationships with the US government and always have since the early days in being a government contractor, and a lot of people that we talked to viewed, or at least that I talked to, viewed this as Qualcomm being able to call in a favor-

David Rosenthal 1:49:57 Mm

Ben Gilbert 1:49:57 ... and say-

David Rosenthal 1:49:58 Yeah

Ben Gilbert 1:49:58 ... "This is a national con- security concern, don't you think?"

David Rosenthal 1:50:01 We're, we're, we're calling in the favor now.

Ben Gilbert 1:50:03 Yep.

David Rosenthal 1:50:03 It's totally true. I mean, like, this deal was gonna go through, and Qualcomm was gonna be everything you were just talking about with, with Broadcom, which would've been very sa- especially now, like, we know about, like, semiconductor, like, every, every, like... It just, like, um, this is one of the huge wins of the Trump administration, uh, you know, for, like, America, was keeping Qualcomm-

Ben Gilbert 1:50:24 Mm

David Rosenthal 1:50:24 ... an independent American company.

Ben Gilbert 1:50:25 Yep.

David Rosenthal 1:50:25 Like, whether it was Qualcomm calling in a favor or just what, like, I think we can all look back in 2022 and be like-... this was an enormous win. [chuckles]

Ben Gilbert 1:50:34 Yep. So, um, [chuckles] in 2017, uh, going back one previous year, uh, both the US Federal Trade Commission and Apple sue Qualcomm for basically the same thing, saying that Qualcomm was using its market position as the dominant smartphone modem supplier to force manufacturers into paying excessive fees. And this is one that I wanna sort of dive in on. We, we spent a bunch of time advancing through the timeline to really get to this particular point, which I think is, is a great place to zoom in on Qualcomm's strategic position today, is, is this Apple lawsuit. So some background. Apple has always used either Samsung processors, uh, in the first iPhones until they switched to their own, but they still had to pay, uh, Qualcomm patent royalties for whatever RF stuff they were using. So whether... You know, let, let's treat the CPU as its completely own world, transitioning from Samsung to the A-series processors. Apple e- probably has to buy stuff from, from Qualcomm. Maybe they could look somewhere else, but either way, they're, they're paying Qualcomm the licensing for it.

David Rosenthal 1:51:44 IP.

Ben Gilbert 1:51:44 Um, today, Apple does use Qualcomm cellular modems, which started in 2011, and there was just one year where they used Intel-

David Rosenthal 1:51:52 Intel, yeah

Ben Gilbert 1:51:53 ... where they did not use Qualcomm. We're gonna talk about that. So the way that I essentially perceive this, and, and why Apple eventually initiated the lawsuit, is Qualcomm got greedy. They had patents on technologies that were part of standards that were set by industry consortiums all over the world, and they leveraged those patents in basically every way possible. And here's the economics as far as I could sort of suss it out. So they asked Apple for $7.50 per phone sold, which comes to about $2 billion a year, plus an additional 8 to 10 when they were gonna raise prices later. And so you, you, you quickly get to a situation where the, that Qualcomm was sort of expecting Apple to pay $17 just to license patents-

David Rosenthal 1:52:38 Right

Ben Gilbert 1:52:39 ... which is-

David Rosenthal 1:52:39 No chips

Ben Gilbert 1:52:40 ... on top of the price that they were paying for those baseband chips. So rack rate for a baseband chip, and, and baseband chips are the same thing as, as sort of cellular modems, uh, is $30 a chip. And it's not actually $30, it's more like 5% of whatever the average selling phone price is. But I-

David Rosenthal 1:52:58 Oh, guess what phones have a really high average selling price? [chuckles]

Ben Gilbert 1:53:01 iPhones.

David Rosenthal 1:53:01 [chuckles]

Ben Gilbert 1:53:02 Uh, and so if you think about 250 million phones a year, that is $7.5 billion a year that Apple would be paying Qualcomm. That would be 20% of the QCT revenue, 20% of all of the chip revenue that, that Qualcomm makes. And further, if you back out the 14 million a year from the- from QCT, their chip segment, that doesn't come from, uh, the chips for handsets specifically, but rather there's some other stuff they're working on, automotive, IoT, and this new thing that they're calling the RF front end radios product line, which we'll also talk about. Um-

David Rosenthal 1:53:40 This is cool.

Ben Gilbert 1:53:40 Apple could make up, up to one-third of Qualcomm's handset chip revenue. Now, analysts have estimated that Apple negotiated down from $30 to $10. Apple's general counsel, during the lawsuit, uh, let the number $18 slip. So whether it's 10, 18, or 30 bucks a pop, that is an enormous amount of revenue that Apple pays Qualcomm. Again, not for a Snapdragon, not for the CPU, not for the system on a chip, just for the RF cellular modem.

David Rosenthal 1:54:12 Wild. [chuckles]

Ben Gilbert 1:54:13 So there's some other interesting things that came out in this lawsuit. Qualcomm asked Apple to speak out against WiMAX, which is a competing technology, and they were like: We need you to vocally s- speak out that our competitor is a bad piece of technology.

David Rosenthal 1:54:27 [chuckles]

Ben Gilbert 1:54:27 They also stipulated that if Apple ever used a competing supplier, and keep in mind, this deal is signed in the early days of the iPhone, if they ever used a competing supplier to Qualcomm, they would owe Qualcomm a billion dollars.

David Rosenthal 1:54:40 Wow!

Ben Gilbert 1:54:40 So what Apple is basically doing is biding their time for there to be an actual credible competitor, and they had to wait all the way up until the 4G days, until they're, like, looking at Intel, and they're like, "Especially if we work with you and we work closely with you, we think you can be a credible competitor to Qualcomm right now. We think your cellular modems business is, like, close enough, where our customers won't notice the difference, and we can tell Qualcomm that we're gonna use you and try to-

David Rosenthal 1:55:07 Right

Ben Gilbert 1:55:07 ... get a little leverage there."

David Rosenthal 1:55:08 Give us enough leverage. Yeah.

Ben Gilbert 1:55:09 What Qualcomm interpret that as is, "Well, now you owe us a billion dollars-

David Rosenthal 1:55:13 [chuckles]

Ben Gilbert 1:55:13 ... because, uh, look at our original deal we did." Um, the w- the... What this basically comes down to from a legal perspective is, because Qualcomm owns patents that are a part of an industry standard, they have to charge a price that is fair, reasonable, and nondiscriminatory, or FRAND, is the industry terminology. And Apple's basically alleging, "Look, you're abusing the market because it's not fair, reasonable, and non- you're highly, highly unreasonable in the way that you're charging us this." So, uh, around the time of the iPhone XS and XR, those phones actually did use Intel modems.

David Rosenthal 1:55:52 Wow.

Ben Gilbert 1:55:53 But what was basically happening is the Intel modems were falling further and further behind Qualcomm. Apple was realizing, "Oh, crap, we're gonna miss 5G, 'cause there's no chance that Intel catches up-

David Rosenthal 1:56:03 Right. Right

Ben Gilbert 1:56:03 ... and can actually develop a credible 5G chip." And so they end up settling and sort of backing off the, uh, their, their big lawsuit with Qualcomm.

David Rosenthal 1:56:12 Well, this is where the, for, uh... W- we're gonna escape our, uh, technical level of competency quickly, if we haven't already. But, like, 5G is, like, it's pretty cool, and this is where, like, you were talking about patents. This all sounds a little sort of, like, icky, but, like, the amount of engineering and, like, IP and, like, work that has to go into, like, what we described originally back in, like, the World War II and the... Like, it was so crazy complicated to make this stuff work back then. Now it's just, like, a factor of a million more. Like, the amount of processing, the, what Moore's laws had to come up the curve to enable something like 5G is unreal. Like, there's a dedicated processor in front now of the RF stack.

Ben Gilbert 1:56:50 Yep.

David Rosenthal 1:56:50 ... to do all the crazy multiplexing that is required for 5G bandwidth to work, right?

Ben Gilbert 1:56:57 Yes. So this RF front end- okay, so here's a fun little, um... So what is 5G?

David Rosenthal 1:57:03 [chuckles]

Ben Gilbert 1:57:04 It actually is an open question. Uh, when 5G was first proposed, the proposal was to use the millimeter wave spectrum, this super high-frequency part of the spectrum that, for years, people thought was basically impossible to work with because it was, it was, uh, it just requires incredibly sophisticated electronics to make it work. Not only that, but when you have really high frequency, um, and again, we're right on the edge of our competency here, but when you have really high-frequency radios, uh, they can't transmit through a lot of stuff. It doesn't handle concrete well, and so you end up needing a, a little base station on every street corner. Now, it can give you, like, 10 gig internet. Like, it's crazy, but it needs to be really close to you. And so as the, uh, the, um, telecoms were starting to build this out, of course, the initial review- they, they say, "We're- we now have 5G." In fact, they even rebranded a bunch of LTE stuff to be 5G-

David Rosenthal 1:57:58 Yeah

Ben Gilbert 1:57:58 ... so it would show up as 5G on your phone-

David Rosenthal 1:58:00 I remember AT&T did this, right? Like, they were like-

Ben Gilbert 1:58:02 Yeah

David Rosenthal 1:58:02 ... uh, all of a sudden, uh, 'cause I was on AT&T at the time, used to say 4G LTE, and then all of a sudden it just said 5G on my phone. I was like, "What?"

Ben Gilbert 1:58:08 Or 5GE.

David Rosenthal 1:58:09 You're right.

Ben Gilbert 1:58:09 You're like, really, 5GE? Like, that's... No, no, that's exactly the same stuff I was using before, but now you've rebranded it. So occasionally, you'd walk by something that actually had a millimeter wave tower, and it would over- it'd be like, "Oh, my God, this is the fastest internet I've ever experienced!" And then you'd, like, walk across the street.

David Rosenthal 1:58:24 Oh, I remember, like, Nilay at The Verge doing, like, um-

Ben Gilbert 1:58:27 Yes

David Rosenthal 1:58:27 videos.

Ben Gilbert 1:58:27 Nilay is the world's expert on this.

David Rosenthal 1:58:29 Yeah, yeah, yeah, like, on a specific street corner in, like, New York City or San Francisco, getting, like-

Ben Gilbert 1:58:33 5G is a 10 out of 10.

David Rosenthal 1:58:34 And then you take one step to the right, and you're like-

Ben Gilbert 1:58:36 Right

David Rosenthal 1:58:37 ... back on 4G. [chuckles]

Ben Gilbert 1:58:37 So here we are in 2022, five years after the initial hubbub about 5G started for consumers, and, um, what is 5G? Well, the industry has decided to allot two more areas of spectrum that are not millimeter wave and are easier to work with and are cheaper to build infrastructure for and are slower as 5G also. So now what that does to chip makers is it says, if you're building a cellular modem in your phone, you have to have a really complex RF front end, or what Qualcomm-

David Rosenthal 1:59:12 Easy

Ben Gilbert 1:59:12 ... is calling their RFFE business. The, the RF front end basically needs to, at any given point, adjust in real time, depending on what flavor of 5G-

David Rosenthal 1:59:21 You're accessing-

Ben Gilbert 1:59:22 ... currently available

David Rosenthal 1:59:22 ... so many different windows of spectrum-

Ben Gilbert 1:59:24 Yes

David Rosenthal 1:59:25 ... so far across the spectrum bands that, like, yeah, there's... Oh, man, think about, like, back to the original Hedy Lamarr and frequency hopping, like, it was all within one band. [chuckles]

Ben Gilbert 1:59:34 Yeah, it's-

David Rosenthal 1:59:34 Now we're talking about, like-

Ben Gilbert 1:59:35 See what they have to do

David Rosenthal 1:59:36 ... a crazy number of bands.

Ben Gilbert 1:59:38 So, um, Apple, l- going back to the Apple lawsuit, Apple sort of realizing, uh, we're screwed here if we don't have Qualcomm as our customer, so they settle with Qualcomm, uh, and this is in 2019. Apple says, "We will continue using Qualcomm's radios for now." I think they negotiated some discount to the exorbitant fees that they were having to pay Qualcomm. Uh, they- a- Apple also paid $4 billion, now switching over to the licensing side of the house, uh, to secure the patent licenses over the next six years. I think it was $4.5 billion for a six-year deal. Um-

David Rosenthal 2:00:14 Wow!

Ben Gilbert 2:00:15 ... it's actually unclear who really wins here. I think Qualcomm wins in the short term because Apple's backup solution of Intel's modem fell entirely behind. But in the long term, I mean, what ended up happening is Apple actually bought that division away from Intel, and they've been developing their own cellular modems in-house. We know based on, uh, I don't know if it was a slip of the tongue or an intentional thing, but we know from the most recent Qualcomm earnings call a week ago that, uh, the next version of the iPhone that comes out in November of 2023 will continue to use Qualcomm's chips. Like, even though Apple has been working on their own-

David Rosenthal 2:00:58 So they're trying to do the PA Semi on the modem.

Ben Gilbert 2:01:00 Yes. It's ludicrously hard to build the stuff that Qualcomm has built, so even next year's iPhone will have Qualcomm-

David Rosenthal 2:01:09 Wow

Ben Gilbert 2:01:09 ... RF front ends and, uh, I think they use RF front ends and cellular modems. But after that, Apple's definitely gonna try and take this in-house. But, uh, Cristiano, the CEO of Qualcomm, said on the most recent earnings call, "After that, we do anticipate having almost zero dollars come from Apple-

David Rosenthal 2:01:28 Wow

Ben Gilbert 2:01:29 ... in our chips business."

David Rosenthal 2:01:30 In the chips.

Ben Gilbert 2:01:30 So at least their sha-

David Rosenthal 2:01:32 [chuckles]

Ben Gilbert 2:01:32 ... foreshadowing to their shareholders, Qualcomm is, that they think Apple's gonna succeed at this. It's just gonna take a couple of years.

David Rosenthal 2:01:38 Well, this feels, um, like the perfect time to talk about [chuckles] the other strategic, uh, chess move that Qualcomm made here.

Ben Gilbert 2:01:44 Yes, Nuvia?

David Rosenthal 2:01:45 Nuvia. [chuckles]

Ben Gilbert 2:01:46 So-

David Rosenthal 2:01:46 Yeah

Ben Gilbert 2:01:47 ... uh, this is another 2021 move. So Qualcomm bought this company called Nuvia for $1.4 billion. Now, what is Nuvia? Well, Nuvia was founded by former Apple silicon people, including the chief architect of the A-series chips. That seems like a good get.

David Rosenthal 2:02:04 Yeah.

Ben Gilbert 2:02:05 And so-

David Rosenthal 2:02:05 Back to PA Semi.

Ben Gilbert 2:02:06 Yes. So this... One way to look at it is this is Qualcomm's ticket into the laptop CPU/system-on-a-chip market. They already make Snapdragons for the high-end Android phones, and soon they'll be able to make a competitor to Apple's M-series chips for laptops and desktops and maybe even servers.

David Rosenthal 2:02:23 And phones, too. I mean, like iPads, phones, tablets, like-

Ben Gilbert 2:02:27 So this-

David Rosenthal 2:02:27 This is crazy.

Ben Gilbert 2:02:28 This is where it gets interesting. So Snapdragons, th- for anyone who listened to our ARM episode, you'll remember the difference between ARM makes a instruction set architecture that you can license, or you can go big with them and just buy one of the actual ARM-designed chips off the shelf.

David Rosenthal 2:02:46 Like buying a solution, you might say.

Ben Gilbert 2:02:47 Yes. Snapdragons use an off-the-shelf ARM design for their CPU.

David Rosenthal 2:02:53 Mm.

Ben Gilbert 2:02:53 Apple just uses the ARM instruction set but has-

David Rosenthal 2:02:56 Right

Ben Gilbert 2:02:56 ... done their own custom design to get the most performance.

David Rosenthal 2:02:58 And that's why Apple silicon is so far ahead-

Ben Gilbert 2:03:01 Yes

David Rosenthal 2:03:01 ... of the competition.

Ben Gilbert 2:03:02 The Nuvia team can just-... do their own custom design of chips and actually be differentiated from stock ARM CPUs, just like Apple is doing. Unfortunately, like Qualcomm, everything cool about the, um, the Snapdragon chip doesn't actually include the CPU. The CPU is just a standard issue-

David Rosenthal 2:03:21 Yeah, a standard issue ARM-

Ben Gilbert 2:03:23 Just ARM design.

David Rosenthal 2:03:24 Package.

Ben Gilbert 2:03:24 So here's-

David Rosenthal 2:03:25 Oh, this is cool. So this is the path for Snapdragon to get on par with Apple Silicon.

Ben Gilbert 2:03:30 Yes, and for their CPUs to actually... Exactly. So, but one caveat to this whole th- thing about, like, maybe they'll do laptops, maybe they'll do servers, Qualcomm actually doesn't really wanna do any of that. Qualcomm historically has failed every time they've tried to do servers or watches or smart home or s- displays. Like, every time they've strayed too far from their core competency, it, it hasn't been good. And-

David Rosenthal 2:03:52 Probably what Qualcomm really wants [chuckles] is 20 bucks from Apple for every iPhone. [chuckles] Like-

Ben Gilbert 2:03:57 I think that's a reasonable path forward. The CEO is pitching a much broader story than that to shareholders these days. So what Qualcomm actually wants is for the Nuvia team to s- sort of like invest where they see the frontier going, where they see a much bigger TAM, where, where Qualcomm sees a multi-hundred billion dollar opportunity, and that is IoT, automotive, and the RF front end. And so they, they sort of describe phone modems and phone, um, systems on a chip as almost like a legacy business-

David Rosenthal 2:04:34 Mm.

Ben Gilbert 2:04:34 -and they're highlighting these other areas as sort of the, the growth business, as the frontier.

David Rosenthal 2:04:40 Interesting.

Ben Gilbert 2:04:40 But either way, Nuvia seems to be the ticket, 'cause if you can custom design chips using the ARM ISA, but be, like, the performance-

David Rosenthal 2:04:49 Different

Ben Gilbert 2:04:49 ... of Apple Silicon, I don't care what you're putting those in, that's a really good-

David Rosenthal 2:04:52 Yeah

Ben Gilbert 2:04:53 ... powerful thing.

David Rosenthal 2:04:54 Well, just, I mean, even, like, for technology, the technology industry writ large, to have... Just like with Android, you had a, um, you know, iPhone-rivaling operating system available off the shelf for any kind of application that let a million flowers bloom-

Ben Gilbert 2:05:11 Yep

David Rosenthal 2:05:11 ... to have the same thing for Apple Silicon, like, that's pretty cool. For our next sponsor of this episode, we have one of our very, very favorite companies in the Acquired family, Pilot.com. Pilot, for those few of you who don't know by now, sets up and operates the entire financial stack for your company, uh, whether you're a startup or a growing company or even a large enterprise. That includes all your finance, all your accounting, your tax, even higher-level CFO services, like investor reporting. If you were to do this the old-school way, you would either be building out your own finance team in-house, which is gonna cost you half a million to millions of dollars in increased burn, which nobody needs right now, or you would be using an old-school accounting firm, which probably is in no way equipped to help you as a modern tech company.

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David Rosenthal 2:07:32 Oh, yeah

Ben Gilbert 2:07:33 ... of Qualcomm [chuckles] in 2018. He tried to take the company private through a buyout, uh, when there was all this sort of tumult about, is it gonna be bought by Broadcom, all this stuff. And the board said, um, "If you're gonna try and make a hostile takeover and LBO the company yourself, uh, you can get right off the board." And so there are no members of the Jacobs family on the board of directors anymore. The other thing that happened, 2016 to 2018, uh, Qualcomm tried to acquire NXP Semiconductors, but I think eventually China sort of just, like, dragged their feet enough to kill that.

David Rosenthal 2:08:00 It got tied up in the whole Broadcom thing, and-

Ben Gilbert 2:08:02 Yes.

David Rosenthal 2:08:03 So.

Ben Gilbert 2:08:03 But quick review of where they are today, and then we'll go into analysis. Qualcomm today has a $120 billion market cap, which, two things: One, that's astonishing, that's impressive. They're technological pioneers, and they're amazing at value capture. Two, that is the same price [chuckles] that it was worth-

David Rosenthal 2:08:25 Yeah

Ben Gilbert 2:08:25 ... at the peak of the dot-com bubble.

David Rosenthal 2:08:26 Wow, and, uh, just about the same amount that Broadcom offered to buy it for, right?

Ben Gilbert 2:08:31 Yep.

David Rosenthal 2:08:32 Which is interesting. You know, by revenue, I think revenue and probably also number of chips, they are the largest fabless semiconductor company in the world, bigger than Nvidia.

Ben Gilbert 2:08:40 Yep.

David Rosenthal 2:08:40 But a way lower market cap than Nvidia.

Ben Gilbert 2:08:42 Yep. I mean, are you gonna make a bet? Like, I... Here's my view on, uh, uh, Qualcomm versus Nvidia. Do you bet on the intelligent connected edge, as, as the CEO Cristiano Amon would put it, or do you bet on AI? And, like, they're both megatrends. AI has a far bigger potential, in my opinion, than the intelligent connected edge, which is wonderfully buzzy.

David Rosenthal 2:09:03 Although I do really have a genuine appreciation after doing this episode for, like, the amount of-... engineering that goes into wireless technological advances-

Ben Gilbert 2:09:15 Yes.

David Rosenthal 2:09:15 Which almost at a Moore's Law, like, well, much slower [chuckles] than Moore's Law-like pace, but a steady drumbeat, have continued to improve and ex- I mean, now there's, like, no difference between 5G and, like, home broadband. Like, um, and that's, like, incredible.

Ben Gilbert 2:09:30 Uh, if you're standing on the right street corner.

David Rosenthal 2:09:31 Plugged in to church.

Ben Gilbert 2:09:32 Okay. Uh, they do forty-four billion in revenue. Chips make up most of that at thirty-seven billion. Licensing fees make up only seven billion, but the licenses are a much higher margin business. It's a sixty-nine percent, um, margin. I think it's earnings before tax margin on licensing, versus only thirty-four percent for the chips. So there's a, a super efficient business there in licensing. Revenues are growing thirty-two percent, earnings are growing forty-seven percent year over year. This is an amazingly high-

David Rosenthal 2:10:04 That's pretty good

Ben Gilbert 2:10:04 ... growth rate company.

David Rosenthal 2:10:06 Yeah, that's pretty awesome.

Ben Gilbert 2:10:07 They almost doubled their revenue over the last couple of years, too.

David Rosenthal 2:10:10 Wow!

Ben Gilbert 2:10:10 So the, the, Cristiano is definitely coming down on a high-

David Rosenthal 2:10:11 Cristiano does seem to be doing a good job.

Ben Gilbert 2:10:13 Cristiano is the new CEO, uh, as of last year.

David Rosenthal 2:10:16 Yeah.

Ben Gilbert 2:10:16 I think he's been for- been in for about a year. So into analysis. What power do you think that Qualcomm has?

David Rosenthal 2:10:22 Oh, wow. [chuckles] Patents? [laughing]

Ben Gilbert 2:10:25 Is that a cornered resource?

David Rosenthal 2:10:26 Is that a corner... I think that is a cornered resource. Oh, I think, yeah, Hamilton in Seven Powers, I think he does say patents are cornered. I think they're in the canonical distribution of a cornered resource. That for sure. Um, [lips smack] they had at least, maybe still do have network economies in the infrastructure side of the telecom, ah, industry and the handset side. Like-

Ben Gilbert 2:10:54 Yep

David Rosenthal 2:10:54 ... you have to-

Ben Gilbert 2:10:54 One, one locks in the other.

David Rosenthal 2:10:56 One locks in the other. Like, if you control the infrastructure standard, all the handsets will have to use that.

Ben Gilbert 2:11:02 Yep.

David Rosenthal 2:11:02 If all the handsets use XYZ standard, then the infrastructure will have to do that. So, like, being able to control both, like-

Ben Gilbert 2:11:08 Yep

David Rosenthal 2:11:08 ... I think there actually was a network effect there.

Ben Gilbert 2:11:11 I also think there's scale economies. If you are a fabless, ah, chip company, then-

David Rosenthal 2:11:17 Totally

Ben Gilbert 2:11:17 ... it is worth all the R&D going into-

David Rosenthal 2:11:19 The amount of R&D you can pour in

Ben Gilbert 2:11:20 ... creating a Snapdragon, designing and creating a, a Snapdragon and re- realized across a huge number of customers. So, like, it's really hard to start the next Qualcomm if the front, the frontier you wanna compete on is making a better Snapdragon, that's not gonna happen.

David Rosenthal 2:11:33 Uh, I've got a fun one here, um, that is both fun to talk about 'cause it always is, but I think actually as, uh, I feel reasonably confident in. I think Qualcomm dur- during the golden years that we told the history of, had real process power. I think it was equivalent to the, um-

Ben Gilbert 2:11:52 Mm

David Rosenthal 2:11:52 ... Pixar brain trust. Like, that set of people working together under those set of circumstances were wholly unique in the industry and the world.

Ben Gilbert 2:12:02 Yep.

David Rosenthal 2:12:02 Um, and actually, it's interesting, like I, I read a, you know, a l- besides, um, the Qualcomm Equation book from Dave Mock, which is amazing, there's a ton of history out there about Qualcomm, especially in, like, local San Diego.

Ben Gilbert 2:12:13 Yeah.

David Rosenthal 2:12:13 Like, like the, uh, lots of local San Diego publications and history books and stuff.

Ben Gilbert 2:12:17 Especially 'cause the Jacobs has given hundreds of millions of dollars to support the community.

David Rosenthal 2:12:20 Oh, we didn't talk about this, but Irwin is-

Ben Gilbert 2:12:22 So they're like beloved

David Rosenthal 2:12:22 ... Irwin is one of the great philanthropists of the past century. Like, uh, undoubtedly, uh, but to UCSD, the UC system, so many pe- like, so much of building infrastructure in San Diego comes from [chuckles] Qualcomm and the-

Ben Gilbert 2:12:35 Yep

David Rosenthal 2:12:35 ... Jacobs family. So going and doing all the research, all these local San Diego publications and, and, um, you know, historical documents, they all talk about the, like, wealth, the, the wellspring of startups and other technology companies that came out of Qualcomm. And indeed, there are like, you know, Linkabit and Qualcomm. There are like a hundred plus, um, in the San Diego area that came out of Qualcomm. But you compare that to, like, the Silicon Valley, like what came out of Intel, what came out of Fairchild, what came out of Trader SE, there's not the same, uh, diaspora of success in Qualcomm. Like, there's plenty of success and, you know, Solana and Tully is, you know, part of the Qualcomm dias- diaspora, so it's not like there's none, but not at the same scale. And I think that actually de facto shows there was process power. Like, it was that unique group of people-

Ben Gilbert 2:13:20 Mm

David Rosenthal 2:13:20 ... in that unique situation.

Ben Gilbert 2:13:21 Oh, that's an interesting sort of like proof by example.

David Rosenthal 2:13:23 Yeah.

Ben Gilbert 2:13:24 Huh?

David Rosenthal 2:13:25 Deductive proof.

Ben Gilbert 2:13:27 Do you wanna talk about the bear and bull case for the company? I have a few.

David Rosenthal 2:13:31 Okay, go for it.

Ben Gilbert 2:13:32 All right. So here's the bear case. Qualcomm has very real competition from the low end that we didn't talk about. Uh, an example is MediaTek, who not only makes the baseband modem chip, but also systems on a chip using the stock Arm CPU designs. So MediaTek's systems are way cheaper than Qualcomm, and I think they actually just surpassed Qualcomm in terms of, uh, number of units shipped.

David Rosenthal 2:13:57 Mm.

Ben Gilbert 2:13:57 And so all the low and mid-end Android phones are using MediaTek. And so Qualcomm kind of needed to buy Nuvia in order to differentiate-

David Rosenthal 2:14:06 Mm

Ben Gilbert 2:14:06 ... the CPU and not just be using the stock Arm design that MediaTek and everyone else is using on much cheaper chips.

David Rosenthal 2:14:13 Amazing.

Ben Gilbert 2:14:14 Um, historically, they failed that everything that was not a phone that we talked about before, and now they're sort of saying the future is IoT and automotive, these things that are not phones. We'll see. Uh, they're just constantly in lawsuits. I mean, uh, we didn't talk about this, but like China, South Korea, EU, Taiwan, all these company, all these nations have sued or, or, or-

David Rosenthal 2:14:36 So many law firms must just be making a fortune off of [chuckles] -

Ben Gilbert 2:14:39 Right

David Rosenthal 2:14:39 ... this industry.

Ben Gilbert 2:14:41 Um, and the last one for the, the bear case for me is, I really think that they finally poked the bear, talking about their customers, enough to make them wanna actually do something about it.

David Rosenthal 2:14:50 Mm.

Ben Gilbert 2:14:50 The, the, the, the goal for Qualcomm should have been, make as much money as you can without pissing people off too much, and I think over the last decade, they really upset Samsung, Apple, so many people that are s- starting to at least make their own radios or even consider systems on a chip. And so now that there's very viable alternatives for silicon, that people could either use in-house or competitors coming around at different angles-... Qualcomm may lose their leverage to actually get a royalty out of each phone sold. Now, licensing business is gonna continue to be a, a juggernaut, smaller in revenue, but higher in margin. Um, but you know, that, that is the sort of bear case on the current silicon business. Now, the bull case, like maybe the lawsuits thing is actually a bull case. They manage to keep making more and more money and have been reaffirmed over and over again in a bunch of jurisdictions that, um, you know, they settle their way out of these lawsuits, or they wh- whatever, but they're able to keep making tons of money. Um, the big bull case is you believe that this shift to automotive, IoT, and, uh, 5G RF front end is real. And so for those keeping track at home, everything I'm about to say is a part of the chip segment that does that $37 billion in revenue. Automotive does $2 billion in revenue. That's a very real business. The RF front end business that we were talking about, that does $4 billion a year in revenue.

David Rosenthal 2:16:16 It's interesting. I mean, uh, we rented a car here in Lisbon, um, and, uh, for the family, and, um, of course, it has, uh, data built in, you know, uh, 4G or 5G data-

Ben Gilbert 2:16:28 Huh

David Rosenthal 2:16:28 ... right in, as, as does, like, just about every new car these days.

Ben Gilbert 2:16:31 Yep. Uh, the IoT segment is now doing over $7 billion a year. Qualcomm thinks overall this is a $100 billion opportunity. Uh, there's a bigger narrative that Cristiano is trying to espouse around this intelligent, connected edge that they call a $700 billion, uh, opportunity. That's re-

David Rosenthal 2:16:48 Getting into massive numbers. [chuckles]

Ben Gilbert 2:16:49 I know. It reminds me a lot of the qual- the, um, Nvidia slide that talks about their-

David Rosenthal 2:16:53 Yeah

Ben Gilbert 2:16:53 ... trillion-dollar TAM. Uh, w- I mean, they're executing very well, but I think they're trying to sell a story in terms of addressable market that is, uh, hand-wavy.

David Rosenthal 2:17:05 Yeah.

Ben Gilbert 2:17:06 All right, playbook. So in the early days, this is a thing that we didn't talk about. We talked about the, some of the ecosystem stuff, but there was this incredibly delicate dance of needing to be the best supplier to win deals, but also have other credible suppliers. No phone company was gonna take a dependency on the CDMA technology when just one vendor existed, and so they needed to evangelize and create their own competitors so that their customers could feel safe with this new technology. But of course, as long as they kept some things secret of how to eke out the absolute best performance from the innovations, they actually could still be the leader. So it was like-

David Rosenthal 2:17:46 Mm

Ben Gilbert 2:17:46 ... figure out how to get a bunch of other people-

David Rosenthal 2:17:48 Yeah

Ben Gilbert 2:17:48 ... just good enough, which-

David Rosenthal 2:17:49 Yep

Ben Gilbert 2:17:50 ... is, is fascinating, and-

David Rosenthal 2:17:51 It's such an amazing case study in bootstrapping an industry. [chuckles]

Ben Gilbert 2:17:55 Yes. Yes. Similarly, they had a clever tactic in their IP strategy. So at Qualcomm, where I think they have something like 17,000 patents now, there's a decision every time there's a novel piece of technology about whether they should patent it or keep it a trade secret. And there's enough things patented so that you, you can't achieve any of these things, these magical things that we've re- been referring to all episode, these layers of magic, without paying Qualcomm. But they don't patent everything-

David Rosenthal 2:18:27 Mm

Ben Gilbert 2:18:27 ... because they wanna keep an advantage for, like, consulting revenue or-

David Rosenthal 2:18:33 Mm

Ben Gilbert 2:18:33 ... implementation fees or signing big deals where they say, "Not only do you get access to our patents, which may expire at some point, but if you work directly with us, you get access to the trade secrets, and you can pay us to, you know, ha- basically generate services revenue for you to work with our engineers."

David Rosenthal 2:18:49 There's... I, I was thinking about this for playbook as we were going, too. There's this really interesting dynamic to this industry that lends itself well to the IP and patent, um, monetization scheme that Qualcomm has adopted, which is that the successive generations of wireless network, you know, Gs, happen just fast enough that it's within the patent lifetime. [chuckles]

Ben Gilbert 2:19:09 Yes.

David Rosenthal 2:19:09 Uh, so that, like, you know, all that core CDMA pat- like, all those patents are expired now, but it doesn't matter 'cause we're so many generations-

Ben Gilbert 2:19:16 Yes

David Rosenthal 2:19:16 ... beyond that, like, those patents are now worthless.

Ben Gilbert 2:19:19 Yep.

David Rosenthal 2:19:20 So you get all the useful life during the protection period of the patent, and then when it's, you know, a gene- it's not like a generic drug, where like, you know, Advil is still or Tylenol or whatever is still like, you know, useful. [chuckles]

Ben Gilbert 2:19:32 Right. That's a great point. It's also interesting that if you miss the window, like, if Qualcomm had missed the window in the early '90s of evangelizing the technology for 2G, they may not have survived long enough to catch the next window ten years later for 3G.

David Rosenthal 2:19:45 Yeah.

Ben Gilbert 2:19:45 So this is, like, one of the few industries where i- there's these super quantized time windows that exist when you can actually get in.

David Rosenthal 2:19:54 Yep.

Ben Gilbert 2:19:55 Uh, another one that I thought was pretty interesting, uh, 'cause I mentioned I think the businesses actually make sense together. The licensing business offers Qualcomm predictable, high-margin revenue that they can basically use to fund R&D. So because they know they're gonna keep getting that-

David Rosenthal 2:20:11 Mm

Ben Gilbert 2:20:11 ... and because it's a big revenue stream, it lets them sort of take bets on new R&D, and when they do more R&D, that fuels the flywheel, where they both get new products, and they get more IP that they can continue putting into the licensing flywheel.

David Rosenthal 2:20:27 Yep.

Ben Gilbert 2:20:27 So there is... I think there is a credible argument of why you wanna keep them together. There's also a-

David Rosenthal 2:20:32 And Qualcomm makes that argument explicitly.

Ben Gilbert 2:20:34 Totally. The not very credible argument is, this thing's a cash cow, and we wanna keep our rich uncle around to make this a nice place to work, and, you know, like, they have several... I think they have nine airplanes. Like, it's a, it's a, it's a relatively cushy company, from what I understand. Um-

David Rosenthal 2:20:50 Well, San Diego is a very nice place.

Ben Gilbert 2:20:52 Yes. I do think the big picture is that the US government's patent system has granted Qualcomm a monopoly, and I, I think there's like... This is one of the few things we've covered on the show where the business exists because of the US's regulatory system.

David Rosenthal 2:21:15 Yep.

Ben Gilbert 2:21:15 They've, they've basically said, and then reaffirmed in a lot of these rulings, "You are allowed to capture a ton of value from this." And there's so many good debates about-... whether the patent system exists a- and serves its intended purpose of enabling, uh, people to spread the news about their innovation so other people can add it, and the way we compensate you is we give you a 20-year exclusivity window, or whether something like this is an abuse of the system. But there's no way to argue that this is anything but a perfect execution of the game on the field.

David Rosenthal 2:21:48 Yeah. It strikes me, telling this whole story, that, like, think about early-stage venture capital company building and the, like, you know, and, you know, you said, Ben, when we were telling this story, if you were to [chuckles] give a venture capitalist the Qualcomm pitch, and, like, there's so many... There are, like, at least six or seven different hops where, you know, ex ante, it looks like, well, and then a miracle happens, and then we succeed at this, and then another miracle happens, and then we succeed at that. And, like, usually, you know, my pattern matching as an investor in early-stage companies is, like, anytime there's a single, "And then a miracle happens," automatic pass. Like, 'cause if you're betting on a mir- but, but sometimes-

Ben Gilbert 2:22:27 Yeah

David Rosenthal 2:22:27 ... if you have a team, that-- 'cause this wasn't just like, "And then a miracle happens." If you listened closely and, like, really knew this team, th- they, like, really knew. They had really high degree of confidence that all of these tight, you know, threading-the-needle moments were gonna happen.

Ben Gilbert 2:22:42 Yep.

David Rosenthal 2:22:42 Um, and it j- really to a degree that just blows my mind. I've never heard anything like it.

Ben Gilbert 2:22:47 Yep.

David Rosenthal 2:22:48 Um, and it just makes me think that, like, sometimes, like, to maybe just be a little more open to that, you know? That, like, sometimes, like, if obv-- some, some person off the wa- uh, uh, walked in off the street and said, like, gave you the Qualcomm pitch, for sure, it would not work.

Ben Gilbert 2:23:02 For sure. And, and the hardest thing about being a technology investor or someone participating in this ecosystem in any way is it's a power law dynamic.

David Rosenthal 2:23:09 Yeah.

Ben Gilbert 2:23:09 This is a business of exceptions.

David Rosenthal 2:23:11 And I've seen, and I'm sure you have, too, so many counterfactuals, too, where incredibly credible teams walk in off the streets with miracle-- like, then a miracle happens, and yeah, it still doesn't work. [chuckles] Like, you know, but sometimes-

Ben Gilbert 2:23:22 But sometimes it does.

David Rosenthal 2:23:22 But sometimes, yeah.

Ben Gilbert 2:23:24 It never works, but sometimes it does.

David Rosenthal 2:23:25 But sometimes it does. [chuckles] That's what makes our industry fun.

Ben Gilbert 2:23:28 All right, so we're gonna not do grading because we've decided to kill grading until we otherwise resurrect it, but I do think it's worth articulating a little bit of a takeaway. So my takeaway on Qualcomm is the, the last decade was basically the best decade for their business model and being in the right place at the right time to have an incredible business model around capitalizing on mobile. And in order for the next decade to be as successful, they need to be absolutely correct about their growth businesses, around IoT, around um, automotive, and around whatever the intelligent connected edge ends up describing, 'cause I think those are technologies that we don't quite know what they are yet.

David Rosenthal 2:24:10 Yep.

Ben Gilbert 2:24:10 I think if they continue to try to run the same playbook in just the handset market that they have been, the best days are behind them because people have caught on to their games a little bit and, and are gonna, gonna squeeze them from a bunch of different directions.

David Rosenthal 2:24:23 Yep. Well, yes, totally agree. I think to paint the best version of the intelligent connected edge that I've heard Cristiano articulate is, just sort of put plainly, like, hey, we all agree that, like, cloud is, like, a thing. Like, we did the AWS episode. There's over $100 billion in, like, revenue backlog in the cloud.

Ben Gilbert 2:24:42 Yep.

David Rosenthal 2:24:42 We talked about on the AWS episode, like, Snowball and Snowmobile, and, like, getting data to and from the cloud is, like, still, like, one of the major pieces of lock-in. And, like, you think about how data gets in and out of the cloud, most of it's not by snowmobiles. [chuckles]

Ben Gilbert 2:24:58 Right, it's connected on the edge.

David Rosenthal 2:24:59 Most of it is wireless-

Ben Gilbert 2:25:00 Yep

David Rosenthal 2:25:01 ... connected on the edge. And so if you think about it like that, you're like, "Okay, yeah, I can b- I can buy that this is a, you know, trillion-dollar market," but how do you capture value in that, and can they capture it in the same way that they have in the past? Like, very much open questions.

Ben Gilbert 2:25:13 Oof, listeners, that was a total blast. David, crazy to do a live show like that with no guest for two and a half hours on stage, just you and I. [chuckles]

David Rosenthal 2:25:23 Yes. [chuckles] And a professionally operated boom arm camera.

Ben Gilbert 2:25:28 Yes. If you haven't watched the video version of this, uh, just go check it out on, on YouTube or Spotify or anywhere just to see what that looked like. It was a very fun spectacle to get to do that. Our huge thank you to Fundrise, Pilot, Brex, and the Solana Foundation for hosting us at Breakpoint this year. It's a really great event and fun to be in Lisbon. On another note, we wanted to say a huge thank you to everyone who took our survey over the last month. We have emailed the winners of all of the Acquired T-shirts, and the AirPods Pro second-generation winner is Lindsay from San Francisco, who we have also emailed, so congratulations to all of our winners, and a huge thank you for helping us learn more about all of you. And it really helps us run the business and make the show better and really understand the audience. When you finish this episode, come talk with us, acquired.fm/slack, 13,000 other smart, thoughtful, kind people. If you want some of that sweet Acquired merch everyone is talking about, go to acquired.fm/store. I know in the next few weeks, there's gonna be a couple of new designs dropping, inspired by catchphrases from episodes where I applied my graphic design skills, for better or for worse.

David Rosenthal 2:26:36 It's the perfect time to sign up as a customer for Brex to get one of those.

Ben Gilbert 2:26:40 Yes, that's right. If you don't wanna pay for your T-shirt, brex.com/acquired, much cheaper way. You also get to be a Brex customer, so wins all around.

David Rosenthal 2:26:48 Win-win.

Ben Gilbert 2:26:49 If you wanna listen to the LP show, we have had some awesome, awesome episodes recently. We just interviewed Jay Hoag, which is a super rare interview, uh, to get. Jay is the founder of the $21 billion firm TCV, formerly Technology Crossover Ventures, about their story and his personal philosophies. TCV was a major investor on much of the journey of companies you know, like Zillow, Spotify, and Netflix, which we spent a lot of time talking with Jay about. You can search Acquired LP Show for free publicly in the podcast player of your choice to catch that. With that, listeners, we'll see you next time.

David Rosenthal 2:27:26 We'll see you next time.

Speaker 2:27:27 [singing] Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Uh. [upbeat music]