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Why Partners Should Tune In to Qualcomm’s Epic Soap Opera

Like sand through the hourglass, these are the days of Qualcomm’s life.

Lawsuits, vindictive jabs, and hostile takeovers: 2017 has given us one breathless cliffhanger after another when it comes to chipmaker Qualcomm. The gloves came off this week when semiconductor manufacturer Broadcom’s efforts to acquire Qualcomm turned hostile as it started a high-profile campaign to stack Qualcomm’s board of directors with stooges who would greenlight the deal.

Qualcomm’s board comes up for re-election annually, and Broadcom has until the shareholder meeting on March 6 of next year to get its people in place and sweeten its $105 billion offer before asking for votes.

Broadcom isn’t the only threat. Qualcomm is also embroiled in bitter battles with Apple and Intel over patents, with lawsuits flying back and forth as each company vies over the technologies that power not only current smartphones, but next-gen computing, too. Q1 of next year is going to be fascinating to watch unfold as Qualcomm attempts to counter aggressive moves coming from every which way.

How does this impact partners? First of all, it provides for a lot of entertainment as we watch the drama unfold, something we rarely see in this space. More importantly, whether or not Qualcomm successfully escapes both a takeover and hugely expensive legal rulings could well have a significant impact on channel partners’ offerings in the very near future, especially those of traditional resellers, and shape what IT and plain old everyday life will look like by 2020.

So grab some popcorn and settle in, because unpacking this snarl is a doozy.

Setting the scene: why Qualcomm’s tech is worth fighting for

Qualcomm wasn’t just first to the smartphone high-speed cellular modem game, it’s also poured way more into R&D than its competitors, in large part because smartphones have been by far its biggest play.

Let’s flash back to the days of 3G, if you can remember that far back. Way back then, cell phone carriers basically faked constant connectivity by sending and receiving bursts of data in milliseconds (Google “wireless spectrum” for the nitty gritty technical details). Everyone essentially took their turns on the network, which only allowed for a limited speed. Remember your first iPhone? It could make calls fine and kinda-sorta connect to the internet, but good luck streaming music over wireless.

What Qualcomm did--and what it built its business on--was figure out a way to let everyone transmit at one time. In essence, it paved the way for high-speed connectivity for smartphones. In subsequent years, the company designed a slew of technologies that power 21st century life as we know it, like ways to conserve power and the tech that’s behind app stores. Qualcomm’s technologies served as the bedrock for most generations of the iPhone.

Today, Qualcomm’s most squeal-worthy new tech is a next-gen LTE modem capable of one gigabit downloads in a second, which is up to 100 times or so faster than what came before. All of the major cellular carriers are banking on the 1 GB speeds to drive a lot of revenue in the next couple of years until manufacturers work out the kinks of 5G, the lightning-fast connection that will power the Internet of Things and change the IT channel forever.

At its Snapdragon Summit this week, the company debuted its newest silicon chip, the Snapdragon 845, which will power all of Android’s phones next year. The 845 has a slew of really cool new features that, while don’t yet directly impact IT, will greatly influence nearly every specialization in the channel in the next couple of years.

For MSSPs, there’s a dedicated security chip designed specifically to protect your biometric data and generate encryption keys. There’s embedded cognitive computing that leverages AI for image recognition, handy for all kinds of sectors from document process automation to retail applications. Are you a UCaaS provider? Qualcomm says the 845 will be 25 to 30 percent faster and more power efficient than previous iterations, which will enable users to truly leverage virtual reality. And maybe most important, its X20 LTE modem, with speeds up to 1.2 Gbps, lays the groundwork for the 5G revolution and the IoT connectivity that will touch everything.

In the meantime, Qualcomm is trying to diversify its portfolio so that it isn’t so dependent on the smartphone market. VARs, take heed. At this week’s summit, Qualcomm announced renewed energy around its partnership with Microsoft, whose Windows PCs will use the Snapdragon 835. (Remember this for later when we’re reaching the end of our Qualcomm binge and bringing our audience fully up-to-date.) And rumors are circulating that the company is working fast and furious on virtual reality gadgets that leverage the new chip.

This has led Qualcomm to vehemently protest Broadcom’s offer, saying that it vastly undervalues the chipmaker. It’s also urging its shareholders not to trade short-term profits from a takeover for long-term revenue from technology that’s still being developed, saying that Broadcom would slash investments in the critical R&D that keeps Qualcomm so far ahead of its competitors. To top it off, there’s the likely battle Broadcom would have to fight against regulators.

These aren’t unreasonable claims, but they might not matter. Read on for the riveting saga of how Qualcomm’s legal troubles have impacted its market value, which understandably spooks many of its shareholders. A Broadcom bailout probably sounds pretty attractive right now to shareholders yearning for a swaggering young thing to come to the rescue.

Broadcom’s braggadocio

In its latest quarterly results, released this week, Broadcom announced higher-than-expected earnings and expressed a high level of confidence that its takeover will be a success. It didn’t say much on the quarterly call with analysts, but what it did say, it said with cockiness. It’s received positive feedback from both customers and shareholders, is hoping for a “constructive dialogue” (ha!), and is confident it can gain regulatory approval and close the transaction within a year of striking a final deal.

While nearly half of Broadcom’s revenue still comes from wired infrastructure, its wireless communications business grew by 33 percent. Its revenue forecast was helped in no small part by its deal with a “large North American smartphone customer.” Broadcom CEO Hock Tan said this mysterious customer’s products had been “pushed out” of the market as compared to prior years, but that he expected Broadcom’s wireless business to keep growing this quarter--which just so happens to coincide with the launch of the iPhone 8 and iPhone X.

Sorry, I wish the big reveal of Apple as the probable mystery customer were more of a surprise. But what Qualcomm’s feud with Apple lacks in shock value, it makes up for in really juicy details...

How do you like them Apples?

While Broadcom’s villainous turn was the big scene this week, Qualcomm’s 2017 plot line has been riddled with lawsuits flying back and forth between it and Apple over patents for the wireless modems, arguably the single most important component in today’s smartphones, that Qualcomm designed and almost all smartphones (including iPhones) use. These technologies lie “at the heart of every iPhone and extend well beyond modem technologies or cellular standards,” explained Qualcomm general counsel Dan Rosenberg in a July 6, 2017 statement.

A big part of Qualcomm’s revenue stems from a pretty unique business model that charges royalties as much as 5 percent on these parts, which enable faster cellular connectivity and, well, let your smartphone work like a smartphone. According to a fascinating blow-by-blow of the battle from Bloomberg, cell phone manufacturers dub this the “Qualcomm tax.”

As you can imagine, this tax did not go over well with Apple. Nobody, and I mean nobody, tells Apple what to do...or touches the sanctity of its iPhone revenue.

Despite an agreement that Apple wouldn’t challenge Qualcomm’s patents or encourage regulators to look into the unusual revenue driver, Qualcomm accused Apple in 2015 of partnering with Samsung (with which Apple has been embroiled in legal battles for the last decade--that’s how irked Apple was at this tax) in a global conspiracy to finagle an investigation by Korean regulators into Qualcomm’s practice.

[Viewers gasp]

That’s right. A global conspiracy, House of Cards style. And it seems to have worked quite well, with the KFTC fining Qualcomm for $850 million and the U.S. Fair Trade Commission accusing the chipmaker of anticompetitive tactics.

So Apple did what Apple does. It sued Qualcomm in three countries, most significantly in the U.S. to the tune of $1 billion. Compounded by the fact that it lost another unnamed manufacturer, Qualcomm’s stock price nosedived hardcore, despite its loud protestations and PR campaign insisting that every smartphone in existence uses Qualcomm technology.

Apple stopped paying Qualcomm its tax, and Qualcomm stopped paying Apple its rebates. Apple accused Qualcomm of extortion, and Qualcomm accused Apple of lying to investigators. Qualcomm countersued and prompted a U.S. International Trade Commission investigation, then they all met on the playground after school for some old-fashioned hair-pulling and shin-kicking. 

Okay, not really. What actually happened is that Apple moved to cut Qualcomm out of the iPhone picture altogether by partnering with the OG semiconductor manufacturer, the half-century-old behemoth with its fingers in almost every PC pie, the OEM that powered a thousand VARs…

Intel joins the fray

It took Apple years before it integrated Qualcomm’s 3G modems into the iPhone, and that lag didn’t slow down the smartphone’s momentum. Apple is banking on its loyal customer base to make up up for the fact that the iPhones made in 2018, unlike the phones from competitor Samsung, won’t run on the Fast-and-Furious speed of Qualcomm’s X16 LTE modem.

As part of its nasty divorce from Qualcomm, Apple’s taken up with a new mistress. The iPhones 8 X will come in two models in 2017: one runs on Qualcomm’s X16 LTE modems, and the other runs on Intel XMM7480 processors that lag behind Qualcomm’s technology. That means that neither model will have Gigabit LTE (thought the Qualcomm model is said to be a little faster than the Intel version). While that probably won’t be all that apparent to users now, it puts a question mark over how future generations of the iPhone will stack up to competitors using the LTE.

But the plot thickens...The technology and messaging that came out of the Snapdragon Summit this week poses a direct challenge to Intel’s huge PC market share. Remember way back at the beginning of this saga when I told you to remember Qualcomm’s partnership with Microsoft and its Windows PCs? That’s a big deal to Intel--and to the channel.

Qualcomm unveiled a series of new laptops and hybrid devices running the Snapdragon 835 infrastructure, which boast an astounding 20-hour “always-on” battery life and come equipped with the 1 Gbps X16 LTE modem, giving the Windows PCs the same lightning fast cellular network speed that Intel can’t yet provide. The devices are so impressive that HP, ASUS, and Lenovo have agreed to offer them, meaning partners can get their customers this Windows PC technology from a multitude of OEMs that are Microsoft competitors.

The channel now has a real, high-quality, super-cool alternative to Intel processors, and as emerging technologies like VR/AR, predictive analytics, and IoT really take off, end users are going to clamor for those faster speeds.

Back in May, Intel celebrated the 40th birthday of its X86 microprocessor. Perhaps emboldened by the weight of Apple behind it, Intel is also hinting at possible lawsuits in Qualcomm’s future. In a happy birthday blog post, Intel cites a long history of wins in patent court before issuing a thinly veiled warning to Qualcomm and Microsoft:

Intel welcomes lawful competition, and we are confident that Intel’s microprocessors, which have been specifically optimized to implement Intel’s x86 ISA for almost four decades, will deliver amazing experiences, consistency across applications, and a full breadth of consumer offerings, full manageability and IT integration for the enterprise. However, we do not welcome unlawful infringement of our patents, and we fully expect other companies to continue to respect Intel’s intellectual property rights.

Qualcomm took the bait and responded with a corporate form of “I’m rubber, you’re glue,” telling The Register, “The Snapdragon 835 Mobile PC Platform brings a true always connected PC experience with support for up to Gigabit LTE connectivity and all-day battery life for sleek, thin and fanless designs. This will change the future of personal computing.”

Maybe so, but will it pay off in time to save Qualcomm from Broadcom’s takeover? If Intel takes Qualcomm to court, no matter how clear it might be that it won’t win, that means Qualcomm will be fighting hugely expensive, long, epic legal battles with two extremely well-funded companies. This will almost certainly hurt the company’s stock price even more, and push shareholders who are on the fence about which way to vote in March into Broadcom’s court.

What this may mean for IT and the coming IoT world

What this all means for partners--and any person in the first world--is that the near term wireless future will be directly impacted by whether or not Qualcomm can weather this storm. Seriously. Stay with me here. If Qualcomm is absorbed into Broadcom, and Broadcom scales back Qualcomm’s massive investment into R&D of technology that won’t be relevant until the 2020s, it may open the door for competitors to finally catch up to Qualcomm’s tech--competitors like Intel, which could pour the influx of cash from the 2018 iPhone 8 and iPhone X into its own R&D and close the gap that currently exists with Qualcomm.  

Most experts and analysts agree that 2020 is when IoT will reach critical mass and widespread adoption, and a 2020 with an IoT infrastructure built on Qualcomm tech will probably look quite different than one built on Intel infrastructure.

Maybe I'm reaching, and it’s true that all of this is built on a series of what-ifs. But oh, my, it sure is entertaining to speculate.

That brings us up-to-date on Qualcomm’s saga, which is sure to continue to offer unparalleled levels of drama, surprises, and cliffhangers in the days to come. I'll keep watching and keep giving recaps of future episodes of As the Channel Turns.

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