The Stalwart

Verizon is Stupid, Obviously

There's a meme going around that because Verizon turned down Apple when it came to it with the iPhone that the company is obviously stupid, or at least the guy who made that decision is.  Why is he/they stupid?  Duh, because the iPhone is selling like mad, breaking all kinds of records, making AT&T a fortune.  Oh wait, about that last part, has anyone confirmed that AT&T is making a mint on this deal?  We know Apple is going to make out pretty well, but AT&T?

I'm not sure the answer is as obvious as people think it is.

Let's first talk about how many subscribers the iPhone is likely to net AT&T.  The most optimistic forecast I've seen is that the company will sell 8 million of 'em in 2008.  Based on the most recent data I could find, that would be somewhere between 3-4% of the market.  Of course, AT&T already has over 25% market share, so many of these customers will be their own, bringing the market share gain somewhere closer to 2%.

There's another problem, which is that Apple is getting some sort of payment from AT&T, either in the form of a revenue share of a bounty of sorts.  This further reduces the value of these captured customer.  As for AT&T's existing users that it turns into iPhone customers, it's conceivable that they'll see an ARPU drop, no?

There's also the problem of image and public perception.  Anytime someone has a problem with their iPhone, the default will be to blame AT&T.  In fact, there's already the viewpoint that AT&T's presence in the whole affair is actually bring down the value of the iPhone.  There are plenty of people that want the device unshackled from Apple's chosen carrier.  Ultimately you have to ask how much money can there be in it for AT&T if there's a sense that it brings absolutely no value to the table.  All the value comes from Apple and its designers, which means that (almost) all of the profit is going to go to Apple.  It's safe to assume that AT&T won this deal, because it was the quickest to genuflect in front of the iGod.

So yeah, Verizon is stupid for passing on the iPhone, obviously.

TXN Makes a Lot Less From Low End Phones

Texas Instruments's (NYSE:TXN) 3Q06 was strong but the company sees weakness in 4Q06, with orders for the company's cell phone chips partially hurt by an increased mobile phone sales mix globally towards low end phones in developing nations. TXN feels the pain since low end phones mean much less TXN tech per phone while high end phones mean much more tech.

...generally call it $5 to $10 for low-end handset content for TI. If you go to a 3G handset, for example, today the base band would be characterized as probably low to mid-teens. An OMAP application processor would similarly be low to mid-teens. And again, that doesn't mean in every 3G handset we're selling both of those products.

This means 3G handsets can potentially rack up say $30 in revenue for TI versus $5 for some very low end phones. Also, in regards to higher end mobile techonology, its interesting to see that TXN has 80% market share when it comes to 3G wireless infrastructure.

our share in 3G infrastructure was very strong and much stronger than what we had historically held in 2G, 2.5G. When I say very strong, I'm talking on the order of probably 80% or so market share in these 3G systems. So as those deployments continue to gain steam, we are disproportionately benefiting. I don't know specifically who you would do the comparison to, but other players, if their share was more weighted toward 2G or 2.5G, versus in our case 3G, that may be the bigger factor in explaining individual company's performance.

Two Cell Companies Might Actually Like WiMax

Dual WiMax/Cellular phones could pose a threat to the revenue growth of telecom operators. Even just WiFi/Cell phones already could be very useful for people in urban environments. Thus its not surprising that many cellular network operators might not be too keen to start handing out dual mode phones to their subscribers. But... for those who might own both cellular and Wifi/Wimax networks... for those companies it might make sense. What two names might come to mind? British Telecom (NYSE:BT) and Verizon (NYSE:VZ). From Barron's blogger Eric Savitz after attending a WiMax conference in Boston:

One of the exciting promises of Internet telephony is toll-free calling from WiFi handsets. Within range of a WiFi base station (or conceivably, a WiMAX base station), you wouldn’t have to use up your cellular minutes.

Large enterprises could realize substantial savings from “dual-mode” phones capable of seamlessly hopping from cellular to WiFi, especially with many enterprises now replacing their office phones with Voice-over-Internet Protocol systems. But the leading VoIP supplier Cisco Systems (NASDAQ: CSCO - News) has lamented that cellular operators seem in no great rush to certify dual-mode handset models that would allow cellular subscribers to user fewer cellular minutes.

So I was intrigued when a bunch of WiMAX World panelists predicted that the arrival of cellular-WiFi would be huge. Motorola (NYSE: MOT - News) marketing executive Hossein Parandeh said that his company was testing such dual-mode phones.

Which operators are removing their roadblocks, I asked him? Some wireless operators own both cellular and WiFi networks, he hinted.

Which ones? Two of the operators fitting that description were British Telecom (NYSE: BT - News) and Verizon Communications (NYSE: VZ - News), he said.

So has Verizon Wireless been testing dual mode phones? “I can’t comment,” said the Motorola vice president, who quickly shook my hand and said, “Gotta go!”

Qualcomm Patents- 47% of WCDMA

How much of WCDMA's intellectual property comes from Qualcomm? (NSDQ:QCOM) We believe CEO Dr. Paul Jacobs spelled it out quite well in the company's 3Q06 conference call. By looking at the overall citations from new inventors referring to for various existing WCDMA related patents. By Qualcomm's calculation, its own WCDMA patents take 47% of the total citation pie. Sony Ericcson is next in line with 21%. Nokia? 3% Texas Instruments? Under 1%.

However, as one indicator of the significance of our contributions to open standards, publicly available sources can be used for one objective measure of the value of essential patents in the WCDMA standard by examining how often patents essential to the WCDMA standard were cited as prior art in the patents of other inventors. While we do not believe that [accounting] schemes if any kind are a reliable measure of the value and quality of patents, the frequency with which once patents are cited by others is obviously more of an indicator of the importance of a patent portfolio than simply counting essential patents in a standard.

Looking at citations is a measure of significance somewhat analogous to the way Google ranks Web pages by examining the links, the number of links to that page. When you factor out citations by a company of its own patents, QUALCOMM has 47% of the citation-weighted portfolio of essential patents for WCDMA, followed by Ericsson at 21%.

Significantly, Nokia has only 3%, NEC 2%, Panasonic 1%, and TI and Broadcom have less than 1%. Of course, to reiterate, the best measure by far of the value of QUALCOMM's patent portfolio is the 130 arms-length license agreements that we've negotiated over 15 years with nearly every major supplier in the industry. Those agreements have established, confirmed and reconfirmed our patent portfolio's market value.

We continue to believe that the operation of free market forces provides the only true indicator of patent value, but looking at citations provides another interesting indicator of innovative importance.

-from 3Q06 earnings result conference call

Handset Supply Exceeding Demand

This data point should have widespread implications: Nokia and Motorola seem to be cutting orders for mobiles.

Nokia Oyj and Motorola Inc, the world's two largest mobile-phone makers, have cut orders, indicating handset supply is exceeding demand, JPMorgan Chase & Co's top technology analyst Bhavin Shah said.

Nokia reduced purchases of handset displays, while Motorola cut orders of Compal Communications Inc phones last month, Shah said in Taipei last Friday. He didn't provide specifics. ...

Makers of chips customized for mobile phones, computers, and consumer electronics are boosting production by about 30 percent, outpacing demand growth of about 20 percent, said Shah, who attended the Computex trade show in Taipei last week.

We remember hearing how MIT had produced sub-100 laptops for developing nations. Now if only the sub-$100 laptops could easily use a cheap mobile phone to access the internet... we're still waiting for the next Google to emerge out of Bangladesh. Since deep down, what is really stopping anyone in the world from creating a Google? A bit of a tangent, but this question has been dogging us lately. Google, a $155 billion dollar company, was created within a few years simply from a computer, an internet connection, free time, and innovation.

DoCoMo Abroad

If you've ever lusted after Japanese cell phones, this may be some good news.  DoCoMo is planning on making all of their phones compatible with the international GSM standard, according to sources at the company.  DoCoMo (NYSE: DCM) has been trying for some time to leverage their wireless expertise abroad, to no avail.  Perhaps aligning itself with a global standard is a good start

Microsoft Develops Mobile Skype

It's called Microsoft Office Communicator and we could see it this year. Worth a full read, its only a page or so.

MICROSOFT has developed a Skype-style free internet voice service for mobile phones that City analysts believe could wipe billions off the market value of operators such as Vodafone.

The service is included in a mobile version of Microsoft Office Communicator due to be released this year. It will take the form of a voice-over internet protocol (VoIP) application that allows Office users to make free voice calls over wi-fi enabled phones running Windows Mobile software. It uses the internet as a virtual phone network as well as accessing e-mail, PowerPoint and other Office applications. ...

Trying to downplay the havoc Microsoft Office Communicator Mobile will wreak on the mobile telecoms industry, Ballmer chose a topical Valentine’s Day theme for his announcement. “I love the mobile industry and I love our operator partners, and I want to have that message precede all we’re about to show,” Ballmer said in Barcelona. He went on to demonstrate how a mobile phone running Windows Mobile can be used to make a free voice call over the internet. Ballmer told the audience: “That was a VoIP call.”

But Ballmer’s announcement may be closer to a St Valentine’s Day massacre than a love letter for the mobile operators concerned.

We've attached a picture of Steve Ballmer consoling the telecom operators, "Well I love you, but it's just that I'm not in love with you..."

By the way, Wikipedia on Ballmer:

Steve Ballmer has been known to be very passionate in expressing his enthusiasm. Once his vocal cords required surgery after he screamed "Windows, Windows, Windows" continuously at a meeting in Japan in 1991. When Microsoft celebrated its 25th anniversary in 2000, Ballmer popped out of the anniversary cake to surprise the audience. His wild screaming and dancing on stage at an employees convention was caught on a widely-circulated video known as "Dance Monkeyboy." A few days later at a developers' conference, a sweat-soaked Ballmer repeatedly chanted "developers" at least 14 times in front of the bemused gathering.

Ballmer has also called Linux "communism" and the GNU General Public License "a cancer," [1] as well as more recently claiming that the most common format of music on iPods is "stolen". He advocates digital rights management and has said that "DRM is the future."

GSM Advocates Trying to Hook the Poor

Something just feels dirty about this following piece of news.

World association of GSM providers, under the umbrella of the GSM Association (GSMA), has announced an initiative to provide funds for nations in the emerging markets area, in its efforts to encourage a better environment for mobile growth and drive economic and social development.

The emerging markets include countries in Africa, Asia and Russia.

Perhaps its just us, but could GSM standards advocates be trying to get the poor "hooked" on GSM. Because once you're using it, its hard to stop.. and switch to the competing CDMA standards.

According to the GSMA, Accenture Development Partnerships has been engaged as implementation partner, and in using the Fund to back a wide range of projects that provide mobile technology to local communities that previously had little or no access to telecommunications. Development Fund Board has also been established to oversee the projects, including representatives from the GSMA.

The GSM Association has, since October last year, been working on the pilot phase projects with operators in eight countries in Asia and Africa. Last year, Motorola won the bid to supply handsets which would cost African subscribers less than $US30 (about N5,000) to buy a phone.

Imagine if Hewlet Packard donated printers to poor schools around the world, only to get them in the habit of buying high-margin printer ink on a recurring basis. Could these development projects by GSM providers be something similar? Is GSM making a landgrab in order to beat out CDMA? From here:

Several forms of CDMA have been introduced in Africa. The progress of cdmaOne, however, has been hindered by the aggressive deployment of GSM on the continent. Even Telecel International, which pioneered CDMA in Africa, has changed sides. In Zambia the CDMA equipment deployed in the capital of Lusaka in 1997 is being replaced and rollout expanded to Lusaka and the Copperbelt.

"It was purely a political decision," says Michel Tsumbu, Telecel International's Africa director in business development. "The Zambian government decided in May 1998 to comply with the Southern African Development Community (SADC) conditions to deploy GSM in the area and the rest of Africa is likely to follow suit." [Emphasis added]

Charity can be more than meets the eye.

Even You Can Know Telecom Acronyms

No matter how many times we read about telecom standards and technology, it never seems to all quite stick. Thus we were happy to find a website full of telecom acronym explanations right here.

CDMA (code division multiple access)
A packet-based wireless-access technology that was improved and commercialized by Qualcomm. CDMA is used in certain cellular phone systems and in some wireless local-area networks, or WLANs. The major benefit of CDMA is increased capacity, up to 20 times that of analog service.

CDMA increases capacity through more efficient use of spectrum. Specifically, it permits many radios to share the same frequency channel. Unlike TDMA (time division multiple access), a competing system used in GSM, all radios using CDMA can be active all the time because network capacity does not directly limit the number of active radios. Since larger numbers of phones can be served by smaller numbers of cell sites, CDMA-based standards have a significant economic advantage over older, TDMA-based standards.

And GSM's 3G evolution to WCDMA..

WCDMA (wideband code division multiple access)
Another name for UMTS (Universal Mobile Telecommunications System), a cellular network also referred to as 3GPP. As the name suggests, WCDMA is based on CDMA technology and was envisioned for the next generation of GSM. It's a European standard designed to support data transmission rates of 144kbps for use in vehicles, 384kbps for pedestrian use and up to 2mbps for use indoors.

All this and more is found at the site.

More on Vonage

Om Malik has a good summary of the Vonage information, with links to what's being written, though I still think the jury is out in terms of how good the S-1 looks.  Here's part of what he has to say:

“During the nine months ended September 30, 2005, we experienced average monthly customer churn of 2.11%. Our churn rate among those U.S. direct and retail customers with us for more than six months was lower,” the company says, in its filing. That seems to be a rather innocuous number. To be fair, the company’s churn rate of 2.11% is pretty darn good - if you compare it to other Internet related services business such as web hosting and DSL High Speed Internet that see about 1%-to-3%. Vonage is actually doing much better than it had reported earlier. [Talk about being wrong in my estimates previously. The numbers reported in the S-1 were exactly half of what I had estimated with the help of others. My original estimate was 4% churn and $400-per-customer acquisition cost.]

Ok, perhaps those Churn numbers and customer acquisition costs aren't too bad, but is Vonage moving the goalposts to kick a field goal?  Consider this most recent quarter.  The company states that marketing costs came to $208.76/gross subscriber.  Yet, net subscriber ad's were 25% lower than gross, meaning that acquisition costs per net addition came to $275.34.  Also, for this company, marketing costs aren't the only cost to acquiring customers.  When you look at CPNA (Costs per Net Acquisition) which takes into account net equipment costs, and other set up, it comes to over $308/net addition. 

Furthermore, as Om notes, ARPU (Average Monthly Revenue Per User) is in a steady decline, and for the last quarter stands at $25.79 per user at $308/net addition, it will take take them 1 year for them to make back their revenue, but if we assume that net margins will be 20%, probably quite generous, then it would take them 5 years to make this up.  Net margins, for mature telephony is closer to 10%, and Vonage is competing against companies giving analogous service away for free, like Skype.