Apple vs Qualcomm - A Dilemma with Chinese Characteristics
As discussed in 5G-Unplugged, the information revolution has developed through most of the 20th century and is well beyond the tipping point. History has yet again accelerated, challenging our ability to adapt and absorb this transformative shift. Ubiquitous access to an infinite amount of personal data elevates the post cold war geo political chess game to a new level. In the face of China’s strategic ambitions, the ongoing Apple vs Qualcomm fight is a lose-lose proposition this side of the world can not afford.
The keystone of the information revolution has been the proliferation of smartphones. On the bright side, we can access and update any data anywhere on the planet and at any given time. On the dark side, providers of mobile services get to know who we are, where we are, and what we do with formidable precision and details. They can nudge our behavior with short term predictable, but long term unpredictable outcomes. We have been caught off guard; the discontinuity exposes our civilization to a possibility that the rulebook which underpins our evolution will be abused with extreme consequences.
Apple’s and Qualcomm’s respective contributions and expertise across key dimensions of the information revolution position them as two of the most important pawns on the chessboard. Apple has been a primary driver of technology intimacy. Thanks to Apple’s focus on personalization, computers hopped from the desktop onto our bodies (laps, pocket, wrist and ears, …) and have become permanently embedded limbs of a new kind. Qualcomm has been the primary driver of mobile connectivity. Thanks to Qualcomm’s focus on mobile data communication, personal connectivity went from cumbersome on/off nomadic availability to (mostly) frictionless always on global mobility. While their respective contributions have been highly complementary, Apple and Qualcomm are now embroiled into a complex maze of litigation and regulatory battles. The outcome could meaningfully influence the bigger board game ongoing between China and societies committed to a more progressive rulebook (most of the Americas, Europe, portion of Asia).
While Qualcomm has carried the torch of wireless technology and cellular communication systems over past decades, earning this position wasn’t easy. The telecommunication industry was heavily regulated and the incumbents enjoyed strong protection. Qualcomm had to figure out a business model to overcome the many barriers it faced to convert its innovation into a sustainable business. This led to the “chip and licensing” model. Qualcomm made its technology available for the world to use against payment of a licensing fee on the end device; it also invested heavily to participate directly in the market with a broad portfolio of system on chip solutions for mobile device and in some cases mobile networks. This model resulted in a textbook example of a functioning market; it enabled multiple generations of new entrants into the mobile device market across Korea, Japan, North America and China; intense competition and falling prices have been a constant throughout. Apple itself benefitted greatly — initially through Infineon, a copycat chip design house spun-off Siemens’s defunct mobile phone business — and then directly by leveraging Qualcomm’s product portfolio to rapidly expand the iPhone’s addressable market to CDMA and LTE networks.
Concurrently, Apple led the world towards the personalization of technology. It made computers, music and the internet more personal. It abstracted the geekiness of technological innovation and distilled the resulting benefits into our day to day routines. It created the bicycle for the mind that Steve Jobs dreamed of. Achieving and preserving such a level of design integrity and clarity wasn’t easy either; it demanded a high degree of conviction and persistence to challenge deeply ingrained industry practices and mindsets. As a corollary, design consistency could only be achieved with a strong control and curation across the value chain and the supply chain.
The underlying philosophies of both business models are evidently orthogonal. Qualcomm’s model is horizontal while Apple’s is vertical. It is therefore not a surprise to see the relationship come to a head. High stake disputes between Qualcomm and the mobile device market leaders have been a constant: Motorola, Ericsson, Nokia, Blackberry, Samsung and Huawei all took turns as they respectively rose to the top of the mobile market. Apple’s action is just the most intense episode in the “market leader hates seeing hard earned dollars fund the next wave of competition” series. We can look at it as yet another contractual dispute. We can also look at it as yet another greedy supply chain optimization by skilled procurement lucifers. However, the macro level environment in which this is happening calls for a broader perspective.
Imagine that at the peak of the cold war, Boeing and Airbus split the market for aircrafts; further imagine that instead of being based in Seattle, Boeing was part of the USSR; further imagine that Boeing had an edge over Airbus in terms of access to capital, skilled workforce and organizational agility; and finally imagine that Boeing retained full access to the market in the West while Airbus’s access to the USSR markets was limited. This is clearly a thought experiment since the US and NATO would never have allowed such a situation to happen; not even close. Fast forward. Replace dominance of aircraft technologies with dominance of mobile network infrastructure as a prime strategic currency; replace Boeing with Huawei, Airbus with Ericsson, USSR with China. This is where we are; it is not a pretty picture. The board game is set; let’s tie it all together from three different angles.
First angle. Qualcomm and Google/Android’s horizontal model for the distribution of mobile processors and mobile services has enabled a vibrant and diverse ecosystem of mobile devices and services. However, in recent years, new players (Oppo, Vivo, Xiaomi, Huawei, Lenovo) have mostly emerged out of China. Qualcomm and Android have accelerated, if not enabled, China’s leadership in this space. Furthermore, Qualcomm and Google have an incentive to see these brands expand outside of China; indeed, this is one of the few avenues available to challenge Apple’s monopsony. People’s comfort with these Chinese brands flows from Qualcomm’s and Android’s credibility; yet the trust in specific sub-system should not blindly extend to the whole. Those devices might eventually be used as Trojan horses. Indeed, China’s regime is increasingly taking advantage of the strength and commitment of its home grown digital ecosystem to intensify surveillance and progress an authoritarian agenda. China is perverting the de-centralized paradigm of the internet; it leverages horizontal business models to acquire expertise on advanced technologies without committing to the rulebook that comes with it. In the case of Android, the situation is already highly asymmetric; the global distribution of Google’s mobile platform is increasingly dependent on Chinese vendors while Google has essentially no influence in China.
Second angle. Apple is amongst a few meaningful entities with a decent (though not perfect) track record of precautionary principle on data sharing and defense of user privacy. As we grope our way along the information revolution, Apple’s business strategy happens to be in the best interest of society when it comes to precautionary handling of data. However, the new generation of Chinese vendors enabled by Qualcomm and Android is creating meaningful pressure on Apple’s business; it might in turn challenge Apple’s ability to sustain its financial performance and in turn its commitment to user privacy. As a major enabler of these vendors, Qualcomm thus appears to be the source of significant concern for Apple. The ongoing litigation firework is Apple’s second chance to structurally protect itself by weakening if not eliminating such a strategic threat. A decade ago Apple failed to do so when Google entered the mobile space with Android; the world was pleased with Google’s response to the risk of iPhone’s total dominance; this happened in the name of healthy competition in a functional market economy and rationale actors. In retrospect, the competition was great, but China has captured most of Android’s strategic value; and its intentions might no longer be consistent with the flawed economic definition of rationality.
Third angle. Huawei is leading the world on mobile networking equipments. It is becoming harder by the day to deploy leading edge mobile network technology without Huawei in the mix. The transition to 5G is accelerating this trend; while the 5G race is led by Qualcomm, Huawei is likely to end up as the main beneficiary. The primary forces balancing Huawei’s dominance are Ericsson and Qualcomm. Ericsson remains a significant force in mobile systems but it simply can’t keep up with Huawei’s pace. In theory, Qualcomm would have the R&D bandwidth, system expertise, disruptive mindset and proven track record to orchestrate a meaningful challenge with multiple partners. However, without predictable licensing revenues, Qualcomm’s foundational R&D capability is at risk as a consequence of Apple’s attacks. Without Qualcomm’s investments in core mobile system innovation and ecosystem, Huawei’s dominance will be increasingly difficult to contain.
Considered in aggregate, these three perspectives are highly concerning. The situation is mind boggling (I’m hesitant to use the F word in written form)! At a time where the evolution of society is increasingly sensitive to the data privacy rulebook and the economy increasingly dependent on ubiquitous access to data, the progressive world needs to have its best team focused on solidifying the foundations of the mobile data networking infrastructure and ecosystem. Yet, in the face of strong forces exposing damning fragilities and structural risks, two of our most valuable players (Apple, Qualcomm) are wasting precious energy and cognitive bandwidth going at each other’s throat; furthermore, due to a lack of better market opportunity, a couple players (Qualcomm, Google) are even helping team China get better at the game. Finally, as the icing on the cake, we are still debating wether the open door policies which invited the fox (Huawei) in the henhouse remain adequate!
This would be a perfectly acceptable outcome if China was playing by the same rules. Instead, China is taking advantage of a political leadership vacuum to expand its digital tentacles into our world with no assurance that they will respect our rule book over time. China is offering ambiguous “trust us” guarantees not worth the paper they are written on. If not yet part of the plan, the regime will inevitably be tempted to leverage these tentacles to further solidify and expand the empire across Eurasia. While this may sound extreme and unlikely, Europe is already getting a real world taste of China’s squeeze. It only took one round of “constructive feedback” for Europe to back down on its consideration of a Huawei ban on 5G infrastructure. The China-Europe asymmetry is already such that governments are hesitant to fully apply sound precautionary principles. Without major course correction, the asymmetry will only worsen. Banning Huawei might be painful and somewhat costly; it could indeed delay the roll-out of 5G in Europe. This is however a small price to pay today to mitigate longer term exposure to potentially much larger risks and consequences.
We can not allow our best players to cripple each other; nor can we afford to cripple them. We need them strong and focused. We need them to collaborate and build on each other’s strengths rather than expose each other’s weaknesses. We need to Think Different! While they and their shareholders might have specific short terms concerns we should recall Warren Buffet’s wisdom: in order to win, you first need to survive. Decimating Qualcomm will not solve Apple’s long term challenges emerging out of China; Huawei is already Qualcomm free; Apple’s problems will therefore persist and get worse without Qualcomm by its side. Being Apple free (and therefore China dependent) should be of equal concern to Qualcomm’s shareholders. Indeed, China’s objective is to become US tech “free” by 2025; we should assume that they will deliver or come close. Without Qualcomm, and with a weaker Apple, the progressive world will be handicapped in time and scale to seriously challenge China’s ambition. We may no longer be able to avoid being surrounded by authoritarian digital tentacles.
Herein lies the dilemma. Letting the Apple vs Qualcomm drama run its natural course is what our rulebook calls for; in the meantime, we risk however that the rulebook gets changed on us by those not accepting the core premises of individual freedom and responsibility. Conversely, taking extreme interventionist arbitration measures runs counter to the spirit of our rules; it resembles the authoritarian behavior we seek to avoid; yet it may be the only recourse we have to respond in kind and in time to reduce our strategic exposure.
The information revolution is unique in its occurrence and magnitude. As we have experienced on our own side with Facebook, the temptation to selfishly take advantage of data mines, with little care for the broader consequences, is high. Yet, Facebook only started with a naively optimistic vision out of a dorm room; not with the ambition to get revenge for the opium wars. Data is the new drug; ignoring the risk that China will be exploiting it as a weapon of mass influence to solidify and expand the empire is a sign of excessive consumption.
Full disclosure and disclaimer: employed for 24 years (until end 2018) by Qualcomm in the area of cellular modem technology, standards, products and businesses. Can neither confirm nor deny interaction with Apple in those years. Long time (30y+) user of Apple products initially driven by ease of use, increasingly driven by Apple’s stance and actions on privacy. Admiring the people of China for their resilience, creativity, enthusiasm and culture (incl. food); feeling for their anxieties relative to the ongoing authoritarian regime shift. Financial interest in both Qualcomm and Apple through a combination of direct/indirect short/long holdings. My comments are philosophical and political in nature and shall not be interpreted in any specific legal context relative to any of the ongoing legal actions between Apple and Qualcomm.