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    Qualcomm

    Qualcomm's CDMA technology, combined with partnerships with infrastructure providers and handset manufacturers, paved the way for a successful wireless network despite challenges, establishing the company as a wireless technology innovator.

    enNovember 15, 2022

    About this Episode

    Qualcomm, or “Quality Communications” — despite being one of the largest technology companies in the world, few people know the absolutely amazing technological and business history behind it. Seriously, this story is on par with Nvidia, TSMC and all the great semiconductor giants. Without this single fabless company based in San Diego, there’s almost no chance you’d be consuming this episode on whatever device you’re currently listening on — a fact that enables them to earn an incredible estimated $20 for every new phone sold in the world. We dive into this story live at the perfect venue: our first-ever European live show at Solana’s Breakpoint conference in beautiful Lisbon, Portugal! 

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    🔑 Key Takeaways

    • Qualcomm's role in the evolution of data transmission has been significant and the use of undetectable spectrum to transmit invisible messages is mind-bending. Fundrise has democratized real estate investing and raised millions through tech.
    • True creativity is built upon a succession of acts, as seen in the development of modern telecommunications, and the book highlights the unlikely success story of Qualcomm and the remarkable achievements of Hedy Lamarr.
    • Understanding communication mediums and adapting to their limitations and requirements is crucial in developing effective communication systems. Spread spectrum technology and Claude Shannon's work on information theory paved the way for modern wireless technology and the digital era.
    • Being adaptable and curious can lead to career-changing opportunities, as exemplified by the story of Irwin Jacobs and his founding of Qualcomm, a company that revolutionized the wireless industry.
    • Linkabit's innovative communication techniques, rooted in efficient use of narrow bandwidth channels, paved the way for mobile technology. Co-founder Irwin Viterbi also co-authored the first digital communications textbook still used today.
    • Linkabit's expertise in satellite communication led them to shift from working on NASA and defense projects to commercial ones, which eventually led to their success and expansion with contracts from retail giants like Walmart.
    • Qualcomm's founders recognized the potential for digital cellular communication and used their industry expertise to build a better way to provide quality communications than anyone else, ultimately changing the game in the industry.
    • By starting small and focusing on a specific technical aspect of the industry, Qualcomm was able to invent a revolutionary technology and gain buy-in from stakeholders, ultimately dominating the cell phone market. Success can come from careful planning and execution, even in a seemingly crowded and competitive industry.
    • CDMA technology allows for efficient use of the same frequency for multiple conversations simultaneously, paving the way for modern cellular communication and maximizing spectrum usage.
    • Qualcomm's journey, from pioneering CDMA patents that changed the wireless communication landscape to leveraging their expertise to launch the mobile satellite network Omnitracs, highlights the importance of adaptability and innovation in the tech industry. Additionally, their early fundraising efforts remind us of the vastly different landscape for startups today.
    • Forecasting future technological advancements and having the financial means to pursue them can lead to successful innovation. Brex offers unique rewards to customers by negotiating with media companies, creating a competitive advantage.
    • The 2G spec's shortcomings stemmed from mis-forecasted cell phone popularity and capacity limits, while Europe's mandatory standards allowed for innovation. Standards bodies are crucial for collaboration and independence from government agencies in technology development.
    • Belief, confidence, and innovation are essential in developing and bringing new technologies to market, even in the face of obstacles. Qualcomm's patented CDMA technology allowed for superior voice quality, security, and network efficiency, giving them a significant advantage and ultimately leading to their success in the market.
    • Qualcomm's CDMA technology, combined with partnerships with infrastructure providers and handset manufacturers, paved the way for a successful wireless network despite challenges, establishing the company as a wireless technology innovator.
    • By offering a complete solution and forming strategic partnerships, Qualcomm was able to take advantage of the growth of fabless semiconductor design and become the largest company in the industry.
    • By focusing on their semiconductor business and patent licensing, Qualcomm became the largest fabless semiconductor company in the world with $40 billion in annual revenue. However, their activities were criticized for antitrust and caution is advised in pursuing similar strategies.
    • Qualcomm's commitment to R&D and strategic acquisitions allowed them to overcome the crash of 2000 and become leaders in wireless technology, leading to their success in the smartphone era.
    • Qualcomm faces challenges from multiple lawsuits and competition, but preserved its independence through a blocked takeover by Broadcom. The broader semiconductor industry faces decelerated growth and varied strategies for profitability.
    • Qualcomm's unfair patent licensing practices led to a legal battle with Apple, resulting in a settlement. The rise of 5G technology highlights the need for sophisticated electronics and widespread infrastructure.
    • Despite previous attempts to develop their own cellular modems, Apple has chosen to use Qualcomm's chips in their next iPhone release, as the development of 5G requires a complex RF frontend that adjusts based on the type of 5G available. Qualcomm's acquisition of NUVIA signals their entrance into the laptop CPU market and highlights the potential for growth in IoT and automotive industries.
    • Qualcomm's strategic position in the semiconductor industry is largely attributed to their high-margin licensing fees, strong revenue growth, and cornered resource in patents. While there is competition from NVIDIA, Qualcomm has the opportunity to bet on the intelligent connected edge or AI as mega trends for continued success.
    • While Qualcomm's success in IoT, automotive, and 5G RF frontend segments offers a lot of potential, their lawsuits and customer grievances create a risk to their royalties. Their success ultimately depends on their ability to capitalize on opportunities in the intelligent connected edge.
    • By evangelizing their technology and strategically patenting some innovations while keeping some trade secrets, Qualcomm's licensing business revenue funds R&D for new products and more IP, making them a leader in the field.
    • Qualcomm's success in the future depends on exploring growth opportunities in IoT, automotive, and intelligent connected edge markets. Capturing value in the trillion-dollar market of connected edge is a challenge that lies ahead for the company and the industry.

    📝 Podcast Summary

    From Small Messages to Megabytes: The Incredible Journey of Data Transmission

    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. Qualcomm has played a significant role in this and is the largest fabless chip company in the world responsible for the mind-bending system of how it all works today. The spectrum that is not detectable to humans still can be used to transmit invisible messages all around us all the time without any of us having any idea. Fundrise, our presenting sponsor for this episode, has democratized real estate investing and has raised $155 million with 35,000 investors for the tech company itself.

    The Physical Book Uncovering Qualcomm's Rise to the Top and Hedy Lamarr's Contributions

    The book on Qualcomm's rise to the top of the wireless industry is not available in audio or Kindle versions, it must be read physically. The book uncovers the story of Hedy Lamarr's contribution to the Allied war efforts by patenting a novel technique to defeat RF frequency jamming through frequency hopping, which remained confidential for decades. True creativity is characterized by a succession of acts, each suggesting the one after. This is evident in the succession of events that led to the development of modern telecommunications. The book starts with Hedy and her husband, a Nazi arms dealer who brought her to business meetings with Nazi military powers. The book tells the story of how Qualcomm came to rule the wireless industry and showcases the rare diamonds in the rough.

    The Journey of Spread Spectrum Technology to the Digital Era

    Hedy Lamarr and George Antheil's discovery of spread spectrum technology allowed for efficient use of radio bandwidth and secure communication. The concept of hopping frequencies to evade jamming and sending coded messages was groundbreaking at the time and paved the way for modern wireless technology. However, the technology required incredibly precise time syncing, which was not possible given the state of digital computing during World War II. Claude Shannon's work on information theory and the concept of digital changed that and ushered in the digital era, leading to the modern era of human beings and computing. Communication methods are governed by the medium, and understanding the limitations and requirements of the medium is crucial in designing effective communication systems.

    Information Theory, Shannon-Hartley Theorem, and the Story of Qualcomm's Founder

    Information theory explains the relationship between how noisy a medium is and how much signal it can transmit, based on the level of entropy or randomness in the message being communicated. The Shannon-Hartley theorem specifies the theoretical limit to signal transmission through a given medium. Irwin Jacobs exemplifies the right place, right time phenomenon as his interest in math and science combined with hotel management education led him to transfer majors and study electrical engineering. His Ph.D. advisor Claude Shannon, the father of information theory, played a pivotal role in allowing Jacobs to establish a career in digital communications. Jacobs eventually founded Qualcomm, a company that revolutionized the wireless industry. The story highlights the importance of staying curious and adaptable in the pursuit of innovation and success.

    The Foundations of Mobile Communication Technology

    Irwin and Andrea Viterbi founded a consulting company called Linkabit in the early '70s to manage their work with defense and space programs. They developed bandwidth-efficient communication techniques, inspired by old patented spread spectrum technology from World War II, as their work involved efficient use of the available narrow bandwidth channel. This laid the foundation for developing mobile communication technology, which became a significant breakthrough for the industry. Furthermore, Len Kleinrock, a founding partner, left Linkabit to become the founding engineer of the internet. Irwin's background in electrical engineering led him to become a professor at UCSD and teaching digital communication theory, which he co-authored in the first textbook on the topic, still used today.

    Linkabit's Shift to Commercial Projects and Success in Satellite Communication System

    Linkabit started as a consulting company in the satellite communication system, mainly working on NASA and defense projects. However, they realized that they were doing all the differentiated engineering work while the prime defense contractors were making all the money. So, they shifted their focus to commercial projects. Their expertise in satellite communications got them their first commercial contract, which was building the satellite communication system for Walmart. They then built the video scrambling system for pay TV on the cable system. Linkabit was sold to an east coast radio tech company called MACOM for $25 million in 1980. With over 1500 employees, Linkabit became a big business, and other retailers also started using satellite networks.

    How Qualcomm's Founders Drove Innovation in Digital Cellular Communication

    The founders of Qualcomm had the foresight to see the potential for digital cellular communication and started the company in 1985. They were aware of the lack of efficient use of channels and the high demand for car phones despite bandwidth limitations. The industry required enormous capex and specialized competencies. Qualcomm was named for quality communications, reflecting their expertise in the industry. The founders were brilliant minds who had made the right decision in selling Linkabit and were well aware of the products they had developed. Their experience in the industry and technical knowledge allowed them to build a better way to provide quality communications than anyone else in the industry at the time.

    Qualcomm's Strategy to Dominate the Cell Phone Industry

    Qualcomm entered the market with a brilliant strategy to bring terrestrial cell phone networks into the digital era and build the dominant company in this massive industry. They started by doing consulting work and later invented CDMA, Code Division Multiple Access, optimizing satellite communication channels for efficiency. CDMA is a technology that allows multiple conversations to access the same channel at the same time by dividing up digital packets instead of using a single frequency. Even though the idea seemed path-dependent and had a high likelihood of failure, Qualcomm knew the massive opportunity they wanted to pursue and created a specific idea to make it better. They focused on being one small part of the industry, inventing the technical means by which phones communicate with towers, and got all stakeholders on board with their idea.

    Understanding CDMA Technology and its Impact on Cellular Communication

    Code division multiple access (CDMA) is a digital technology that allows multiple conversations to be transmitted simultaneously on the same frequency. CDMA uses codes to encode each conversation, which allows for maximally efficient use of the spectrum. This technology was patented by Qualcomm in 1986, and it became one of the most valuable patents in history. CDMA is similar to the packet switching used in the internet, where digital packets are transmitted and reassembled on the other side. This technology is an iteration of time division multiple access (TDMA) and frequency division multiple access (FDMA), which allowed for more people to use one frequency. CDMA allowed for the most efficient use of the spectrum and paved the way for modern cellular technology.

    From CDMA Patents to Mobile Satellite Networks: The Evolution of Qualcomm

    The CDMA patent was a game-changer in wireless communication technology. It allowed for the use of all frequencies available, leading to a more efficient use of mediums for maximum signal transmission. Qualcomm's founding in 1985 with the issuance of the patent in 1986 led to a revolutionary change in the industry. However, before entering wireless, Qualcomm was approached by OmniNet to implement a mobile satellite network specifically for commercial semi-trucks in America, and then networked them up to the distribution centers for retailers, with Walmart being one of their first customers. This led to the founding of Omnitracs and merged with OmniNet in 1988. Qualcomm sold half the equity in their company to raise just a few million dollars, highlighting the different fundraising atmosphere compared to today's startups.

    Qualcomm's CDMA Success and Brex's Unique Rewards

    Qualcomm's success in developing CDMA technology was due to their correct forecast of Moore's Law and their unique patent that no one else had at the time. Despite people's skepticism, they knew it was technically feasible and had the financial capability to pursue it. The timing was perfect too, as the release of the spec for performance requirements for the 2G networks created a market opportunity for them. Brex, a provider of modern corporate cards and expense software, offers their customers unique rewards, such as billboard campaigns in top cities, that can be redeemed using Brex points. They negotiated with media companies to extend it to all Brex customers.

    The Flaws of the 2G Spec and Differences in Standards Bodies

    The 2G spec was created at a time when the popularity of cell phones was wildly mis-forecasted. The US standards body set a high bar for the amount of phones that should be able to use the network, but TDMA's capacity limits meant it would not meet the spec. Meanwhile, Europe had already adopted several technologies, including GSM and Ericsson. While the US's industry associations set recommended standards that were not mandatory, Europe's standards were mandatory. Standards bodies are important for innovation and collaboration, and while they are industry associations, they are decoupled from government agencies. Qualcomm was excited about the 2G spec, which was well-suited for its needs, and was able to confirm with the government that using a different technology as long as it met the performance spec was legal.

    Qualcomm's Success with CDMA Technology

    CDMA was a better technology option than TDMA due to its superior voice quality, security, and 3x-5x more efficiency in operating cell networks. Qualcomm's advantage in power and profit margins due to this technology helped them run the table on their competitors in the market. However, the implementation of CDMA had various challenges such as near-far interference problem, power management issues, and GPS technology that wasn't yet available. Despite these obstacles, Qualcomm was confident in their CDMA technology and patented every single piece of it. This episode highlights the importance of belief, confidence, and innovation in creating new technologies and taking them to market.

    How Qualcomm's CDMA Technology Revolutionized Wireless Networks

    Qualcomm started as a small San Diego technology startup, and they were successful in convincing PacTel Wireless to fund their prototype. Their CDMA technology was demonstrated successfully in San Diego, Manhattan and later in South Korea. CDMA gradually became a second standard, and they were able to raise millions in IPO and secondary offering. However, replacing a whole ecosystem of technology providers and infrastructure was a massive challenge. Qualcomm partnered with base station infrastructure providers and handset manufacturers like Nokia to build a CDMA wireless network. Four things were required for the success of CDMA wireless network – core IP and technology, CDMA infrastructure, handsets, and wireless carriers. Despite challenges, Qualcomm established its position as an innovator in wireless technology.

    How Qualcomm Became the Leader in CDMA Technology

    Qualcomm's success in the CDMA market was due to their ability to offer a complete solution, including IP, infrastructure, handsets, and semiconductors. By creating joint ventures with partners like Nortel and Sony, they were able to bootstrap their offerings and spur adoption. Additionally, the advent of fabless semiconductors allowed Qualcomm to design their own chips without having to invest in their own foundries. This was a significant factor in their ability to capture all of the value in the industry. Qualcomm's success was also marked by a series of brilliant strategic decisions, establishing them as the largest fabless semiconductor company in the world, despite not making handsets or infrastructure. Their success was a result of being in the right place at the right time and knowing it.

    Qualcomm's Shift to Semiconductor Business Drives Revenue Growth

    Qualcomm's strategic decision to focus on their semiconductor business and sell their infrastructure and mobile phone business led to a significant increase in their revenue and set the business model for the future. Their high margin revenue licenses to their patent war chest and relatively high margin semiconductor designs helped them become the largest fabless semiconductor company in the world with close to $40 billion annual revenue. Qualcomm's success story is one of the most impressive business stories, but their activities were also criticized for antitrust by the FTC. The year 2000 marked the height of the tech bubble, and Qualcomm emerged as the single best performing stock for that year.

    Qualcomm's Rise, Fall, and Resilience in the Tech Industry

    Qualcomm's stock appreciated by 2621% in the year 2000, making it the best-performing stock of the year. However, it didn't stay up for long and crashed down over the next 18 months, becoming only 4x from its pre-1999 high. But despite this, Qualcomm continued to invest in R&D, which led to the development of the vastly superior technology CDMA, making them the leaders in 3G. They later acquired Flarion Technologies for $600 million, which had essential patents for 4G, enabling Qualcomm to continue its business model. Furthermore, they created the Snapdragon unit, which put them in a good position for the modern smartphone era, allowing them to make $20 for every smartphone sold in the world today.

    Qualcomm's legal battles and competition within the semiconductor industry

    Qualcomm's strategic position has been challenged by multiple lawsuits and competition within the semiconductor industry. The 2009 Broadcom lawsuit and the 2017 lawsuits from the US Federal Trade Commission and Apple regarding Qualcomm's market position as the dominant smartphone modem supplier have impacted the company's ecosystem reputation. The attempt at a hostile takeover by Broadcom was blocked by the Trump administration due to national security concerns, which preserved Qualcomm's independence as an American company and was viewed as a big win. The semiconductor industry is experiencing decelerated growth, and while some companies are splitting out their chip operations and IP, Broadcom's strategy is to roll up the industry and squeeze them for profitability.

    Apple vs. Qualcomm: A Patent Dispute that Shook the Tech Industry

    Apple sued Qualcomm due to their unreasonable and discriminatory patent licensing practices. Qualcomm had patents on technologies that were a part of an industry standard and leveraged those patents to charge Apple $7.50 per phone sold, which quickly grew to $17 per phone. Apple negotiated the price down to an estimated $10-$18. Qualcomm also stipulated that if Apple ever used a competing supplier, they would owe Qualcomm a billion dollars. Apple switched to using Intel modems, but they fell behind Qualcomm and Apple settled the lawsuit. 5G is an open question and requires incredibly sophisticated electronics to work, needing little base stations on every street corner to transmit high frequency radios.

    Apple to Continue Using Qualcomm's Chips for Next iPhone Release in 2023

    The development of 5G requires chip makers to have a complex RF frontend that adjusts in real time depending on what flavor of 5G is currently available. Despite Apple's efforts to develop their own cellular modems, they settled with Qualcomm and will continue to use Qualcomm's chips in the next version of the iPhone that comes out in November of 2023. Qualcomm bought NUVIA, a company founded by former Apple Silicon people including the Chief Architect of the A-Series chips, as their ticket into the laptop CPU/System on a chip market and sees a multi-hundred billion dollar opportunity in IoT automotive and the RF frontend.

    Examining Qualcomm's Strategic Position in the Semiconductor Industry

    Qualcomm is a technological pioneer with a $120 billion market cap and astonishing value capture. They are the largest fabless semiconductor company in the world, bigger than NVIDIA. They make most of their revenue from chips, but licensing fees are a much higher margin business. Qualcomm's revenues are growing 32%, and earnings are growing 47% year over year, making it a high-growth rate company. They have a cornered resource in patents, which Hamilton describes as a canonical description or a corner resource, and this gives them power in the industry. However, there is competition from NVIDIA, and the question is whether to bet on the intelligent connected edge or AI, both mega trends.

    Qualcomm's Rise, Competition, and Challenges in the Telecom Industry.

    Controlling infrastructure standards in the telecom industry results in network economies and the ability to control both infrastructure and handsets. However, Qualcomm faces competition from companies like Mediatek who make cheaper chips with systems on a chip using stock ARM CPU designs. Qualcomm's success in IoT, automotive, and 5G RF frontend segments may make them a juggernaut in the licensing business, but their constant lawsuits and customer grievances pose a risk to their royalties. The company's process power during its golden years contributed to the wellspring of startups and technology companies that came out of Qualcomm. Ultimately, Qualcomm's success depends on whether they can capitalize on the opportunities presented in the intelligent connected edge which is a $700 billion opportunity according to them.

    Qualcomm's Industry Bootstrap Approach and IP Strategy

    Qualcomm's success is due to their bootstrap industry approach, which involves evangelizing their technology to create their own competitors so their customers can feel safe with it. They keep some things secret of how to extract the best performance from the innovations to remain the leader. Qualcomm's IP strategy involves patenting some technology and keeping some trade secrets to make money off consulting, implementation fees, and big deals. Their predictable high-margin licensing business revenue enables them to fund R&D, which fuels the flywheel where they get new products and more IP. The patent system exists to enable people to spread the news about their inventions, and the US regulatory system has granted Qualcomm a monopoly, which is perfect execution of the game on the field.

    Qualcomm's Shift Towards Growth Businesses

    Qualcomm's success in the last decade was due to their excellent business model around mobile technology, but in order for the company to thrive in the next decade, they must focus on growth businesses like IoT, automotive, and intelligent connected edge. Capturing the value in the trillion-dollar market of connected edge, though, remains an open question for the company and the industry. Overall, the Breakpoint event was a huge success and Acquired FM thanks Fundrise, Pilot, Brex, and the Solana foundation for hosting them. Lastly, Acquired FM thanks their listeners and survey takers for valuable insights that will help them continue to grow the show and engage their audience.

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    Nvidia Part III: The Dawn of the AI Era (2022-2023)

    It’s a(nother) new era for Nvidia.

    We thought we’d closed the Acquired book on Nvidia back in April 2022. The story was all wrapped up: Jensen & crew had set out on an amazing journey to accelerate the world’s computing workloads. Along the way they’d discovered a wondrous opportunity (machine learning powered social media feed recommendations). They forged incredible Power in the CUDA platform, and used it to triumph over seemingly insurmountable adversity — the stock market penalty-box.

    But, it turned out that was only the precursor to an even wilder journey. Over the past 18 months Nvidia has weathered one of the steepest stock crashes in history ($500B+ market cap wiped away peak-to-trough!). And, it has of course also experienced an even more fantastical rise — becoming the platform that’s powering the emergence of perhaps a new form of intelligence itself… and in the process becoming a trillion-dollar company.

    Today we tell another chapter in the amazing Nvidia saga: the dawn of the AI era. Tune in!

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    Costco

    Costco

    Costco is not only Charlie Munger’s favorite company of all time (plus he’s on the board, natch), it’s an absolutely fascinating study in how seemingly opposite characteristics can combine to create incredible company value. For instance: Costco has the cheapest prices of any major retailer in America — and also the wealthiest customer base. They pay their hourly workers 30% above the industry norm (and give them excellent healthcare + 401k benefits) — and are almost 3x more profitable on labor than Walmart. Speaking of Walmart, Costco stocks 40x fewer SKUs than their Bentonville-based rivals — yet sells an average of 15x more volume of each. And oh yeah, practically all of Costco’s C-Suite started their careers as baggers and checkout clerks! Tune in for a mind-bending exploration of one of the world’s most iconic — and iconically unique — companies.

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    Thanks to our fantastic partners, any member of the Acquired community can now get:

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.