Qualcomm

[0] 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?

[1] And then I was like, oh, because we've got a professional boom arm camera.

[2] This is amazing.

[3] All right.

[4] Let's do it.

[5] Who got the truth?

[6] Is it you?

[7] Is it you?

[8] Is it you?

[9] Is it you?

[10] Is it you?

[11] Is it you?

[12] Is it you?

[13] to Season 11, Episode 6 of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

[14] 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.

[15] And I'm David Rosenthal, and I am an angel investor based in San Francisco.

[16] And we are your hosts.

[17] 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.

[18] Now, a tiny fraction of these frequencies are detectable by humans as visible light.

[19] 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.

[20] It's like magic.

[21] Yeah.

[22] These frequencies, have been used for over a century to broadcast TV and radio shows, presidential messages, and important news updates.

[23] In the last 50 years, humans have gotten tremendously clever at purposing some parts of the RF spectrum to be used for cell phones.

[24] 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 an entrepreneurship.

[25] The company most responsible for the mind -bending system of how it all works today is Qualcomm.

[26] 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.

[27] And spoiler alert for listeners, this is an incredible story.

[28] I had no idea before we dove into the research.

[29] This one is up there with like Nvidia, TSM.

[30] There is so much stuff you can't make up in this story.

[31] It's incredible.

[32] Largest fabulous chip company in the world.

[33] Indeed.

[34] The other thing we should say, listeners, this was super fun to do this episode live in person in Lisbon.

[35] Our huge thank you to the Solana Foundation for hosting us at Solana Breakpoint.

[36] Many long -time listeners will know Austin Federa from the Slack.

[37] He was kind enough to invite us and really fun to do it there, especially given Solana's tie to Qualcomm with Anatoli having worked there for over 10 years.

[38] Indeed.

[39] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

[40] Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency.

[41] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsofts at the NVIDias as one of the most important enterprise technology vendors in the world.

[42] And, just like them, Service Now has AI baked in everywhere in their platform.

[43] they're also a major partner of both Microsoft and Nvidia.

[44] I was at Nvidia's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[45] So why is ServiceNow so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

[46] Well, AI in the real world is only as good as the bedrock platform it's built into.

[47] So whether you're looking for AI to supercharge developers and IT, empower and streamline customer service, or enable HR to deliver better employee experiences, service now is the platform that can make it possible.

[48] Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately.

[49] For example, smarter self -service for changing 401K contributions directly through AI -powered chat, or developers building apps faster with AI -powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

[50] With ServiceNow's platform, your business can put AI to work today.

[51] It's pretty incredible that ServiceNow built AI directly into their platform.

[52] So all the integration work to prepare for it that otherwise would have taken you years is already done.

[53] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to ServiceNow .com slash acquired.

[54] And when you get in touch, just tell them Ben and David's you.

[55] Thanks, service now.

[56] After this episode, come talk about it with us.

[57] There are 13 ,000 other smart, kind people in the Slack, Acquired .fm slash Slack.

[58] Without further ado, onto our live show at Solana -breakpoint, and listeners know that this is not investment advice.

[59] David and I may have investments in the companies we discuss, and this show is for information and entertainment purposes only.

[60] Well, one small bit of ado before we dive into the story is we, we a big thank you to Dave Mock, the author of the incredible book, The Qualcomm Equation, which is not well known, but is the definitive history of Qualcomm and ranks right up there with among the best business books, business histories that we've used as a source unacquired throughout the whole history of the show.

[61] It's awesome.

[62] And the book's not even really published under like a real publisher.

[63] It's published under an industry association.

[64] There's no audiobook.

[65] There's no Kindle.

[66] You have to read the physical book.

[67] Yeah.

[68] It's amazing.

[69] I literally, the other day, texted Ben a photo that I noticed on the back cover.

[70] And Ben, of course, had seen it too of one of the blurbs.

[71] I'm going to read it here now.

[72] It says, Dave Mock 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.

[73] Think of it as a recipe book for one of the most innovative and leveraged business.

[74] models of all time.

[75] Whose words does that sound like, Ben?

[76] That sounds like a deep business model thinker and someone who truly appreciates capitalism at its finest.

[77] And is willing to go find the rare gems, the rare diamonds in the rough.

[78] That is written and said by none other than Bill Gurley of Benchmark Capital for this almost unknown book.

[79] I bet it's going to be a lot more known after this episode.

[80] Yep.

[81] Well, Dave starts the book, and it's such an apt place to start.

[82] with a quote by Edwin Land, who I was not familiar with until recently when David Center on the Founders podcast familiarized us with Edwin.

[83] Edwin was the founder of Polaroid and Steve Jobs' hero, 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 after.

[84] So with Act 1 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.

[85] Is this the first time we've been able to say here in Europe unacquired?

[86] It is the first time.

[87] It is the first time.

[88] And we start, you might think, if you know anything about Qualcomm history, I think in mid -30s, They're like, oh, I didn't know Irwin Jacobs, co -founder and CEO of Qualcomm, was born in Europe.

[89] He was not.

[90] He was born in New Bedford, Massachusetts.

[91] We start with somebody very different.

[92] We start with one of the most famous film actresses, Hollywood film actresses, of all time, a woman named Hetty Lamar.

[93] And...

[94] Side note, the fact that we're starting with Hetty Lamar on the story of how modern telecommunications came to be is so cool.

[95] I remember we reached out to the NZS Capital folks and said, hey, do you have any great resources on Qualcomm?

[96] And they sent back this excerpt of, you should go read up on Hedy Lamar.

[97] I was like, are they trolling me right now?

[98] You cannot make this stuff up.

[99] This is like why we do the show.

[100] So Hedy was an incredible, she was like just an incredible human being.

[101] She was world famous, incredibly talented actress, incredibly beautiful.

[102] She would later be built, like the way MGM, She was one of the MGM starlets marketed her was as the most beautiful woman in the world.

[103] She was also a genius.

[104] So she starred in Samson and Delilah, ecstasy, Zig -Free Girl, many, many more.

[105] But what most people, at the time, even up into her death, did not know.

[106] 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.

[107] So this said husband, that's quite the character, his name was Friedrich Mandel, and he was not a good dude.

[108] He was a Nazi arms dealer, which made him very rich at the time, which is probably how he met Hetty, and they became married.

[109] Hetty, though, probably unknown to Friedrich and certainly unknown to his business associates, including Hitler and Mussolini, Heddy was Jewish.

[110] And 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.

[111] And Hedy was listening in to everything that was going on.

[112] And as the situation deteriorated, in 1937, she disguised herself as one of her maids and escaped to Paris.

[113] and then from Paris made it to the U .S., went to Hollywood and lived in Hollywood for most of the rest of her life.

[114] When she came to the U .S., though, she knew, like, an incredible amount of inside information about the Nazi war effort.

[115] And she was incredibly motivated because, obviously, she was from a Jewish family.

[116] She hated the Nazis, hated her former husband, and wanted to contribute.

[117] And specifically, she knew that the Nazis were working with her.

[118] on and using to great effect a radio jamming technique for radio -guided torpedoes that would be dropped from airplanes to attack Nazi submarines.

[119] It's also pretty amazing at this point in history that we had as humans the capability to radio -guide the torpedo.

[120] And the torpedo, you know, gets propelled and you could guide it using radio frequencies deciding which way to turn the rudder.

[121] I did not know that technology existed in the 30s.

[122] This is great, like, the computer does, the digital computer doesn't exist yet.

[123] The concept of digital doesn't exist yet, because we're going to get to that in a minute.

[124] This is all being done essentially with FM radios.

[125] And so Heddy wants to contribute to the Allied War effort.

[126] And when you say with FM radios, therefore pretty easy to jam, if you know that someone's broadcasting on, you know, jammin 92 .3 and you start another signal on 92 .3, you disrupt their signal and they're not able to hit their target with the weapon.

[127] Totally.

[128] So Hetty teams up with her new Hollywood neighbor, a composer, a music composer named George Antheil, bear with us here.

[129] I promise this is getting to Qualcomm, who is a film music composer.

[130] 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 U .S. military.

[131] By the way, this, I believe, did not become declassified until 1981.

[132] That's how long it was buried inside the U .S. It was issued in 1942.

[133] So four decades that this history was completely unknown.

[134] They develop a novel technique to defeat RF frequency jamming by using frequency hopping.

[135] And what they describe becomes the origin of something.

[136] called Spread Spectrum Technology.

[137] So if you're familiar at all with like the wireless world or Qualcomm or I think you're here spread spectrum and you're like, oh, that sounds familiar.

[138] 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.

[139] And what it basically means is any way that you're going to transmit a single message across a variety of spectrums.

[140] So rather than just on, I'm going to keep saying in Jamon 92 .3 to ground.

[141] it in radio.

[142] But instead of just broadcasting on one frequency, they came up with this idea to hop.

[143] So change frequencies during different points in the message to evade anyone trying to jam the signal and move to a different frequency.

[144] 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 sinking 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.

[145] And you're hopping frequencies like dozens or hundreds of times a second.

[146] And this can defeat jamming.

[147] This is great for cryptography.

[148] This is great for sending coded messages.

[149] It turns out this was not on anybody's radar, pun intended at the time.

[150] It turns out that this is also the most efficient way to use radio bandwidth.

[151] But let's put a pin in that for now.

[152] 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 time, 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.

[153] The concept of digital hasn't been invented.

[154] So how are we doing this, David?

[155] What's the technology used to synchronize a schedule of frequency hops between a torpedo and an airplane.

[156] So here's where, if this were a Hollywood movie, like one of Heddy's films, this single -handedly would have, like, defeated the Nazis and all that.

[157] Unfortunately, the reality is there was no digital computing at the time.

[158] It wasn't possible.

[159] The U .S. military tried very hard during World War II to make this happen, the whole Allied military.

[160] They couldn't make it work.

[161] 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.

[162] You would literally need to put, like, Anyak on a torpedo and drop it from the sky to make this happen.

[163] That was not feasible.

[164] It's worth sharing how their prototype worked, though.

[165] So the way that they prototype this, Hetty in the, you know, early 1940s, is they took two player piano scrolls that had 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.

[166] So it would know exactly where to hop around.

[167] So there were 88 frequency hops in their technical description of the patent because there are 88 keys on a piano.

[168] So I guess literally, you wouldn't be dropping any act from the sky.

[169] You'd be dropping a piano from the sky.

[170] Yes, like a cartoon.

[171] Oh, totally.

[172] Okay.

[173] So that is the origin, that you can't make this up origin of spread spectrum technology, that's Act 1.

[174] Act 2, we stay in World War II around the same time, but a few years later.

[175] There is a young PhD grad, from the Massachusetts Institute of Technology, the August Massachusetts Institute of Technology, who was working on codebreaking for the Allies, very famously, at Bell Labs and at the Institute for Advanced Study in Princeton, New Jersey.

[176] where he intersects with luminaries like Albert Einstein, John von Neumann, Alan Turing.

[177] 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.

[178] We're talking about Claude Shannon, literally the father of information theory, one of the fathers of computer science, and the inventor of the concept of digital, of the bit of information.

[179] Like, digital did not exist before, Claude.

[180] So during the war, all of this effort culminates in what he publishes after the war his masterwork, a mathematical theory of communication, which defines a bit, the new field of information theory, ushers in the digital era for the world.

[181] And combined with the other folks who we mentioned, Einstein, Turing, von Neumann, and Bell Labs work on transistors during the war, these things come together to create the modern era of humans and the digital computer.

[182] So we've described like the Hollywood part, we described here in Act II, Claude Shannon, you know, birth of computing, all that.

[183] And it's worth maybe sharing a little bit about information theory.

[184] Can I take a second, David?

[185] Of course.

[186] All right.

[187] So I had heard people reference information theory or communications theory dozens of times over the years.

[188] And every time I'd open up the Wikipedia page, I'd see a bunch of things.

[189] complicated math equations.

[190] And you quickly want to get to like, okay, but what is this?

[191] Why does everyone keep describing it as so important?

[192] 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.

[193] There's no communication that happens through nothing.

[194] You need some way to send signal from a transmitter to a receiver.

[195] And the method by which you communicate, the way you send signal is governed by that medium.

[196] And so what I mean by that in particular is let's use the analogy of a conversation.

[197] 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.

[198] It needs to be a super clear, super loud message because there's a lot of noise in the room.

[199] Whereas if you're in a really quiet room, then you can have kind of a message with a bunch of noise.

[200] Imagine someone talking, but there's a much of static.

[201] Well, that's okay if the medium itself, the room that you're communicating in doesn't have a lot of noise itself.

[202] So there's this relationship between how noisy a message can be and how noisy the medium is that you're communicating in.

[203] And I think this is this very interesting aha moment where what he basically deduces is 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 message that you're trying to describe.

[204] So when I say entropy, let's say, David, you're expecting me, you think there's a 99 % chance that I'm coming to deliver the message to you, I just had breakfast.

[205] Well, if it's in a really loud, noisy room, and, you know, 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.

[206] But if you have no idea what I'm about to tell you and it could be everything from like, hey, you're fired to I just had breakfast and you have no idea.

[207] Like we need to have that in a pretty pristine environment with really nice volume or gain on the signal.

[208] So that's sort of the high level concept of information theory and more specifically of Shannon Hartley theorem describing the relationship between signal and medium.

[209] Yeah, super cool stuff.

[210] So where this all comes together in act three of our story here, which is going to be a little longer because we're going to get into Qualcomm as part of this, is one Irwin Mark Jacobs, an American, born in 1933, as we mentioned, in Scrappy New Bedford, Massachusetts, which used to be, I believe, the wealthiest town in America during the whaling era, as we discussed during Standard Oil or Berkshire?

[211] I think there's Berkshire, actually.

[212] It was Berkshire, because 45, years before Erwin Jacobs was born in New Bedford, the Hathaway manufacturing company was started in New Bedford, in New Bedford, before it merged with Berkshire and before, of course, Warren Buffett.

[213] Even by 1933, New Bedford was not the New Bedford, the Whaling era, shall we say.

[214] So Irwin is a pretty amazing American story.

[215] So he grew up in like a very middle class family in this super scrappy area of the country, his dad worked a bunch of jobs and ended up running a local restaurant called the Boston Beef Market.

[216] Erwin was highly gifted in math and sciences as a kid going through school.

[217] He wanted to study math and science and probably would have wanted to study engineering if he knew it existed in college.

[218] But his high school guidance counselor famously told him that there's no future for math and science in New Bedford.

[219] And frankly, his high school guidance counselor was probably right.

[220] 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.

[221] Which he did.

[222] Which he did go to the school of hotel management.

[223] This engineering genius, this like American pioneer of the wireless and communications industry, that is what he went to college for.

[224] 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.

[225] He would credit that year and a half with really helping him start first link of it, his first company, and then Qualcomm get out of academia and become an entrepreneur because he actually learned about like business accounting the real world applications and found that like he kind of loved that too amazing so after a year and a half at Cornell in the hotel management school he learns about engineering and it's like oh you can make money with math and science this is actually like in demand maybe not a new bedford but like in the rest of America and so he goes to the dean at Cornell he tells this story and he's like hello sir you know I sophomore at Cornell I would like to transfer from hotel management to electrical engineering.

[226] And the dean's like, oh, you mean electrical engineering to hotel management, right?

[227] He's like, no, no, no, no. Hotel management to electrical engineering.

[228] No, I want to do the harder one.

[229] I want to do the hard stuff.

[230] After the dean, like, picked himself up off the floor, he allowed it perhaps with a degree of suspicion, which he need not have, because Irwin is another genius in this string of geniuses.

[231] 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 than Claude Shannon, himself, who, after the war, returned to MIT as a professor.

[232] It's pretty interesting, because so many of these stories that we tell, there's an immense element of genius.

[233] No question, Erwin Jacobs and Jensen at Envidia and Steve Jod geniuses.

[234] And also...

[235] There were like 10 people.

[236] in the world who knew this stuff at the time, and they were among them.

[237] Yeah, it's the most incredible right place, right time in history, too, because without studying under Claude Shanan, the father of information theory, it's extremely unlikely that Erwin Jacobs becomes the Erwin Jacobs he went on to be.

[238] Totally.

[239] And then without what's going to come later in Hetty Lamar, that he would start Qualcomm.

[240] Amazing.

[241] So, Irwin is so young Irwin is so talented that, after he finishes his Ph .D. in three years, you know, mere like five years removed from being a hotel management major at Cordell.

[242] And Shannon and MIT, ask him to stay on as a professor at MIT, like immediately, which he does.

[243] He spends five years teaching at MIT, during which he teaches the first course, like, for students on digital communications in the world, I believe, applying Shannon's theories to disseminate amongst practical engineers being trained at MIT, he and a fellow faculty member write the first textbook on digital communications that is still in use today.

[244] It is the Bible of digital communication theory.

[245] You can buy it on Amazon and written by Irwin distilled from the father himself of Claude Shannon.

[246] He spends five years teaching there.

[247] And then in 1964, he takes a sabbatical and heads out to California to do a sabbatical at JPL, at Jet Propulsion Labs, working on the U .S. space program and communications with satellites in the U .S. space program at the time, where he intersects, faithfully, 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 Ph .D. from MIT in 1957, who was working at JPL, and they become fast friends.

[248] So fast friends, in fact, that when Erwin returns back to Boston to cold, snowy, bleak Boston near his upbringing in Massachusetts, after his sabbatical, Erwin then gets a call shortly thereafter from one of his former professors at Cornell that 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.

[249] He says, well, I really enjoyed my time out there.

[250] I've got this great friend, Andy.

[251] Let's do it.

[252] I would make the exact same decision.

[253] So he and his family, Irwin and his family, move out to UCSD.

[254] And while he's out there, he continues doing his content.

[255] contracting work with defense contractors and JPL and the U .S. space program.

[256] And this is sort of one -off at this time.

[257] I mean, he's like doing it under his own name.

[258] He hasn't really started a company.

[259] It's just kind of Irwin doing contracting.

[260] Totally.

[261] He is like the first, you know, like electrical engineering professor at UCSD.

[262] That's his full -time job.

[263] But because he's in such close proximity to everything going on at JPL and NASA and the like, he's doing that kind of like one day a weekish.

[264] And one day, he and Andy, another professor from UCLA are up at NASA Ames in Mountain View doing consulting work up there.

[265] They're flying back, and they're all kind of lamenting.

[266] They're like, this is super cool that we're doing this.

[267] We're making more money than academia.

[268] We're helping our country.

[269] We're participating in the space race.

[270] But it's kind of hard to like balance all this stuff that we're doing.

[271] And they're like, hey, what if the three of us band together and form a company, kind of a shell company, to just kind of manage this consulting work that we all get?

[272] We could probably get some efficiencies here, maybe hire an assistant, help us out, that kind of stuff.

[273] And they say, great, we don't intend this to be a real company.

[274] We're not going to make any products or anything.

[275] This is just to manage our consulting.

[276] They sort of tongue -in -cheek decide to call it link a bit, like linking a bit.

[277] It's a very like academic joke.

[278] So who is this third partner in Linkabit?

[279] he ends up not kind of jelling with the other two, leaves shortly thereafter.

[280] His name is Len Kleinerock.

[281] And I read that the first time when I was like, I've heard that name before.

[282] I know that name.

[283] And I'm going to guess 99 % 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 the history of the internet, that name should ring a bell.

[284] Well, you know, at first you read this history and you're like, man, bummer for Len.

[285] He missed out on founding Qualcomm.

[286] Well, he actually ended up okay because instead of founding Qualcomm, he founded the internet.

[287] He literally was the, I think the founding engineer on the ARPANET project at DARPA.

[288] Many people were involved in the ARPANET project.

[289] I guess at ARPA.

[290] ARPA net, which was the precursor to DARPANet, which was the precursor to the internet.

[291] Len, and one of his grad students at the time at UCLA, like the next year, right after this is happening, 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.

[292] He's one of the core founding fathers of the internet.

[293] So he ended up doing, okay, you probably didn't make as much money, but he will be remembered in history.

[294] Pretty amazing.

[295] 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 U .S. Navy town.

[296] And most of what they're doing is working on satellite communications.

[297] If you know anything about satellite communications, the bandwidth that you have available to you is very, very narrow.

[298] And you need to be very, very efficient with your communications.

[299] And that's still true to this day.

[300] I mean, any 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.

[301] So it still kind of works the way that computers worked 30, 40 years ago.

[302] Yep.

[303] And so there, you know, it wasn't them.

[304] Like this was the military.

[305] They got exposed to this trolling around to find the 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 from the World War II era, invented by Hedy Lamar and George Antheil.

[306] And the timing is perfect, because the time of Linkabit is this sort of early 80s where that...

[307] Early 70s.

[308] Oh, Linkabit's early 70s.

[309] So they have like 15 years of Linkabit before.

[310] Oh, yeah.

[311] Oh, yeah.

[312] There's a long...

[313] Linkabit is involved you might not know I've got some good surprises for you So they start doing more and more of this Irwin's exercising the hotel management sort of side of his brain as he's doing this He finds that he really enjoys it They start bringing on other professors, other grad students into Linkabit to kind of build this sort of like army of the greatest you know, information theory and wireless signal mines in the country.

[314] All for defense contracting.

[315] Almost all for, I don't think they were doing any commercial work at this point.

[316] I think it was all NASA and defense.

[317] And almost all satellite work.

[318] And so they start building the company that eventually, in 1971, there's so much going on, Erwin decides he's going to take a sabbatical from UCSD and spend a year just organizing the company.

[319] He ends up never going back to UCSD.

[320] Ever.

[321] Because during that year, they get the idea, I believe it was during this year.

[322] Maybe they'd start to have inklings of it before that, you know, it's really nice.

[323] They've got all this technical talent.

[324] They're consulting on these projects that defense contractors mostly are the prime bidders for.

[325] They're like, wait a minute.

[326] Those guys are making all the money.

[327] We're doing all the differentiated, like, engineering work here.

[328] what if we started bidding on some contracts ourselves?

[329] We would probably make a lot more money as like a kind of product, like, you know, contract, focus services company ourselves rather than just as a sub -consultant on these projects.

[330] And that lesson persists to this day, too.

[331] If you can pull off being the prime contractor to the government on a big contract, the economics are much better than if you get subcontracted by one of the primes.

[332] 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.

[333] Like, that is a gravy train that, like, yeah, Raytheon, Lockheed, Boeing, all these companies.

[334] So, of course, they start doing this, but, like, there's a reason the primes then are the primes now.

[335] Linkabit is not going to be a prime, then or ever.

[336] So they need to, if they're going to do this, they need to move into the commercial sphere.

[337] So this is, this is, like, one of these just, like, so good.

[338] It's like history was, like, made for acquired.

[339] Do you know what the first, like, contract project that Linkabit did?

[340] It was, if you knew, you would just be, like, smiling so wide right now.

[341] So they hear about, remember, their expertise is in satellite communications.

[342] They hear about a regional retailer.

[343] No. Did they do Walmart satellite network?

[344] Yeah, they did.

[345] What?

[346] Yeah, they hear about this eccentric founder.

[347] of this small Midwestern regional retailer that for some reason wants to beam himself talking every day from HQ to all of the local stores of this local outlets of this retailer.

[348] Linkovitz first project is doing the satellite communication system for Walmart.

[349] That's wild.

[350] Listeners, for anyone who didn't listen to our Walmart episode, Walmart was for a very long time the most innovative retailer on the planet, I mean, until Amazon, basically.

[351] And one of the illustrations of this is in the late 70s and then continuing into the early 80s when they actually lit it up.

[352] 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.

[353] Oh, it was just the ARPIT.

[354] It was the Klein Rock.

[355] Phone lines.

[356] The public WAN effectively, or precursor to WAN, was insufficient to, you know, send the store data that they had actually been collecting and want to tabulate their results on a daily or weekly basis, but also this like crazy...

[357] Yeah, Sam wanted to broadcast out the Saturday.

[358] Yeah.

[359] Oh, feelings.

[360] So great.

[361] Wait, there's more Walmart to come a little later in the episode.

[362] Stay tuned.

[363] Literally.

[364] So...

[365] God, you just crack yourself up.

[366] I know.

[367] This is fun.

[368] We'll probably cut this from the actual episode.

[369] We get...

[370] Occasionally, we get these reviews for a choir or, like, comments that, like, like one host is like really normal and the other a host is just like laughs at his own jokes crazy person and I'm like well you know at least they remember me we are who we are nothing's changing it seven years in we're not yeah I promise you it's not an act ask my wife okay so the next thing that they get into is because they're in they're in video they're they're in satellite they're in video now with Walmart and they're doing these two -way communications, they build the video scrambling system for pay TV on cable systems.

[371] So it used to be before the link -a -bit solution for multiple -access cable systems, if you like were even mildly technical or could like play around with like an Allen wrench, you could get HBO or any of the early pay TV channels for free.

[372] Yeah, the catchphrase there is security by obscurity.

[373] They would just try and, you know, find one clever thing that consumers weren't likely to figure out by unscrowing their box and, you know, moving one wire or something.

[374] So Jacobs and Viterbi and all the brain trust at Linkabit, they solve that problem.

[375] And the HBO uses them and then all the other, all the other big pay TV channels.

[376] I think that's the inspiration behind the HBO opener.

[377] Yes, the scrambled.

[378] Because it's like de -scrambling and now bringing you this.

[379] So great.

[380] That's Irwin and Andy right there.

[381] So in 1980, they do this for the whole decade of the 70s.

[382] In 1980, the link of it, the company, gets acquired by a East Coast radio technology company called Maccom.

[383] I think is how it was pronounced.

[384] It used to be actually Maccom.

[385] And then it, you know, this like weird 80s branding stuff, they changed the brand to M -S -A -C -O -M, microwave communications, I think.

[386] Anyway, they sell the business for $25 million in 1980, which like...

[387] Nice early win.

[388] Not bad for some former academics, $25 million in $1980.

[389] And they had a lot of people at this point.

[390] I think there was like over 1 ,000 employees.

[391] It grew within...

[392] It was on its way there, but it then it grew over the next five years within MacCom to that big.

[393] So I don't think it was...

[394] It grew to 1 ,500 people eventually.

[395] Like, this is a big freaking business.

[396] Like, you know, mad, the things we're talking about, like, a lot of other retailers started using, you know, satellite networks.

[397] A lot of other cable TV, you know, channels wanted to use Descalake.

[398] And there were other products that they were building.

[399] Like, this is a huge, like, basically they made a big mistake selling the company.

[400] You know, they hadn't listened to a choir.

[401] They didn't have all the lessons.

[402] They wouldn't have had Qualcomm if they didn't sell the company.

[403] Well, that's true.

[404] They made absolutely the right decision in selling Linkabit then.

[405] So they stay with Maccom for five years.

[406] And then there's a leadership change at Maccom and like, this is an East Coast technology company.

[407] So they all leave.

[408] 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 kind of just getting started yeah and this is 1985.

[409] So the cellular telephone industry exists at this point.

[410] It had just started.

[411] We had the, you know how we're on 5G now?

[412] And everybody remembers the iPhone 3G, that second phone and the edge network that the first iPhone launch with was 2G.

[413] It was a little advancement on 2G.

[414] This was 1G.

[415] This was 1G, which was analog.

[416] No digital yet in cellular.

[417] It was analog cellular.

[418] And cellular had just been an innovation.

[419] 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 could be relayed.

[420] And you had this sort of cellularification of all the geography that you needed to cover.

[421] That was new.

[422] And it's funny how today we don't even think about what the word cellular means, but that was the most recent innovation at the time.

[423] Yeah.

[424] That's great.

[425] So, you know, Irwin and Andy, like, they're, they are first -rate academics, you know, as hopefully we've told the story here, like, among the most brilliant minds in the world.

[426] But they're also, like, especially Irwin, like, incredible business people, market analysts, like, they're very aware, like the products they developed a link of it.

[427] They're aware that this market is coming.

[428] And the reason they're so aware, like technically it exists now cellular, it's all car phones at this point in time, because the way it works is it was essentially, it was.

[429] just like the torpedoes back in the day, it was essentially a FM radio broadcaster that you would wire up into your car.

[430] Super high power.

[431] You needed like a lot of freaking power.

[432] You had to put it in a car for what you're talking about and because you couldn't like, there was not a battery available to, uh, you needed a running internal combustion engine to make this thing work.

[433] Yes, on the end points.

[434] Yes.

[435] On the end points.

[436] Um, and bandwidth was super limited.

[437] And, and, bandwidth was super limited.

[438] And, like, these systems worth thousands and thousands of dollars in early 80s dollars.

[439] And despite all that, the consumer demand for car phones was insane.

[440] Like, this was just, like, you know, there were wait lists years long for consumers to get car phones installed.

[441] 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 efficient use of channels.

[442] It's just like the torpedoes back in the day.

[443] Like, they couldn't keep up with all the demand.

[444] I remember when my parents, who were lawyers, like, they had car phones in the 80s.

[445] Did your parents have one?

[446] No, my great uncle had one.

[447] But it is interesting thinking about, you know, when you're listening on an FM radio, you have 99 .1, and then you click up on the dial, and it says 99 .3, and then you click up and it says 99 .5.

[448] and you can't even have 0 .2, 0 .4, 06, because that's too close.

[449] There would be interference.

[450] So you start thinking about, and this isn't exactly right, I'm going to oversimplify this a little bit, but you start thinking about, well, geez, how many slots are there to communicate in this analog way with a cell tower near me?

[451] What can a cell tower handle?

[452] 100 phones, 200 phones, 500 phones?

[453] Either way, it's not going to scale.

[454] Not like much more than 100.

[455] Yeah.

[456] Yeah.

[457] I mean, you think about how many radio stations there are like it's not much more than that so you know the link of it folks everyone and Andy they see this they know and they're like oh 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 total seven in total Andy Irwin and five other of the best link -a -bit engineers.

[458] They meet at Irwin's house, and they decided to start this new company, and they name it Qualcomm.

[459] Quality communications.

[460] Which is short for quality communications, which I had no freaking idea when we did the research.

[461] But then you're like, oh, quality communications.

[462] And then when you know all this history, it makes sense.

[463] They are the highest quality, you know, but they know how to do quality communications.

[464] This is a communications company, and they can provide quality than nobody else.

[465] There's so many companies named this way, too.

[466] These things become these household brands, and then it's like you don't even think about what the original meaning was.

[467] Totally, totally.

[468] Because, like, the industry was still so early, 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 cable, we've talked a little bit about the cable industry history on Acquired, like, that required enormous CAPX.

[469] This is like literally putting towers in the ground, putting base stations on them, building these $1 ,000 mobile phones.

[470] It requires a lot of money to participate in this.

[471] 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.

[472] hardware, and it's not just antennas, it's very specialized chips.

[473] 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?

[474] Do we need to be our own carrier?

[475] Do we sell to carriers?

[476] There's a way to sort of like bite and try and eat the whole elephant here.

[477] Or you could say, okay, we're just going to try and be one small part of this, because we have an idea for how to make this better.

[478] But if you're just doing one small part of it and inventing the means by which the technical method that the phones communicate with the towers, there's a bunch of stakeholders that you've got to get on board with your thing, carriers, the government in terms of licensing spectrum, phone manufacturers, chip makers, base station makers.

[479] So there's this really interesting crux that they're at at this point of the company where they're saying, we know we can do this better.

[480] We have a specific idea about how to make this better, which we'll get to in a second, but there's really trying to figure out how much of the elephant to try to eat themselves.

[481] story, you know, this, um, hopefully this first, you know, 45 minutes of the episode was interesting way, you know, fun telling this like crazy World War II Hollywood, you know, history of all the technical aspect that comes to this.

[482] The business history of Qualcomm, just like Bill Gurley said on the blurb of this book, it is one of the most brilliant strategic executions of entering a market, uh, period, you know, like writ large ever.

[483] Like, this is on par with Nvidia, if not, honestly, more brilliant.

[484] It seems more difficult, because if you were to pitch me this idea, a priori, as an investor, I would tell you immediately no, because I see 15 different needles, all of which you must thread perfectly, a story that's entirely path -dependent, so you're not going to get one thing until you get the previous thing, and that was a needle that you were threading.

[485] So the likelihood of success is unbelievably low.

[486] And yet, here we are talking about Qualcomm.

[487] So they knew two things at the outset of founding.

[488] One, this is a massive opportunity that they eventually wanted to pursue, was bringing their expertise to bringing cell phone, terrestrial cell phone networks into the digital era and building the dominant guerrilla company in this soon -to -be massive industry.

[489] And two, they knew they couldn't do it yet.

[490] So they actually started in the same fashion that Linkabit did.

[491] They're like, okay, we're going to bootstrap up by doing consulting work.

[492] So one of the first consulting projects they do is with Hughes, you know, like one of the defense primes, Hughes like Howard Hughes, pretty awesome, on a proposal to the FCC for a mobile satellite network.

[493] They're like, all right, well, we'll learn about consumer mobile, you know, telephony services, enter the market, we'll work on the satellite network.

[494] And we're talking like Jurassic Park sat phones.

[495] Yes.

[496] You know, that is exactly.

[497] Like big honking thing, super expensive.

[498] but like when you really need it, it's nice that there exists a SAT phone network.

[499] Yes.

[500] 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, optimizing satellite communication channels for efficiency.

[501] They come up with an application of spread spectrum to use multiple access, multiple conversations, access the same channels at the same time that they call, that they use a technique called CDMA.

[502] Code, division, multiple access.

[503] Which the first time you hear this phrase sounds like complete jargon, like meaningless, and then you stare at the Wikipedia article for a while to try and unpack each one.

[504] So we'll break it into parts.

[505] Multiple access.

[506] Well, that's fairly straightforward.

[507] Rather than being broadcast, so like a TV network, we have multiple endpoints that all want to communicate with each other using whatever the same communication medium is.

[508] So rather than using one single frequency to all child pile on there at the same time, which of course wouldn't work in that analog world that we were talking about, I want to call you on 923, you want to call Bob on 92 .3.

[509] My mom wants to call my dad on 92 .3.

[510] You quickly get into a situation where everything is just colliding with each other.

[511] So multiple access on just single analog frequency doesn't work, so you've got to divide up and say everybody gets their own frequency.

[512] and that's sort of the way the way the world evolved.

[513] So you mentioned code division.

[514] Before we get to code division, can we talk about a different type of division?

[515] Yes, we certainly can.

[516] So before we get to the CD in CDMA, Code Division, so we've got the multiple access part, a bunch of people trying to communicate using the same medium.

[517] Well, the things that we were talking about before, everybody gets their own frequency, that was called FDMA, frequency, division, multiple access.

[518] So a pretty straightforward way that you might divide up the airwaves in order to have multiple conversations.

[519] And the way the telecommunications industry works is, remember I opened the episode by saying it's basically a layered set of magic tricks?

[520] This is sort of the next iteration on top.

[521] And if you say, okay, rather than sending analog signals, what if we were sending digital signals?

[522] So if I'm talking to David, there's a lot of sort of pauses, about half the conversation is actually empty air.

[523] And if two folks out in the audience are talking to each other, a lot of your time is actually empty air.

[524] So we don't both need the entire frequency all the time.

[525] 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.

[526] And just rotate the time of when different packets are being sent.

[527] Right.

[528] So, you know, the very crude example is if we're to dinner party, I can have my conversation for 30 seconds, in a room and then, you know, I pause and I stop talking, a different conversation can happen for 30 seconds.

[529] Of course, that's too crude and that's far too long.

[530] 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 milliseconds someone else gets their digital packets, and we'll keep round -robbin it between the 20 conversations that we're all having.

[531] And when it gets reassembled on the other side by some other phone or some something.

[532] Thanks to transistors and digital technology, this can all happen fast enough that like you don't even notice.

[533] Yeah, you're like, oh, the signal maybe sounds a little compressed.

[534] 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.

[535] Even though we're all borrowing different time slots on the same frequency, it actually sounds pretty smooth to me. So that's the next iterative invention.

[536] This is a case where Europe was way farther ahead than the U .S. Europe was basically ready to implement this time division multiple access digital standard in Europe for European cell phone technology.

[537] And that was driven by Erickson, the big European infrastructure provider.

[538] So I think, like, just to pause and reflect, big innovation going from maybe 20, 30, 50x, like 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.

[539] This is the movement from frequency division multiple access FDMA to time division, multiple access, or TDMA.

[540] It's actually, who's at 30 -50?

[541] Maybe now that kind of is, but like back then it was 3 to 5x.

[542] Really, I think the right analogy is like it is time sharing.

[543] Time sharing is what it is.

[544] And it's kind of like the old computing model of like time sharing on a teletype on a mainframe.

[545] That's what's going on here.

[546] Yep.

[547] And so over to Qualcomm.

[548] So they're thinking about doing this satellite communication thing.

[549] And remember, Erwin studied with Claude Shannon.

[550] 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.

[551] And he's sort of looking at TDMA and they're like, I think there's something even more efficient than this.

[552] And we need something more efficient than this for this satellite network.

[553] And these guys were all around the beginning of the internet.

[554] Yes.

[555] And like, you think about, if you know anything about how the internet works under the hood.

[556] And packet switch networks generally.

[557] Packet switching.

[558] It's not time sharing.

[559] No, it is.

[560] Everybody compresses their data as much as they possibly can into a digital packet.

[561] They fire it off and it bounces around a series of places until it hits the other side, gets decoded.

[562] And hopefully the protocol is written correctly where as you're sort of opening your packets 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.

[563] And you said the magic word decoded.

[564] And that's what these guys figure out.

[565] They're like, duh, we'll just use code.

[566] And then like everybody will send all the conversations, all the same time, all across all the different channels, will 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.

[567] It's basically the same way the Internet works.

[568] Yeah.

[569] So to break that down further, so you've got this really interesting situation now where all messages are encoded digitally.

[570] And I keep like going back to this analogy that they use in the telecommunications industry of the dinner party.

[571] So rather than 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.

[572] Or TDMA, which is you put five or ten people in a room, but they need to wait their time.

[573] turn to have their conversation.

[574] Well, what code division basically is, as the analogy goes, is, well, everybody can communicate in whatever room they want.

[575] They're all just communicating in their own language.

[576] And the person that they're communicating, too, understands that language.

[577] So they can sort of listen and disregard noise that's coming in.

[578] It's like you were saying, if I'm expecting your message to be, I had breakfast this morning, then like, I don't care how much noise is in the system.

[579] You don't care how much space.

[580] I either know you said that or you didn't say that.

[581] Right.

[582] 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.

[583] And that's an oversimplification.

[584] If you really wanted to sort of dig into it, what you're basically doing is you run any given packet through, like literally an encoding.

[585] So maybe my encoding is 10010.

[586] So you detect, so you encode whatever the packet of information is.

[587] You run it through, sort of add it to 10010.

[588] And then you end up with this signal that you can sort of stack on top of other messages.

[589] So imagine a digital signal, like a digital wave, where all of our messages are layered on top of each other.

[590] So the top of the peaks of some of the wave are extra high and the troughs are extra low for others.

[591] And when it all arrives all together on the other side, the other side knows how to decode all of our messages.

[592] 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.

[593] 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 just care about the message that came from Ben which was 10010 or whatever code I just made up.

[594] And that's...

[595] It reassembles it?

[596] The schick for CDMA.

[597] And what these guys do, just this brilliant, like, they saw it, they had the background, they had the engineering, like, everything, right place, right time, and the business sense, they developed this, and they freaking patent it.

[598] 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 U .S. patent number 4 ,901 ,307, which is one of the most.

[599] valuable patents in history.

[600] Unreal.

[601] Like, literally, they played such a long game, and they threaded needle after needle after needle, and that was just the first.

[602] 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 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.

[603] 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 that sort of thing, because since it's encoded...

[604] You don't need an internal combustion engine to power this thing?

[605] Right.

[606] The other side knows what it's looking for.

[607] So this is the equivalent of there's a bunch of people whispering in a gigantic house to each other all in different languages.

[608] So it's this way more efficient way to use a given medium to have the absolute maximum amount of conversations or signal transmission in that medium.

[609] Okay.

[610] So Qualcomm founded 1985, patent issued 1986 or applied for in 1986.

[611] Which is worth remembering, so it'll expire in 2006.

[612] That's right.

[613] That's right.

[614] Looking ahead.

[615] foreshadowing.

[616] Qualcomm doesn't enter the wireless industry until 1989.

[617] What happens in the interim?

[618] This is the next Walmart.

[619] Oh, that's so good.

[620] Literally you just can't make this stuff up.

[621] So they get approached to bid on another contract, fledgling Qualcomm does, from a company called Omnienet, which has this idea that they think the Qualcomm folks are going to be perfect to implement.

[622] They want to make a mobile satellite network specifically to connect commercial semi -trucks on the roads in America.

[623] And network them up to the distribution centers for retailers and other people who, companies who ship a lot of things in the U .S. This is right in their wheelhouse.

[624] Qualcomm and Irwin are like, great, we're going to bid on this contract.

[625] They win it.

[626] They start working with Omnip.

[627] And they make it work.

[628] and one of the very first customers is, of course, Walmart, which implements it on their own proprietary fleet of trucks, building further their technical advantage over just about every other retailer in America.

[629] And at this point, they've walked away from the satellite contract, right?

[630] They sort of like...

[631] Yeah, the Hughes satellite thing, it actually just never happened.

[632] So they developed this technology, they patent it.

[633] They were like, oh, but there's no money here because the contract...

[634] Yeah, the FCC was like, yeah, satellite.

[635] Jurassic Park phone's not going to be a thing.

[636] Right.

[637] So instead, they're focused on this Omnit.

[638] So they focus on this.

[639] And they also have, like, a lot of the business, you know, relationships already from the previous iteration of what they were doing in Link of it, including with Walmart, many of the other large companies and retailers.

[640] I believe it's Schneider trucking.

[641] Yep.

[642] It becomes one of the, actually the first customer, I think, for that.

[643] So they work on building that.

[644] It becomes pretty clear, like, this is going to be the interim main product.

[645] Qualcomm and OmniNet merge in 1988.

[646] They raised $3 .5 million in funding as part of that.

[647] They bring the product to market at the end of 1988 as Omni Tracks.

[648] People might have heard of it.

[649] It was part of Qualcomm for a long time before I believe it ended up getting spun out to private equity.

[650] And in 1989, in the first year of business for Omni Tracks, they do $32 million in revenue in 1989.

[651] Which is something like, it's like inflation adjusted to $100 million.

[652] It's a lot of money.

[653] And there's a lot of demand for this product.

[654] In the first year of the product long.

[655] Year one.

[656] Now there's a lot of cogs.

[657] Like this isn't SaaS revenue.

[658] No, yeah, yeah.

[659] Talking about.

[660] And 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, the first kind of like the Linkabit days, you know, remember Walmart was their customer for the Linkabit satellite thing.

[661] Walmart is very happy to integrate and implement technology themselves.

[662] most other customers are not.

[663] So they go around and they're like, you know, pitching this to trucking companies and retailers and the like.

[664] And most of them are being like, well, this is like cool, but we're not going to operate our own dispatch centers and messaging.

[665] We try to have a small and IT department as possible.

[666] Yeah.

[667] Why on earth are you asking us to do all this work and just handing us this pile of technology?

[668] Yeah.

[669] So Irwin is like, well, what if we just operate it for you?

[670] and we provide a whole full -stack solution.

[671] We don't sell you a technology.

[672] We sell you a solution.

[673] Which is like every enterprise company that you ever...

[674] You know a company has become enterprisie when they cross the chasm and their website no longer has like products, pricing, about, and it changes to solutions.

[675] Yeah, solutions.

[676] They make the business discovery of solutions.

[677] We all should say to say, like, this is a tremendously dilutive financing event.

[678] This is Qualcomm saying, we need money so badly to fund the development of Omnitracks for this customer OmnitNet, that the most attractive option for us is to sell half the equity in our company.

[679] 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.

[680] It's a pretty different time than today where you go raise a seed round and you sell 5, 10, 20 % of your business for two...

[681] I don't know too many seed rounds that are happening for 5 % dilution these days, but they were.

[682] They were.

[683] And so it's a very...

[684] 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 it.

[685] And I think some people were pretty bitter about this.

[686] Totally.

[687] And you could imagine, too, it's not like an idea.

[688] Like, they had done a bunch of work already.

[689] This was going to happen.

[690] They were going to go to market.

[691] they were just a couple years away from making $100 million in inflation -adjusted dollars, and yet they had to give up half the company.

[692] 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.

[693] Wow.

[694] Freaking awesome.

[695] So now that this is in place that 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 in our original patent.

[696] And here's the other just brilliant thing.

[697] What happened originally was not an event.

[698] There were other people who knew about Code Division multiple access.

[699] Other folks could have been in a position to patent this and pursue it.

[700] But at the time, nobody believed it could actually work because you needed such sophisticated processing power on both the endpoints, on the base stations and the endpoints to actually make this work?

[701] Like, it sounded completely freaking crazy.

[702] It needs to happen in real time.

[703] I mean, people need to have conversations without a perceptible delay, and you are cutting a conversation.

[704] You're first doing the analog to digital encoding, where you're taking their voice and you're actually turning it into a digital signal.

[705] You're cutting it up into a bunch of packets.

[706] You're encoding those packets with every user's unique code.

[707] You're sending it over the airwaves to your most local cell tower.

[708] 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.

[709] On the handset.

[710] On the handset.

[711] And so this is the thing like maybe you could believe you could do this processing on the on the base stations on the infrastructure side.

[712] But like the idea that like at a car like something powered by an internal combustion engine like in a car or heaven forbid not a car like a mobile phone like a Zach Morris phone that you know somebody would hold in their hand that you could do this on something like that was crazy.

[713] in 1986, but the Qualcomm guys, they know about Moore's Law, which like most people didn't know about it at that time.

[714] And they're like, yeah, I'm pretty sure you give it one or two more turns of the crank on Moore's Law here.

[715] And like, I think we could maybe do this.

[716] There are so many things that we've talked about in the last, I mean, not acquired generally, but especially in the last year, where their success came from correctly forecasting where Moore's Law would be at the time that they shipped their product.

[717] So knowing that something was at the time of shipping, like it's not possible today, but when we're going to ship this, which is still going to be several years in the future.

[718] It will be possible then.

[719] It's so cool.

[720] And like, the fact that it's like, there were so few people that knew that then.

[721] And like, ah, crazy.

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[743] So in September of 1988, all these factors, you know, they've got the financing capability to take a swing at this.

[744] They see a path with Moore's law to it being technically feasible.

[745] They've got the patent.

[746] They're literally the only ones that can do this.

[747] And then the market timing.

[748] So in September 1988, the U .S. cellular telecommunications industry association, or CTIA, as most people know it, and then its related entity, the TIA, the Telecommunications Industry Association, they release performance requirements, the spec for performance requirements for the planned upgrade of the U .S .'s cellular networks from the analog 1G networks to the digital 2G networks.

[749] And this is just the U .S. one.

[750] Europe has its own.

[751] Europe's already well on its way.

[752] GSM, Erickson, TDMA, it's all happening here in Europe.

[753] The Qualcomm folks, of course, they eagerly anticipate the release of the spec, and they look at it, and they're like, oh, my God, this could not have been written better.

[754] It's written for us.

[755] This is a dream.

[756] It's written for us.

[757] They realize two things.

[758] One, of course, TDMA is the frontrunner and Erickson and all that to, like, do the U .S. too, because they're successfully doing it in Europe.

[759] And not only is it being done in Europe, it makes sense to adopt in the U .S. too, because it's kind of nice to have a global standard, and because it's quite believable.

[760] Like, okay, one big thing I have to believe is we're switching to digital.

[761] I can believe that.

[762] 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 different time windows.

[763] Okay, I can believe that, but gosh, how much new stuff are you trying to invent all at the same time?

[764] Anything further than that feels like I've got to take a leap of faith.

[765] And show me it can work, and Erickson's well on the way to pilots proving showing it works, this actually works.

[766] They're big companies, they've succeeded before, they're the right vendors that everyone trusts.

[767] So the spec that the CTIA publishes, the Qualcomm guys, it must have just been like beaming ear to ear.

[768] They realize that TDMA, because of the capacity limits of TDMA, it's not going to meet spec.

[769] You can have the best implementation of TDMA.

[770] It's not going to allow for enough compression to actually meet the spec that the U .S. wants to hit.

[771] So here, this is a, I've been waiting to bring this thing up.

[772] So at this point in history, the U .S. standards body is correctly forecasting the incredible popularity of cell phones in the U .S. So they're sitting a really high bar for the amount of phones that need to be able to use this network.

[773] And the reason that they have 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 and company to predict cell phone.

[774] It all goes back to McKinsey, always.

[775] To predict the cell phone usage in the United States in the year 2000.

[776] So flash forward 20 years in the future.

[777] the consulting group argued that cellular telephony would be a niche market.

[778] Ah, yes, of course.

[779] They forecasted 900 ,000 people would be subscribed to a cellular telephony network in the year 2000.

[780] I think I have 900 ,000 cellular connections personally.

[781] So as you know, that number was off by over 100X.

[782] There were 109 million people, not 900 ,000, 109 million subscribed in the year 2000.

[783] So it does make the point that in 1980, it was super not obvious.

[784] 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 mis forecasting this.

[785] 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.

[786] So this like 2G spec that was written is right around the time that 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?

[787] 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 day thread, you know, domino that falls of TDMA didn't hit the spec.

[788] and they could kind of foresee this, you know, because they knew what the demand was and they knew TDMA wasn't going to be able to do it.

[789] So here's the next.

[790] This is cool.

[791] I didn't expect to get into kind of like geopolitics on this, but the one great that, you know, the U .S. has like a ton of bureaucracy and regulation, like all of this being like, you know, case in point.

[792] But one incredible...

[793] I think this took five years to eventually...

[794] And like these standards bodies and like all, like, this is not the free market like by any means.

[795] But the one difference in the U .S. process for all this versus the European process, and it was the difference that made all of the difference, was the U .S. government said, the industry associations, you guys can set the specs and all that, and that can be official.

[796] But it's not mandatory.

[797] So, like, in Europe, it was, like, mandatory.

[798] Like, the TDMA, which DSM was based on, like, mandatory.

[799] That's it.

[800] And plenty of other countries, you know.

[801] mandatory.

[802] And the U .S. is like, this is the industry standard, and like, we recommend that any mobile carrier follows it.

[803] But if you want to do your own thing, like, as long as it meets the performance spec, you can use whatever technology you want.

[804] And importantly, standards bodies are decoupled from government agencies.

[805] So the FCC allocates spectrum, but these standards bodies are literally just industry.

[806] They're industry associations, yeah.

[807] 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.

[808] Otherwise, the innovation doesn't happen because no one knows what to build against and no one can sort of effectively collaborate enough.

[809] So once all this, you know, the standard comes out, Qualcomm immediately, like, goes to Washington, like, Irwin and Andy, every, they go, they go to, they go to D .C. And they're like, hey, just to make sure, we just want to, 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.

[810] As long as it used a spec, like, that's cool.

[811] That's not illegal, right?

[812] And they're like, yep, that's the case.

[813] They're like, okay, cool, thank you.

[814] We'll be back.

[815] And so that was like the next needle they thread.

[816] They're totally undaunted.

[817] They go, and they're like, great, we can go pitch individual carriers on using CDMA as a technology.

[818] So they start a sales process.

[819] This is now the beginning of 1989.

[820] They start a road show.

[821] They go out pitching this new novel CDMA standard versus the TDMA industry standard.

[822] And this starts what is known.

[823] Literally, I tweeted this the other day.

[824] In the Wikipedia entry for all this, this is like canonically known as the holy wars of wireless.

[825] And there's so much telecom nerdery.

[826] And it really is holy wars.

[827] Because it's about belief.

[828] So many people were just like, I don't believe you that CDMA will work.

[829] And, you know, it was literally only the Qualcomm folks.

[830] who thought it would work.

[831] And not just, you know, I'm reminded of the Don Valentine, like I knew the future.

[832] 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 in the market.

[833] And there's so many benefits of CDMA versus TDMA.

[834] We've covered some of them.

[835] One of the other ones is that the voice quality is actually much better than TDMA.

[836] There's a whole litany of benefits.

[837] Security is much better.

[838] I mean, it was originally created for the government to beam stuff up and down to satellites.

[839] Another huge one is it literally, if you're operating a cell network and you can have more subscribers per unit of infrastructure, is literally cheaper.

[840] So you're going to...

[841] It's a lower cost technology.

[842] This is the thing.

[843] So there's one benefit that actually matters.

[844] All the others are like nice to have on a feature spec.

[845] There's one benefit that is going to allow them to be super sure they're going to win, which is that it is like an order of 3 to 5x more efficient to operate.

[846] Unfortunately, they originally pitched 40x.

[847] That's the standard that everyone was benchmarking.

[848] Oh, that was versus animal versus analog, I think.

[849] It was 3 to 5x more than TDMA.

[850] 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 are operating with.

[851] You could fit 3 to 5X more subscribers, 3 to 5X more monthly revenue on that same fixed cost base than your competitors who are using TDMA.

[852] And if you know anything about, like, if we've learned anything unacquired about economics of industries and power and Hamilton, Helmer and all that, like, if you have have a scale advantage, or you have a power advantage of differential profit margins versus your competitors, you are going to run the table on your competitors in any given market if you do this.

[853] If a customer is worth more to me than they're worth to you and we can offer them the same value, I'm going to win.

[854] Yeah, because you can just lower prices and get all the customers and make more profits along the way.

[855] And there's, we've only sort of scratched the surface on this episode of reasons to doubt that code division was the right technology.

[856] There were all these other crazy hoops they had to jump over.

[857] One of them is the near -far interference problem.

[858] Oh, yeah.

[859] This is like...

[860] If you think about it, so let's keep the whispering analogy going.

[861] 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 to communicate with each other.

[862] So it's much more efficient than all these other high gain, high power, high volume signals that everyone else is trying to use.

[863] Well, if I'm using a really low -gain signal, and I'm far from the base station from the cell tower, that's an issue, because the people who are really close are going to sort of drown me out.

[864] Imagine we're all whispering, but I'm miles away.

[865] Well, you're going to hear the person whispering right next to you.

[866] So, you know, we're very early days in powerful chips, powerful power management, and you've got Qualcon pitching the industry that they're going to 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.

[867] And you have to know in real time and adjust in real time all of that.

[868] So you have to be good at power management chips.

[869] Also, how are you going to know how far away someone is from the tower?

[870] And they're like, well, we'll be able to just 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.

[871] And this is blowing people's minds in the mid -80s.

[872] They're like, are you crazy?

[873] They're like, oh, don't worry.

[874] We got that.

[875] In real time, you're going to modify a signal based on what you're currently hearing from that signal.

[876] And then Qualcomm comes in way over the top and says, oh, also, there's this new thing called GPS that is coming out.

[877] And we're going to start.

[878] Which they knew about from the military.

[879] Basing the technology on GPS, so we know how far away someone is from the cell tower based on GPS, which doesn't really.

[880] really exist yet.

[881] Like, there's all these impossibilities with the 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.

[882] Back to the magic thing, like, just the technological magic that went into this.

[883] At every stage of the way, they're like, yeah, we got this, figured out.

[884] And they patent every single piece of this.

[885] Every single piece.

[886] Like, unreal.

[887] The first patent we talked about is the most valuable.

[888] But, like, there is a whole string of, you know, dozens, hundreds, thousands of other patents that come after this.

[889] Yep.

[890] That are just incredibly valuable.

[891] So they start the road show pretty quickly in February of 1989.

[892] One of the largest carriers in the Southern California area, Pactel wireless, is interesting because they get it.

[893] Like, this economic argument, like, it's, you know, basically they're like, all right, if this works, like, yeah, you got us.

[894] So they put up a million dollars to fund a prototype.

[895] They're like, okay, proved to us that this works, build a prototype.

[896] Qualcomm, for the rest of the year, works on this.

[897] November of 1989, they host a demo with the Pactel money, but they invite the whole rest of the industry in San Diego.

[898] And there's famously a little hiccup where they're about to, you know, Irwin's giving like a big speech, introducing it, then they're going to do the actual demo.

[899] They've got vans driving around the city and then like a base station back at Qualcomm HQ, and they're going to make it all work.

[900] He's giving the interest speech in one of the engineers just, like, frantically waving in the back, like, keep talking, keep talking.

[901] They had to reboot the GPS system.

[902] And so, like, he's, you know, he makes a little quip of, like, as a former professor, it was easy for me to keep talking.

[903] He's told this story, like, a million times.

[904] Anyway.

[905] There is something funny, too, about this original demo where they're not a consumer hardware manufacturer yet.

[906] They've never built a phone.

[907] They're a bunch of academics and consultants and, you know, electrical engineers.

[908] And so for this demo, the cell phone that they build, it basically looks like a mini -frid.

[909] with like a handset hanging off of it.

[910] I mean, they build the most...

[911] There's a photo of it in the book.

[912] It's awesome.

[913] It's awesome.

[914] We'll come back to building handsets in a sec. So it works.

[915] Like, Pactel's like, great, we're in.

[916] And then some of the other folks...

[917] Which Pactel, by the way, would eventually get rolled up into Verizon.

[918] I think they're basically a Verizon's West Coast operator at this point.

[919] Some of the other industry folks who come, they're like, well, this is impressive.

[920] It works.

[921] But, like, San Diego is a pretty forgiving environment for cellular technology.

[922] This is a very geographically easy city to operate in terms of wireless signals.

[923] Prove to us that this can work in like an urban jungle environment.

[924] And Qualcomm's like, okay, how about New York?

[925] And they're like, well, we'll see you there.

[926] So in February of 1990, they do a successful demo in Manhattan in New York City.

[927] On the back of that, they sign 9x, 9x mobile, which is one of the largest New York carriers.

[928] And then in August they sign Ameritech, which is one of the largest Chicago, I think.

[929] Chicago, yeah, I think it had a big chunk of the Midwest.

[930] And then, there again, another brilliant move.

[931] They start going international.

[932] So, like, here in the U .S., there's all this, like, forward momentum that's already happened with the 1G analog services and, you know, the TDMA and all that.

[933] They're like, what if we go out to countries where it's just tabula rasa, like, clean slate?

[934] And we pitch this as, like, the obvious best technology.

[935] And famously, South Korea, back to the, like, go.

[936] government -mandated standards.

[937] The South Korean government is like, yep, this is clearly the best.

[938] Government -mandated, all, you know, they were building up the first cell phone networks in South Korea that were going to be these digital, you know, next -gen networks.

[939] Yep.

[940] All CDMA, all Qualcomm.

[941] South Korea, for a time, was, I think, close to 40 % of Qualcomm's revenues.

[942] Wow.

[943] Because the whole country, like, and it was one of the, you know, most advanced mobile countries, all just using Qualcomm.

[944] There's lots of benefits to the free market and freedom.

[945] and rights of individuals.

[946] There's also benefits to regulatory and government capture.

[947] Yes, coming in over the top with an edict is also beneficial.

[948] In December of 1991, on the back of all this, they go public.

[949] There is a paltry $68 million in their IPO.

[950] Like a series B. Yeah, totally.

[951] A 2021 series B. So, finally, in 1993, three, the U .S. industry associations of CTIA and the TIA does actually adopt CDMA as a second standard officially.

[952] It's like, okay, now you have our blessing.

[953] It's like, well, it doesn't matter.

[954] We already got like half the industry signed up with us anyway.

[955] You know, thanks for nothing.

[956] At that point, Qualcomm does a secondary offering.

[957] There is another $150 million on the public markets.

[958] A couple years later they do, or maybe a year later, there is another $500 million on the public markets.

[959] So they're very well capitalized.

[960] And why are they raising all this money?

[961] Back to the Omnitracks and like this, 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 except in the case of south korea um you know they already have built out like towers infrastructure they kind of 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 9x or any of these folks.

[962] 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.

[963] Are you going to replace my towers?

[964] Are you going to replace my base stations?

[965] Are you going to replace all of my customers' handsets?

[966] Right.

[967] Like all of our customers buy phones from phone manufacturers.

[968] So are those phone manufacturers signed up?

[969] Yeah, right.

[970] It quickly becomes a rat's nest of industry dependencies.

[971] Qualcomm knew, they're like this, you know, still relatively small, San Diego, you know, technology startup.

[972] They can't do all this stuff.

[973] So they do start signing some partnerships with both base station infrastructure providers and handset makers.

[974] They sign Nokia, big win, big European manufacturer as a partner.

[975] 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.

[976] 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.

[977] You need the infrastructure, the CDMA, like base stations that go on the towers, you know, all that, like the back ends, switching all that.

[978] You need that infrastructure.

[979] It needs to be CDMA.

[980] The old stuff's not going to work with it.

[981] The TDMA stuff's not going to work with it.

[982] You need the handsets for consumers to work.

[983] Same deal.

[984] It's got to be CDMA.

[985] 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.

[986] And so somebody's got to do all four of those things.

[987] You know, like all four of those things need to happen.

[988] Qualcomm's for sure got number one covered.

[989] The question is, who's going to do two, three, and four?

[990] Quang was like, you know, they start signing partners, but they're like, you know, we really need to spur adoption.

[991] I think we kind of got to do everything ourselves.

[992] We need to offer the complete solution.

[993] The complete solution.

[994] And this is a major undertaking.

[995] This is why they raise all this money in the public markets.

[996] Which is quite interesting, because despite.

[997] I mean, none of us are buying Qualcomm phones today.

[998] No, Qualcomm brand of phones.

[999] Today, spoiler alert, Qualcomm today is the largest fabulous semiconductor company in the world.

[1000] Isn't that crazy?

[1001] Bigger than Nvidia.

[1002] Bigger than Nvidia.

[1003] And they don't make handsets and they don't make infrastructure.

[1004] I think.

[1005] Bigger than Apple.

[1006] Oh, yeah, yeah.

[1007] In terms of numbers of orders they're placing with chip foundries, Qualcomm is the biggest.

[1008] How do you get from there to here?

[1009] 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.

[1010] We'd strap it up.

[1011] So they do another just brilliant move.

[1012] They create two joint ventures.

[1013] I believe both of them, I know the hands at one, but I believe both were 51 % owned by Qualcomm, 49 % owned by the partner.

[1014] On the infrastructure side, they partner with Northern Telecom, Nortel, to do a JV to manufacture CDMA Bay Station equipment.

[1015] And then, in another wonderful acquired Full Circle moment.

[1016] They call up our friends in Japan.

[1017] They call up our friends in Japan who, at the time, their U .S. manufacturing headquarters was based in San Diego.

[1018] That's convenient.

[1019] California.

[1020] Very convenient.

[1021] Our friends...

[1022] At Sony.

[1023] I guess Akio Marita was running it at that point in time.

[1024] Yep.

[1025] The Sony Corporation to partner in a JV to make handsets.

[1026] So I actually had a Qualcomm handset back in the day.

[1027] Like one of those little flip phones?

[1028] Yeah, well, that was a lawsuit with Motorola.

[1029] No, no, I had a brick phone, like a small brick.

[1030] Not a Zach Morris brick, but a small brick.

[1031] Because of Qualcomm phone.

[1032] That was made by the JPM with Sony.

[1033] That was a Sony phone with Qualcomm branding.

[1034] But they're doing all this to be able to answer yes.

[1035] When a carrier is coming to them and saying, well, great, we'll be CDMA, but question mark, question mark, question mark.

[1036] Qualcomm's like, yep, yep, and yep, we make all that stuff.

[1037] So you should feel safe adopting us.

[1038] IP infrastructure, handsets, silicon that goes into both.

[1039] We got all of it.

[1040] So we just talked about one, two, and three.

[1041] We didn't talk about the silicon.

[1042] And to be clear on the silicon, people know the Snapdragon brand today.

[1043] This is not Snapdragons.

[1044] This is not systems on a chip, CPUs.

[1045] This is not a competitor to Apple's A -15.

[1046] This is literally the silicon to power the radios.

[1047] And just that.

[1048] It's to do the encoding, decoding, decoding.

[1049] power management of literally just attenuating the airwaves to send CDMA encoded telephony back and forth.

[1050] You're making it sound trivial, but this is actually, this is, this is the final.

[1051] I'm not making it sound trivial.

[1052] I mean, I couldn't do it.

[1053] You do it.

[1054] You do it.

[1055] This is the final, just brilliant masterstroke in this long series of brilliant masterstrokes that Irwin and Qualcomm did at this time.

[1056] I don't know any other chain of just brilliant, brilliant strategic decisions one after the other.

[1057] If this had been 10 years earlier, they would have had to do the same thing with Silicon.

[1058] They would have had to partner with Intel or, you know, AMD or somebody, or TI, Texas Instruments.

[1059] One of the real men that had...

[1060] One of the real men that had Fabs, of course, were referring to AMD founder, CEO?

[1061] I think so.

[1062] Jerry, forget his last.

[1063] Who once said that real men...

[1064] have fabs and, of course, was proven desperately wrong.

[1065] Right.

[1066] They would have had to do the same thing they did with Sony and Nortel on the semiconductor side.

[1067] And maybe, you know, they could have had some value capture from the Qualcomm IP, but they would have had to partner to make this stuff.

[1068] But thanks to our acquired superhero, Morris Chang, fabulous semiconductors in 1989, 1990, 1991, just starting to become a thing.

[1069] Just starting to become a thing.

[1070] So they could design their own chips without having to actually have.

[1071] a foundry in -house to make them, and they could outsource that.

[1072] They could actually do all the important value -added work.

[1073] Like, it's totally, it's a reeking Ben Thompson smiling curve in this industry.

[1074] 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.

[1075] and Qualcomm would have been a great company if they had just captured the first.

[1076] They captured the first and the last.

[1077] They got all of the value, like all of the value.

[1078] And we talked about on the Nvidia episodes, it was equally crazy and like future seeing to know that Fablis was a thing, that foundries were a thing, to be willing to work with foundries.

[1079] And Qualcomm did it.

[1080] It's like how many times is this company going to be in the right place at the right?

[1081] time.

[1082] And just to, you know, the silicon.

[1083] And know it.

[1084] Yeah, and right, and right.

[1085] Sees it.

[1086] And the, you know, we're going to talk more about Silicon and Qualcomm as we go here.

[1087] But, you know, just to, you know, paint the punchline here.

[1088] Today, Qualcomm's total revenue is what, close to 40 billion annually, I think, of which 85 % is their semiconductor business.

[1089] Yep.

[1090] So like without.

[1091] 37 billion of their 44 billion of revenue is selling.

[1092] So, but for this strategic decision, 85 % of today's Qualcomm revenue would not exist.

[1093] And they are the largest fabulous semiconductor company in the world bigger than Nvidia, who's number two.

[1094] Crazy.

[1095] Totally crazy.

[1096] It makes sense.

[1097] They started a couple years before Nvidia.

[1098] So, you know, compounding.

[1099] It's a thing.

[1100] That's right.

[1101] So they pull this whole freaking thing off.

[1102] It's just crazy.

[1103] There's nothing more to say than it.

[1104] It's just one of the most impressive business stories I have ever heard.

[1105] CDMA gets adopted as a major 2G standard for the next set of phones that come out.

[1106] 57 % market share in the U .S. in 2G, 100 % market share in countries like South Korea.

[1107] They end up getting, I should know this, I'm either 100 % of massive market share in China, which is adopting mobile cell for the first time and like this is so much.

[1108] So the first, 1995 is the first year that these networks go live in the U .S. and internationally.

[1109] Qualcomm does $383 million in revenue in 1995.

[1110] In 1996, they do $814 million in revenue.

[1111] Oh, my gosh.

[1112] But here's the crazy thing.

[1113] So here's another, like, just wild you can't make this stuff up.

[1114] You would think Wall Street would love the stock.

[1115] that Wall Street bets would be going nuts for this stock, the equivalent at the time.

[1116] Not at all the case.

[1117] The stock is like basically flat.

[1118] 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 of the company.

[1119] The stock gets punished basically all the way up until January of 1999.

[1120] And a few interesting things happen.

[1121] Are you okay jumping to 99?

[1122] Yeah, great.

[1123] I was going there anyway.

[1124] So a few interesting things happen in 99.

[1125] One, Qualcomm starts to realize it's a pretty serious drag on our business to have this super capital intensive manufacturing operations.

[1126] 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.

[1127] We've got to do something about this.

[1128] So in March of 99, they sell their infrastructure business, the base stations, to Erickson, which was formerly one of competitors.

[1129] They're a big competitor.

[1130] It was part of a licensing deal of all the loss, or a settlement deal of all the lawsuits that popped up between the two companies along the way.

[1131] They're like, oh, great, we'll sell you our manufacturing to business.

[1132] I mean, and this is basically them looking and saying, I don't think we need that to bootstrap our strategy anymore.

[1133] I think at this point, we've got enough momentum that we don't need to make our own base stations.

[1134] We don't need to make our own cell phones.

[1135] So a thousand of the 9 ,500 Qualcomm employees, become Erickson employees.

[1136] Then they look over at their mobile phone business.

[1137] One fun little, not fun at the time, but fun now, little footnote on that sale to Erickson.

[1138] The employees that got transferred as part of that were so freaking pissed that they lost their Qualcomm stock options.

[1139] They got Erickson.

[1140] I don't think they even got equity in Erickson at all.

[1141] They actually filed a class action lawsuit against Qualcomm to like get their stock options back.

[1142] I mean, over the next 18 months.

[1143] the stock would basically be Tesla stock.

[1144] That's this crazy moment that we're about to talk about.

[1145] December 1999, Kiosera buys Qualcomm's mobile phone business.

[1146] So they now officially just sell chips that they call QTC, the Qualcomm CDMA Technologies Group.

[1147] And then they've got a second group, QTL, which is Qualcomm Technology Licensing.

[1148] It's just one and four.

[1149] The business model is now set.

[1150] They make silicon.

[1151] They make licenses.

[1152] They sell very high -margin revenue licenses to their patent war chest.

[1153] That's the business model for the future.

[1154] They no longer have this drag on them.

[1155] And they sell relatively high -margin semiconductor designs.

[1156] Because they don't fab any of the semis.

[1157] And when they're selling these designs, they're not just saying, here's a chip, give me $5 for it.

[1158] They're saying, how much you sell those phones for?

[1159] Yeah, we'll take 5 % of that.

[1160] And you say, what?

[1161] What if I want to raise prices on my phones?

[1162] Qualcomm says, yep, you'll still pay us 5 % of that.

[1163] And you're like, what do you mean?

[1164] I'll just go somewhere else.

[1165] And they're like, where are you going to go?

[1166] We own all the patents.

[1167] And by the way, in addition to paying us 5 % of the phones, I think you should pay us to license these patents too.

[1168] And all the customers go, what?

[1169] And Qualcomm goes, where else are you going to go?

[1170] You make them sound so evil.

[1171] I mean, they did invent it all, so they do have a right to monetize it.

[1172] And Apple did, and the DOJ did, the FTC sued them for antitrust.

[1173] Well, spoilers.

[1174] We'll get to that.

[1175] The punchline of all this, after the December 99 offloading of the handset business to Kiosera, which is actually a Japanese company, I also had Kiosera phones growing up.

[1176] Boy, you bought all the good ones.

[1177] I got all the good ones.

[1178] Well, you were on a TVMA network, right?

[1179] I was on Singular, which was a GSM network, which got bought by 18 and TOR.

[1180] It doesn't matter.

[1181] It all becomes CDMA anyway, in a sec, as we'll see.

[1182] In the year 2000, after this sale, the height of the tech bubble, you know, this is like on the benchmark episodes, we're talking about eBay, e -boys, benchmark's making billions of dollars, Yahoo's going nuts, like it's the internet bubble, it's the tech bubble.

[1183] And people are looking around, they're like, what powers the internet and what's going to power the next generation of the internet?

[1184] the single best performing stock for the entire year 2000 is Qualcomm.

[1185] It appreciates, the Qualcomm stock appreciates 2 ,621 % for the 366 days of the year, 2000.

[1186] I think it was a leap year.

[1187] Yeah.

[1188] It's, yeah, unreal.

[1189] 26 .2x in the public markets.

[1190] in one year, the best performing stock of the craziest year until 2021, until last year in the stock markets.

[1191] However, you would have had to know just the right moment to sell because it did not stay up there for very long.

[1192] It would crash down over the next year such that it became 18 months, such that it became only a 4x from its pre -1999 high.

[1193] But if you bought it on the way up, you lost a lot.

[1194] I'll take only a 4X on my 2021.

[1195] investments all day long these days.

[1196] Yeah, pretty great.

[1197] So, you know, that's like the core, just crazy business story of Qualcomm.

[1198] To take it from there to today, the next generation of cell phone networks, 3G, which Ben and I probably vividly remember probably many folks listening do too.

[1199] 3G, you know, that's when there was a lot of debate, especially in the U .S. about GSM versus CDMA and all thinking like naively you would think at the time like oh well all the folks were going GSM like this bad for Qualcomm DSM switched to CDMA anyway so like all basically all of 3G was CDMA in Europe and in the US just worldwide I mean they just ran the table yeah 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 a total you didn't have to encode anything from analog to digital.

[1200] When you're talking into your phone, you've got to encode the signal.

[1201] 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.

[1202] So it's already packets.

[1203] It lends itself perfectly to CDMA's digital required infrastructure.

[1204] Totally.

[1205] Then in 2005, Irwin retires as CEO, I believe, and also as chairman of Qualcomm.

[1206] Interestingly, his son, one of his four sons, Paul Jacobs, takes over and becomes the company's CEO.

[1207] Paul actually has a PhD in electrical engineering as well, spent his whole career at Qualcomm, rose through the ranks, becomes the CEO.

[1208] 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?

[1209] So Paul Jacobs becomes CEO.

[1210] Also in 2005, Qualcomm buys Flerian technologies for, $600 million.

[1211] Now, Flarion did some interesting, like they had some interesting products, but they had a lot of patents that would become essential for 4G.

[1212] 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.

[1213] So the key set of technologies here were OFDMA, which is, we're not going to get into it, but it was That's what 4G becomes.

[1214] It's sort of...

[1215] 4G was based on OFDMA instead of CDMA, orthogonal frequency...

[1216] Division multiplexing.

[1217] Yeah, we're not going to dive into it, but it was more efficient than CDMA.

[1218] CDMA, well, it was definitely the night and shining armor versus the previous set of technologies.

[1219] It didn't quite hold up to the claims or the future -proofing of sort of its evolution path that...

[1220] Which makes by this point in time it's 20 -year -old technology.

[1221] Totally.

[1222] So, but what we do see here now is, after the Flarian 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.

[1223] Yeah, it's interesting.

[1224] You know, so the Paul, the Paul Jacobs era of Qualcomm from 2005 to 2013, I think, 13, 14.

[1225] So somewhere, about a decade.

[1226] Yep.

[1227] You know, I think it's like very viewed at a very mixed light.

[1228] his big strategic initiative was getting Qualcomm into IoT.

[1229] IOT didn't really become a thing, at least at that time.

[1230] I mean, maybe it's starting to work now.

[1231] Yeah, it's starting to work now, but like not in the time.

[1232] Everyone thought it did.

[1233] And it was kind of like a lost era for Qualcomm.

[1234] But, you know, when you look back on it, two things that actually, like, were really great then.

[1235] One was that acquisition and getting, because initially Qualcomm was fighting OFDM and trying to have CDMA still be the state.

[1236] standard for 4G.

[1237] Eventually, they did pivot and get into OFDM.

[1238] So that was kind of an initial wrong move, but then a pivot in a save.

[1239] But two, that's when they start building the Snapdragon, you know, and mobile systems on a chip and CPUs and taking on more of the processing on the early predecessors to smartphones.

[1240] And that would just put them in such a good position for the modern smartphone era.

[1241] They sell the high -end Android chip today.

[1242] I mean, the world has sort of standardized around.

[1243] Apple makes the A -Series chips for your iPhone, and if you're buying a high -end Android phone, it's a Qualcomm, whatever.

[1244] I don't know all the model numbers, but Series 8, Gen 1 or something, is the Snapdragon.

[1245] Snapchat.

[1246] And they now brand everything, Snapdragon.

[1247] They do, which makes teasing some of this apart very confusing, because they've just slapped the Snapdragon label on so much that you're like, wait, but that's just an RF antenna.

[1248] How come it says Snapdragon?

[1249] And they're like, yeah, fake you out.

[1250] Like, that's the whole point of calling everything Snapchat.

[1251] I mean, I guess to be fair, like the silicon engineering and the chip design is so complete.

[1252] Even for like, oh, just an RF antenna, like, that is like a million times more complex than like any processor in a phone 10 years ago.

[1253] So it is truly differentiated work that they're doing.

[1254] But that was, you know, obviously a huge win.

[1255] And I, you know, to the point, I think today, Qualcomm makes on average about $20 for every smartphone.

[1256] sold in the world, including Apple iPhones.

[1257] Yes.

[1258] So let's get into that.

[1259] So I've got the timeline from here.

[1260] So going to 2009, this is when all the litigation really starts to happen, and people flip from Qualcomm, we think really highly of you, and you're a pioneer of technology and true inventors, which they are.

[1261] 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.

[1262] And so they lose a loss.

[1263] You capture pioneers.

[1264] That's another acquired t -shirt.

[1265] Value capture pioneer.

[1266] Or what's the phrase that I use for Apple, maximally extractive over their ecosystem?

[1267] So Qualcomm loses a lawsuit with Broadcom in 2009, has to pay $900 million in $200 million in 2012, Paul Jacobs at the helm makes a really bad bet.

[1268] Maybe it's a good bet, but bad outcome, on a reflective display technology called Mirosol.

[1269] They spun up a $2 billion fab to make it.

[1270] Well, they actually made a fab?

[1271] There's ultimately zero customers for this next generation.

[1272] The promise was clear.

[1273] Real companies don't have fabs.

[1274] It was supposed to be like a screen that looks like a magazine page, but they were never really able to reproduce the image quality.

[1275] That's right.

[1276] I was working at the Wall Street Journal at this time.

[1277] I haven't like, oh, man. That was the future.

[1278] Turns out the iPad was the future.

[1279] Steve Mollen conf comes in and becomes CEO, where I suppose gets promoted to become CEO.

[1280] Very technical leader.

[1281] He was C -O -O before.

[1282] Was C -O before.

[1283] But the problems, problems.

[1284] They keep growing revenue.

[1285] They keep doing well as a company, but the ecosystem issues for them, an ecosystem reputation continues.

[1286] So in 2015, they enter into not just an issue with other companies, but now with nations.

[1287] So they have a licensing dispute with China.

[1288] You have an activist investor who comes in that same year.

[1289] John, a partner's to try to split up the licensing and the chip business.

[1290] That activist investor is kind of saying, why do these need to be the same company?

[1291] The licensing business is printing cash.

[1292] And at this point in time, many semiconductor companies have split out the actual chip operations and the IP.

[1293] A lot of old semiconductor companies are basically just litigation companies at this point.

[1294] Yeah.

[1295] So that's the Broadcom model.

[1296] So it's interesting to say, okay, what is Broadcom at this point?

[1297] Broadcom is actually a company called Avago, where the CEO of that basically made a bet and said, I think the semiconductor industry is no longer experiencing growth.

[1298] I think that industry should be harvesting profits, because 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 settled frontier.

[1299] And what should be happening is we should be rolling up these companies.

[1300] So Avago buys Broadcom, takes Broadcom's name, buys some other stuff like LSI Logic.

[1301] ElisI Logic.

[1302] Oh, big Sequo win.

[1303] Don Valentine's, one of his first very few investments.

[1304] And really the Broadcom strategy, is to roll up the semiconductor industry, squeeze them as much as possible.

[1305] In fact, they're basically a private equity firm.

[1306] Broadcom is borrowing lots and lots of debt to make the acquisitions that they're making and then squeezing them for profitability.

[1307] So, John...

[1308] You've got my favorite piece of Broadcom history trivia that Avago, the sort of core of the, you know, what Broadcom is, actually...

[1309] started its life as Hewlett Packard's chip division.

[1310] What a sad state of affairs.

[1311] Yep.

[1312] 2015, the company shakes off Janna Partners and doesn't split out the two businesses.

[1313] I think that was the right call, and I'll tell you why in Playbook.

[1314] But we were talking about Broadcom.

[1315] 2018, Broadcom comes in and tries to do a hostile takeover at a $117 billion valuation.

[1316] And interestingly, it was financed by $106 billion of debt.

[1317] So, that company for the rest of its life, I mean, that would basically just be Qualcomm servicing the debt.

[1318] So, interestingly, the Trump administration got involved and said it would be a national security concern and block the deal.

[1319] And while that may have been true for the reason that the Singapore -based Broadcom was sort of joined at the hip with Huawei.

[1320] He did a lot of business with Huawei.

[1321] This, I think, ends up being a big win for Qualcomm's lobby.

[1322] I think they had great relationships with the U .S. government and always have since the early days in being a government contractor.

[1323] And a lot of people that we talked to viewed, or at least I talked to, viewed this as Qualcomm being able to call in a favor and say, this is a national security concern, don't you think?

[1324] We're calling in the favor now.

[1325] It's totally true.

[1326] I mean, like, this deal was going to go through and Qualcomm was going to be everything you were just talking about with Broadcom, which would have been very, especially now, like, We know about, like, semiconductor, like, everything, like, it's just like, this is one of the huge wins of the Trump administration, you know, for, like, America was keeping Qualcomm an independent American company.

[1327] 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.

[1328] Yep.

[1329] So, in 2017, going back one previous year, both the U .S. federal trade.

[1330] 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.

[1331] And this is one that I want to sort of dive in on.

[1332] We spent a bunch of time advancing through the timeline to really get to this particular point, which I think is a great place to zoom in on Qualcomm's strategic position today, is this Apple lawsuit.

[1333] So some background.

[1334] Apple has always used either Samsung processors in the first iPhones until they switch to their own.

[1335] But they still had to pay Qualcomm patent royalties for whatever RF stuff they were using.

[1336] So whether, you know, let's treat the CPU as its completely own world, transitioning from Samsung to the A -series processors.

[1337] Apple probably has to buy stuff from Qualcomm.

[1338] Maybe they could look somewhere else, but either way, they're paying Qualcomm, the licensing for it.

[1339] Today, Apple does use Qualcomm cellular modems, which started in 2011, and there was just one year where they used Intel, where they did not use Qualcomm.

[1340] We're going to talk about that.

[1341] So the way that I essentially perceived this and why Apple eventually initiated the lawsuit is Qualcomm got greedy.

[1342] They had patents on technologies that were part of standards that were set by industry consortiums all over the world, and they leverage those patents in basically every way possible.

[1343] And here's the economics as far as I could sort of suss it out.

[1344] So they asked Apple for $7 .50 per phone sold, which comes to about $2 billion a year, plus an additional eight to 10 when they were going to raise prices later.

[1345] And so you quickly get to a situation where that Qualcomm was sort of expecting Apple to pay $17 just to license patents, which is on top of the price that they were paying for those baseband chips.

[1346] So, rack rate for a baseband chip, and baseband chips are the same thing as sort of cellular modems, is $30 a chip.

[1347] And it's not actually $30.

[1348] It's more like 5 % of whatever the average selling phone prices.

[1349] Oh, guess what phones have a really high average selling price?

[1350] iPhones.

[1351] 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 Qualcomm makes.

[1352] And further, if you back out the $14 million a year from QCT, their chip segment, that doesn't come from 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 radio's product line, which we'll also talk about.

[1353] This is cool.

[1354] Apple could make up up to one -third of Qualcomm's handset chip revenue.

[1355] Now, analysts have estimated that Apple negotiated down from $30 to $10.

[1356] Apple's general counsel during the lawsuit let the number $18 slip.

[1357] So whether it's $10, 18, or $30 a pop, that is an enormous amount of revenue that Apple pays Qualcomm.

[1358] Again, not for a Snapdragon, not for the CPU, not for the system on a chip, just for the RF cellular modem.

[1359] Wild.

[1360] So there's some other interesting things that came out in this lawsuit.

[1361] Qualcomm asked Apple to speak out against Wi -Mex, which is a competing technology.

[1362] They were like, we need you to vocally speak out that our competitor is a bad piece of technology.

[1363] 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.

[1364] So what Apple is basically doing is biting their time for there to be an actual credible competitor.

[1365] 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.

[1366] We think your cellular modem's business is like close enough where our customers won't notice the difference and we can tell Qualcomm that we're going to use you and try to give us enough leverage there.

[1367] What Qualcomm interpret that as is, well, now you owe us a billion dollars.

[1368] Because look at our original deal we did.

[1369] 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 non -discriminatory, or Fran, is the industry terminology.

[1370] And Apple's basically alleging, look, you're abusing the market because it's not fair, reasonable and not...

[1371] You're highly, highly unreasonable in the way that you're charging us this.

[1372] So, around the time of the iPhone 10S and 10R, those phones actually did use Intel modems, but what was basically happening is the Intel modems were falling further and further behind Qualcomm.

[1373] Apple was realizing, oh, crap, we're going to miss 5G, because there's no chance that Intel catches up and can actually develop a credible 5G chip.

[1374] And so they end up settling and sort of backing off their big lawsuit with Qualcomm.

[1375] Well, and this is where we're going to escape our technical level of competency quickly if we haven't already.

[1376] But like 5G is like it's pretty cool.

[1377] And this is where like you were talking about patents, this all sounds so like icky.

[1378] 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.

[1379] And they're like, it was so crazy complicated to make this stuff work back then.

[1380] now it's just like a factor of a million more.

[1381] Like the amount of processing, what Moore's Law has had to come up the curve to enable something like 5G is unreal.

[1382] Like there's a dedicated processor in front now of the RF stack.

[1383] Yep.

[1384] To do all the crazy multiplexing that is required for 5G bandwidth to work, right?

[1385] Yes.

[1386] So this RF front end, okay, so here's a fun little...

[1387] So what is 5G?

[1388] It actually is an open question.

[1389] 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 just requires incredibly sophisticated electronics to make it work.

[1390] Not only that, but when you have really high -frequency, and again, we're right on the edge of our competency here, but when you have really high -frequency radios, they can't transmit through a lot of stuff.

[1391] It doesn't handle concrete well.

[1392] And so you end up needing a little base station on every street corner.

[1393] Now, it can give you like 10 gig internet.

[1394] Like, it's crazy, but it needs to be really close to you.

[1395] And so as the telecoms were starting to build this out, of course, the initial review, they say, we now have 5G.

[1396] In fact, they even rebranded a bunch of LTEs stuff to be 5G.

[1397] So it would show up as 5G on your phone.

[1398] I remember AT &T did this, right?

[1399] They were like, all of a sudden, because I was on AT &T at the time, used to say 4GLT, and then all of a sudden it just said 5G on my phone.

[1400] Or 5GE?

[1401] You're like, really, 5GE?

[1402] Like that's exactly the same stuff I was using before, but now you've rebranded it.

[1403] So occasionally you'd walk by something that actually had a millimeter wave tower, and it would over, it would be like, oh my God, this is the fastest internet I've ever experienced.

[1404] And then you'd like walk across the street.

[1405] Oh, I remember like Nealai at the verge doing like videos.

[1406] Yes.

[1407] Nealai is like the world's expert on this.

[1408] Yeah, yeah, yeah.

[1409] on a specific street corner in like New York City or San Francisco getting like...

[1410] 5G is a 10 out of 10.

[1411] And then you take one step to the right and you're like back on 4G.

[1412] So here we are in 2022, five years after the initial hubbub about 5G started for consumers.

[1413] And what is 5G?

[1414] 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.

[1415] as 5G also.

[1416] So now what that does to chipmakers 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 is calling their RFFE business.

[1417] The RF frontend basically needs to, at any given point, adjust in real time, depending on what flavor of 5G you're accessing so many different windows of spectrum, so far across the spectrum bands that like, yeah, there's oh, man, think about, like, back to the original Hetty Lamar and frequency hopping, like, it was all within one band.

[1418] Now we're talking about, like, a crazy number of bands.

[1419] So, Apple, going back to the Apple lawsuit, Apple's sort of realizing we're screwed here, if we don't have Qualcomm as our customer, so they settle with Qualcomm, and this is in 2019, Apple says we will continue using Qualcomm's radios for now.

[1420] I think they negotiated some discount to the exorbitant fees that they were having to pay Qualcomm.

[1421] Apple also paid $4 billion, now switching over to the licensing side of the house, to secure the patent licenses over the next six years.

[1422] I think it was $4 .5 billion for a six -year deal.

[1423] It's actually unclear who really wins here.

[1424] I think Qualcomm wins in the short term because Apple's backup solution of Intel's modem fell entirely behind.

[1425] 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.

[1426] We know based on, 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 the next version of the iPhone that comes out in November of 2023 will continue to use Qualcomm's chips.

[1427] Like, even though Apple has been working on their own cellular stuff for whatever, semi -on -the -modem.

[1428] Yes.

[1429] It's ludicrously hard to build the stuff that Qualcomm has built.

[1430] So even next year's iPhone will have Qualcomm, R -F front -ends, and I think they use RF -front -ins, and cellular modems.

[1431] But after that, Apple's definitely going to try and take this in -house.

[1432] But Cristiano, the CEO of Qualcomm, set on the most recent earnings call, after that, we do anticipate having almost zero dollars come from Apple in our, chips business.

[1433] So at least they're foreshadowing to their shareholders, Qualcomm is that they think Apple's going to succeed at this.

[1434] It's just going to take a couple years.

[1435] Well, this feels like the perfect time to talk about the other strategic chess move that Qualcomm made here.

[1436] Yes, Nuvia.

[1437] Nuvia.

[1438] So this is another 2021 move.

[1439] So Qualcomm bought this company called Nuvia for $1 .4 billion.

[1440] What is Nuvia?

[1441] Well, Nubia was founded by former Apple Silicon people, including the chief architect of the A -series chips.

[1442] That seems like a good get.

[1443] Yeah.

[1444] And so...

[1445] Back to P .A. semi.

[1446] Yes.

[1447] So this...

[1448] One way to look at it is this is Qualcomm's ticket into the laptop CPU slash system on a chip market.

[1449] 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.

[1450] And phones, too.

[1451] I mean, like iPads, phones, tablets, like, this is crazy.

[1452] This is where it gets interesting.

[1453] So, Snapdragons, for anyone who listened to our ARM episode, you'll remember the difference between Arm makes an instruction set architecture that you can license, or you can go big with them and just buy one of the actual arm design ships off the shelf.

[1454] Like buying a solution, you might say.

[1455] Yes.

[1456] Snapdragons use an off -the -shelf arm design for their CPU.

[1457] Apple just uses the arm instruction set but has done their own custom design to get the most performance.

[1458] And that's why Apple Silicon is so far ahead of the competition.

[1459] 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.

[1460] Unfortunately, like Qualcomm, everything cool about the Snapdragon chip doesn't actually include the CPU.

[1461] The CPU is just a standard issue.

[1462] Yeah, the standard issue arm.

[1463] arm design.

[1464] This is cool.

[1465] So this is the path for Snapdragon to get on par with Apple Silicon.

[1466] Yes, and for their CPUs to actually, exactly.

[1467] But one caveat to this whole thing about like maybe they'll do laptops, maybe they'll do servers.

[1468] Qualcomm actually doesn't really want to do any of that.

[1469] Qualcomm historically has failed every time they've tried to do servers or watches or smart home or displays.

[1470] Every time they've strayed too far from their core competency, it hasn't been good.

[1471] Probably what Qualcomm really wants is 20 bucks from Apple for every iPhone.

[1472] I think that's a reasonable path forward.

[1473] The CEO is pitching a much broader story than that to shareholders these days.

[1474] So what Qualcomm actually wants is for the Nuvia team to sort of like invest where they see the frontier going, where they see a much bigger Tam, where Qualcomm sees a multi -hundred billion dollar opportunity, and that is IoT Automotive and the RF front end.

[1475] And so they sort of describe phone modems and phone systems on a chip as almost like a legacy business, and they're highlighting these other areas as sort of the growth business as the frontier.

[1476] Interesting.

[1477] But either way, Nuvia seems to be the ticket, because if you can custom design chips using the ARM ISA but be like the performance of Apple Silicon, I don't care what you're putting those in.

[1478] That's a really good, powerful thing.

[1479] Well, just, I mean, even like for technology, the technology industry writ large, to have, just like with Android, you had an, you know, iPhone rivaling operating system available off the shelf for any kind of application that let a million flowers bloom.

[1480] Yep.

[1481] To have the same thing for Apple Silicon, like, that's pretty cool.

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[1510] There are two other small things that happen that I think let's just sort of skip.

[1511] I'll mention them briefly, but let's get into analysis.

[1512] Paul Jacobs got kicked off the board of Qualcomm in 2018.

[1513] He tried to take the company private through a buyout when there was all this sort of tumult about, is it going to be bought by Broadcom, all this stuff?

[1514] And the board said if you're going to try and make a hostile take over and LBO the company yourself, you can get right off the board.

[1515] And so there are no members of the Jacobs family on the board directors anymore.

[1516] The other thing that happened in 2016 to 2018, Qualcomm tried to acquire NXP semiconductors, but I think eventually China sort of just like dragged their feet enough to kill that.

[1517] It got tied up in the whole Broadcom thing.

[1518] Yes.

[1519] But quick review of where they are today, and then we'll go into analysis.

[1520] Qualcomm today has a $120 billion market cap, which, two things.

[1521] One, that's astonishing, that's impressive.

[1522] They're technological pioneers and they're amazing at value capture.

[1523] Two, that is the same price that it was worth at the peak of the dot -com bubble.

[1524] Wow.

[1525] And just about the same amount that Broadcom offered to buy it for it, right?

[1526] Yep.

[1527] Which is interesting.

[1528] You know, by revenue, I think revenue and probably also a number of chips, they are the largest fabulous semiconductor company in the world bigger than NVIDIA, but a way lower market cap than Nvidia.

[1529] Yep.

[1530] I mean, are you going to make a bet?

[1531] Like, here's my view on Qualcomm versus NVIDIA.

[1532] do you bet on the intelligent connected edge, as the CEO, Cristiano Amman, would put it, or do you bet on AI?

[1533] And, like, they're both megatrends.

[1534] AI has a far bigger potential, in my opinion, than the intelligent connected edge, which is wonderfully buzzed.

[1535] Although I do really have a genuine appreciation after doing this episode for, like, the amount of engineering that goes into wireless technological advances, which almost on a Moore's law.

[1536] Well, much slower than Moore's Law -like pace, but a steady drumby have continued to improve and now there's, like, no difference between 5G and, like, home broadband, like, and that's, like, incredible.

[1537] If you're standing on the right street corner, I mean, okay, they do 44 billion in revenue, chips make up most of that at 37 billion.

[1538] Licensing fees make up only $7 billion, but the licenses are a much higher margin business.

[1539] It's a 69 % margin.

[1540] I think it's earnings before tax margin on licensing versus only 34 % for the chips.

[1541] So there's a super efficient business there in licensing.

[1542] Revenues are growing 32%.

[1543] Earnings are growing 47 % year over year.

[1544] This is an amazingly high growth rate company.

[1545] Yeah, that's pretty awesome.

[1546] They almost doubled their revenue over the last couple of years, too.

[1547] So Christiano is definitely coming in on a high.

[1548] Doing a good job.

[1549] Cristiano is the new CEO as of last year.

[1550] I think he's been in for about a year.

[1551] So into analysis, what power do you think that Qualcomm has?

[1552] Patents.

[1553] Is that a cornered resource?

[1554] I think that is a quartered resource.

[1555] Oh, I think, yeah, Hamilton in Seven Powers, I think he does say patents are a cornered.

[1556] I think they're in the canonical description of a cornered resource.

[1557] That for sure.

[1558] they had at least maybe still do have network economies in the infrastructure side of the telecom industry and the handset side like you have to one locks in the other one locks in the other like if you control the infrastructure standard all the handsets will have to use that yep if all the handsets use XYZ standard then the infrastructure will have to you and so like being able to control both.

[1559] I think there actually was a network effect there.

[1560] I also think there's scale economies.

[1561] If you are a fabulous chip company, then is worth all the R &D going into creating a snapdg, designing and creating a snapdragon and realized across a huge number of customers.

[1562] So, like, it's really hard to start the next Qualcomm if the frontier you want to compete on is making a better Snapdragon.

[1563] That's not going to happen.

[1564] I've got a fun one here.

[1565] That's both fun to talk about because it always is, but I think actually as a, I feel reasonably confident in.

[1566] I think Qualcomm during the golden years that we told the history of had real process power.

[1567] I think it was equivalent to the Pixar Brain Trust.

[1568] Like that set of people working together under those set of circumstances were wholly unique in the industry and the world.

[1569] And actually, it's interesting.

[1570] Like I read all, you know, besides the Qualcomm equation book, from Dave Mock, which is amazing.

[1571] There's a ton of history out there about Qualcomm, especially in, like, local San Diego.

[1572] Like, lots of local San Diego publications and history books and stuff.

[1573] Especially because the Jacobs has given hundreds of millions of dollars to support the community.

[1574] We didn't talk about this, but Irwin is...

[1575] Erwin is one of the great philanthropists of the past century, like, undoubtedly.

[1576] But to UCSD, the UC system, so much of building infrastructure in San Diego comes from Qualcomm and the Jacobs family.

[1577] So going and doing all the research.

[1578] all these local San Diego publications and, you know, historical documents, they all talk about the like wealth, the wellspring of startups and other technology companies that came out of Qualcomm.

[1579] And indeed, there are like, you know, Link of it in Qualcomm, there are like 100 plus in the San Diego area that came out of Qualcomm.

[1580] But you compare that to like the Silicon Valley, like what came out of Intel, what came out of Fairchild, what came out of the Trader's E, there's not the same diaspora of success in Qualcomm, like plenty of success.

[1581] And Solana and Toli is part of the Qualcomm to diaspora.

[1582] So it's not like there's none, but not at the same scale.

[1583] And I think that actually, de facto shows there was process power.

[1584] Like, it was that unique group of people in that unique situation.

[1585] Oh, that's an interesting sort of like proof by example.

[1586] Deductive proof.

[1587] Do you want to talk about the Bear and Bull case for the company?

[1588] I have a few.

[1589] Okay, go for it.

[1590] All right.

[1591] So here's the Bear case.

[1592] Qualcomm has very real competition from the low end that we didn't talk about.

[1593] about.

[1594] An example is MediaTech, who not only makes the baseband modem chip, but also systems on a chip using the stock ARM CPU designs.

[1595] So MediaTech systems are way cheaper than Qualcomm, and I think they actually just surpassed Qualcomm in terms of number of units shipped.

[1596] And so all the low and mid -end Android phones are using MediaTech.

[1597] And so Qualcomm kind of needed to buy Nuvia in order to differentiate the CPU.

[1598] and not just be using the stock arm design that Media Tech and everyone else is using on much cheaper chips.

[1599] 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.

[1600] They're just constantly in lawsuits.

[1601] I mean, we didn't talk about this, but like China, South Korea, EU, Taiwan, all these nations have sued or respected.

[1602] So many law firms must just be, making a fortune off of this industry.

[1603] And the last one for the bear case for me is, I really think that they finally poked the bear, talking about their customers, enough to make them want to actually do something about it.

[1604] The goal for Qualcomm should have been make as much money as you can without pissing people off too much.

[1605] And I think over the last decade, they really upset Samsung, Apple, so many people that are starting to at least make their own radios or even consider systems on a chip.

[1606] 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.

[1607] Qualcomm may lose their leverage to actually get a royalty out of each phone sold.

[1608] Now, licensing business is going to continue to be a juggernaut, smaller in revenue, but higher in margin.

[1609] But, you know, that is the sort of bare case on the current silicon business.

[1610] Now, the bull case, like maybe the lawsuits thing is actually a bull case.

[1611] They managed to keep making more and more money and have been reaffirmed over and over again in a bunch of jurisdictions that, you know, they settle their way out of these lawsuits or they, whatever, but they're able to keep making tons of money.

[1612] The big bull case is you believe that this shift to automotive, IoT, and 5G RF front end is real.

[1613] 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.

[1614] Automotive does $2 billion in revenue.

[1615] That's a very real business.

[1616] The RF front -end business that we were talking about, that does $4 billion a year in revenue.

[1617] It's interesting.

[1618] I mean, we rented a car here in Lisbon for the family, and of course it has data built in, you know, 4G or 5G data right in, as does like just about every new car these days.

[1619] Yep.

[1620] The IOT segment is now doing over $7 billion a year.

[1621] Qualcomm thinks overall, this is a $100 billion opportunity.

[1622] There's a bigger narrative that Cristiano is trying to espouse around this intelligent connected edge that they call a $700 billion opportunity.

[1623] Getting to massive numbers.

[1624] I know.

[1625] It reminds me a lot of the NVIDIA slide that talks about their trillion dollar tam.

[1626] I mean, they're executing very well, but I think they're trying to sell a story in terms of addressable market that is hand -wavy.

[1627] Yeah.

[1628] All right, Playbook.

[1629] So, in the early days, this is a thing that we didn't talk about.

[1630] We talked about 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.

[1631] No phone company was going to take a dependency on the CDMA technology when just one vendor existed.

[1632] And so they needed to evangelize and create their own competitors so that their customers could feel safe with this new technology.

[1633] But of course, as long as they kept something secret of how to eke out the absolute best performance from the innovations, they actually could still be the leader.

[1634] So it was like figure out how to get a bunch of other people just good enough, which is fascinating.

[1635] It's such an amazing case study in bootstrapping an industry.

[1636] Yes, yes.

[1637] Similarly, they had a clever tactic in their IP strategy.

[1638] 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.

[1639] And there's enough things patented so that you can't achieve any of these things, these magical things that we've been referring to all episode, these layers of magic, without paying Qualcomm.

[1640] But they don't patent everything because they want to keep an advantage for like consulting revenue or 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.

[1641] And you can pay us to, you know, basically generate services revenue for you to work with our engineers.

[1642] I was thinking about this for Playbook as we were going to.

[1643] There's this really interesting dynamic to this industry that lends itself well to the IP and patent monetization scheme that Qualcomm has adopted, which is that the successive generations of wireless network, you know, geez, happened just fast enough that it's within the patent lifetime.

[1644] Yes.

[1645] So that, like, you know, all that core CDMA patent, like, all those patents are expired now, but it doesn't matter because we're so many generations beyond that, like, those patents are now worthless.

[1646] Yeah.

[1647] So you get all the useful life during the protection period of the patent.

[1648] And then when it's, you know, it's not like a generic drug where, like, you know, Advil is still or Tylenol or whatever is still, like, you know, useful.

[1649] Right.

[1650] That's a great point.

[1651] 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 10 years later for 3G.

[1652] So this is like one of the few industries where there's these super quantized time windows that exist when you can actually get in.

[1653] Yep.

[1654] Another one that I thought was pretty interesting, because I mentioned I think the businesses actually make sense together.

[1655] the licensing business offers Qualcomm predictable high margin revenue that they can basically use to fund R &D.

[1656] So because they know they're going to keep getting that, and because it's a big revenue stream, it lets them sort of take bets on new R &D.

[1657] 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.

[1658] So there is, I think there is a credible argument of why you want to keep them together.

[1659] There's also a...

[1660] And Qualcomm makes that argument explicitly.

[1661] Totally.

[1662] The not very credible argument is this thing's a cash coward.

[1663] We want to keep our rich uncle around to make this a nice place to work.

[1664] And, you know, like they have several, I think they have nine airplanes.

[1665] Like, it's a relatively cushy company, from what I understand.

[1666] Well, San Diego is a very nice place.

[1667] Yes.

[1668] I do think the big picture is that the U .S. government's patent system has granted Qualcomm a monopoly.

[1669] And 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 U .S .'s regulatory system.

[1670] They've basically said, and then reaffirmed in a lot of these rulings, you are allowed to capture a ton of value from this.

[1671] And there's so many good debates about whether the patent system exists and serves its intended purpose of enabling.

[1672] people to spread the news about their innovation so other people can add it.

[1673] 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.

[1674] But there's no way to argue that this is anything but a perfect execution of the game on the field.

[1675] Yeah.

[1676] It strikes me telling this whole story that like, think about early stage venture capital company building and the like, you know, you said Ben, we were telling the story.

[1677] If you were to give a venture capitalist the Qualcomm pitch.

[1678] 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.

[1679] And then another miracle happens and then we succeed at that.

[1680] 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.

[1681] Like, because if you're betting on a miracle.

[1682] But sometimes if you.

[1683] have a team that because this wasn't just like and then a miracle happens if you listened closely and like really knew this team they like really knew they had really high degree of confidence that all of these tight you know threading the needle moments were going to happen yep um and it really to a degree that just blows my mind i've never heard anything like it yeah 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, some person walked in off the street and said, like, gave you the Qualcomm pitch, for sure, it would not work.

[1684] For sure.

[1685] 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.

[1686] This is a business of exceptions.

[1687] 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.

[1688] Like, you know, but sometimes.

[1689] But sometimes.

[1690] It never works, but sometimes it does.

[1691] But sometimes it does.

[1692] That's what makes our industry fun.

[1693] All right.

[1694] So we're going to not do grading because we've decided to kill grading until we otherwise resurrect it.

[1695] But I do think it's worth articulating a little bit of a takeaway.

[1696] So my takeaway on Qualcomm is 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.

[1697] And in order for the next decade to be as successful, they need to be absolutely correct about their growth businesses around IoT, around automotive, and around whatever the intelligent connected edge ends up describing, because I think those are technologies that we don't quite know what they are yet.

[1698] 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 onto their games a little bit.

[1699] and are going to squeeze them from a bunch of different directions.

[1700] Yep.

[1701] Well, yes, totally agree.

[1702] I think the best version of the intelligent connected edge that I've heard Cristiano articulate is you sort of put plainly like, hey, we all agree that, like, the cloud is like a thing.

[1703] Like, we did the AWS episode.

[1704] There's over $100 billion in, like, revenue backlog in the cloud.

[1705] Yeah.

[1706] We talked about on the AWS episode, like, snowball and snowmobile and, like, getting data to and from the cloud, it's like still like one of the major pieces of lock -in.

[1707] And like you think about how data gets in and out of the cloud.

[1708] Most of it's not by snowmobiles.

[1709] Right.

[1710] It's connected on the edge.

[1711] And so if you think about it like that, you're like, okay, yeah, I can buy that this is a, you know, trillion dollar market.

[1712] But how do you capture value in that and can they capture it in the same way that they have in the past?

[1713] Like very much open questions.

[1714] Ooh, listeners, that was a total blast.

[1715] David crazy to do a live show like that with no guest for two and a half hours on stage, just you and I. Yes.

[1716] And a professionally operated boom arm camera.

[1717] Yes.

[1718] If you haven't watched the video version of this, just go check it out on YouTube or Spotify or anywhere just to see what that looked like.

[1719] It was a very fun spectacle to get to do that.

[1720] Our huge thank you to the Salana Foundation for hosting us at Breakpoint this year.

[1721] It's a really great event and fun to be in Lisbon.

[1722] When you finish this episode, come talk with us, Acquired .fm slash Slack, 13 ,000 other smart, thoughtful, kind people.

[1723] If you want some of that sweet, acquired merch everyone is talking about, go to Acquired .com slash store.

[1724] I know in the next few weeks there's going to be a couple of new designs dropping inspired by catchphrases from episodes where I applied my graphic design skills for better or for worse.

[1725] It's the perfect time to sign up as a customer for Brex to get one of those.

[1726] Yes, that's right.

[1727] If you don't want to pay for your t -shirt, brex .com slash acquired, much cheaper way.

[1728] You also get to be a Brex customer, so wins all around.

[1729] Win -win.

[1730] If you want to listen to the LP show, we have had some awesome, awesome episodes recently.

[1731] We just interviewed Jay Hogue, which is a super rare interview to get.

[1732] Jay is the founder of the $21 billion firm TCV, formerly technology crossover ventures about their story and his personal philosophies.

[1733] 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.

[1734] You can search Acquired LP show for free, publicly in the podcast player of your choice to catch that.

[1735] Without listeners, we'll see you next time.

[1736] We'll see you next time.