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I walked, and the first thing I saw was the bottom of the big crane. Will mom with the weight sounds like, why are there olympic weights here? And then I was like, oh, because we got a professional boomer m. camera. This is amazing.

right?

Let's do IT. Get the two is. Story about two hundred and seven, episode six of acquired .

the podcast about great technology companies and the stories and playbooks behind them. I'm been gilborn and on the cofounder and managing director of seattle based pioneer square labs and our venture fund.

psl ventures, David rose ball, and I am an Angel investor based in separate cisco.

and we are your hosts. There's an incredible property of the universe where electro magnetic signals can be broadcast, travel through space at the speed of light to be received at a different point in the universe. Now a tiny fraction of these frequencies are detectable by humans as visible light.

Some other frequencies can be dangerous, like x rays or gama rays, but there's a part of the spectrum that is not detectable to humans and it's not harmful at modestovich that can be used to transmit invisible messages all around us all the time without any of us having any idea. It's like magic ah. These frequencies have been used for over a century to broadcast T, V.

And radio shows, presidential messages and important news updates. In the last fifty years, humans have gotten tremendously clever at purposing some parts of the R F spectrum to be used for cell phones. But the story of how we got from transmitting small messages on a single frequency to having billions of humans can currently sending megabits or gigabits of data every minute has been an incredible journey of invention and entrepreneurship. The company most responsible for the mind bending system of how IT all works today is calm, and today we will dive into their entire history and strategy, unpacking their products, which to the outside is really best described as a layer series of magic .

tricks and spoiler alert for listeners. This is an incredible ble story. I had no idea what we drove into the researching. This one is up there with, like in video A T S M C, there is so much stuff you can make up in the story. It's incredible.

Largest flex chip company in the world.

indeed.

The other thing we should say, listeners, uh, this was super fun to do, this episode live in person in lisbon are huge. Thank you to the salona foundation for hosting us at salona break point. Many longer listeners will know Austin federal from the slack. He was kind enough to invite us and and really fun to do IT there, especially given salon as tie to call come with anatomy. Having worked there for over .

ten .

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Yep, so learn how you can put A I agents to work for your people by clicking the link in the shower notes or going to service now, dcom ash A I dash agents after the episode, come talk about IT with us. There are thirteen thousand other smart kind people in the slack acquired data slash slack without further do onto our live show at a on a break point. And listeners know that this is not investment advice even, and I may have investments in the companies we discuss in the show is for information and entertainment purposes only.

Well, one bit to do before we dive. And the story is we are a big thank you to dave mock, the author of the incredible book, the qualcomm quality, which is not well known, that is the definitive history of coal com, and ranks right up there with among the best business books, business history that we've used as a source on acquired through out the whole history. The show, it's awesome.

And books not even really publish under like a real publisher. It's published dunder, an industry association. There is no audio book. There is no kindle. You have to read the physical book.

Yep, you it's amazing. I literally the other day tested by a photo that I noticed on the back cover. And then, of course, it's seen IT. Two of one of the blurb i'm i'm going to really hear now, says dave. Mark helps uncover the single most important business story, single most important business story that has yet to be told.

How well come came to rule the wireless industry? Think of IT as a recipe book of for one of the most innovative and leveraged business models of all time. Whose word does that sound like been?

That sounds like a deep business model thinker and someone who truly appreciates capitalism.

It's finest and is willing to go find the rare gems, the rare diamonds in the that is written and said by none other than bill girly, a benchmark capital for this almost unknown book. I bet this can be a lot more known after this episode.

you, well.

dave starts the book and it's such an after place to start with a quote by Edwin land who I was not familiar with until recently when David center on the founders podcast familiarized us with Edward din was the founder of polar IDE and Steve jobs hero uh, and he had this quote that dave starts this book with true creativity is characterised by a succession of act, each dependent on the one before and suggesting the one after. So with act one of the cocom story. We start in australia, hearing you up in the mid nineteen thirties, in the pre world war ti era as hitler and muslin I and the nazis were rising to power.

start. Is this the first time? We we don't say here in .

europe on a quietly IT is first time. IT is the first time. And we start you might think if you know anything about cocom history, you think of mid dirties like, oh, I didn't know irwin Jacobs, s.

Cofounder and CEO of cocom, was born in europe. He was not. He was born in new bed for mato sets with somebody very different. We start with one of the most famous film actresses, hollywood film actresses of all time, a woman named heady lamar. And side note, the fact that we're .

starting with hedy lamar on the story of how modern telex communications came to be is so cool. I remember we reached out to the nz s capital folks and said, hello, do any great resources on on calcomp? And they sent back this excerpt of you should go read up on heady lamar. I was like, are they trolling me right now?

You cannot make this stuff up. This is a like, why we do the show. So hey, was an incredible, he was like, just incredible human being.

SHE was world famous, incredibly talented actress, incredibly beautiful. SHE would later be built like the way mgm he was. One of the mgm starlets marketed her was as the most beautiful woman in the world. He was also a genius.

So he started in sampson and dala extasies agree, girl, many, many more ah but what most people at the time even happened to her death did not know and certainly her husband at the time in austria in the middle thousand and thirteen ties did not know was that he had incredible powers of observation and was way more intelligent than anybody else around her. So this said husband, it's quite character. Uh, his name was fredrick mando and he was not a good dude.

A, he was a native arms dealer, which made him very rich at the time, which is probably how you met, hey. And they became married heady, though probably unknown to fredrick and certainly unknown to his business associates, including hitler in user eni. Hey was jewish, and so fredrick would bring his beautiful film actress, world renown film actress, bride to his business meetings, you know, with the nazi military powers.

And hetty was listings in to everything that what's going on. And as the situation deteriorated one thousand nine hundred and thirty seven, SHE disguise ed herself as a as one of her mates and escaped to paris, and then from paris made IT to the us, went to hollywood d and lives in hollywood for most of the rest of her life. When SHE came to the us, though, he knew like an incredible amount of inside information about the nac war effort.

And SHE was incredibly motivated because obviously he is from a to wh family. SHE hated the not, hated her former husband and wanted to contribute. And specifically, he knew that the notes were working on and using the great effect, a radio gaming technique for radio guided torpedos that would be drawn from airplanes to attack and not see submarines.

It's also pretty amazing at this point in history that we had as humans the capability to radio guide torpedo. And the torpedo, you know, gets propelled, and you could guide IT using radio frequencies, deciding which way to turn the rudder. I did not know that technology existed in the thirties.

This is quaintly the computer the digital computer doesn't exist yet. The concept of digital doesn't exist because we're going to get to that in a minute. Ah this is all being done essentially with FM ideas. And so hedy wants to contribute to the ali war effort. And when you say with FM radios.

therefore pretty easy to jam if you know that someone's broadcasting on gman ninety two point three and you start another signal and ninety two point three, you disrupt their signal and they're not able to hit their target .

with the weapon totally. So hey, teams up with her new hollywood neighbor, a composer, a music composer named George antil bare with us here. I I promise this is getting to welcome who is a film music composer.

And they, with her ideas and his musical promise, they develop a concept that they patent, and they get issue to a confidential patent. This is confidential for decades in the U. S. Military.

by the way. This, I believe, did not become declassified until eighty eighty one. That's how long IT was buried inside.

Was issued in one thousand and forty two of four decades that this history was completely unknown. Uh, they develop a novel technique to defeat R F frequency jamin by using frequency hopping. And what they describe becomes the origin of something called spread spectrum technology.

So if you're familiar at all, would like the wireless world or qual command think you hear spread spectrum and you're like, oh, that sounds familiar. Red spectrum technology. This is the first like description of IT in a technical document and a pattern by these two like incredibly unlikely people.

And what IT basically means is any way that you're going to transmit a single message across a variety of spectrum. So rather than just on, i'm to keep saying in James ninety two point three to grounds IT in radio, but instead of just broadcasting on one frequency, they came up with this idea to hop, so change frequencies during different points in the message to avoid anyone trying to jam the and moved to a different frequency.

And the reason he teamed up with a music composer for this is that the way you make this happen is you have incredibly precise time thinking on, in this case, the two ends, but in a wireless you case, all end points of the communication channel, incredibly precise thinking, so that all end points know when to hop frequencies. And you're hoping frequencies like dozens or hundreds of times a second, and this can defeat jamming.

This is great for cpt graphs. This is great for sending coded messages. IT turns out this was not on anybody's rate. Are pon intended at the time. IT turns out that this is also the most efficient way to use radio bandwidth.

Let's put a pin in that for now. 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 times. So the transmitter to change the frequency, and the receiver knows to start receiving the message on a new frequency at very specific points in time.

The concept of digital hasn't been invented. So how are we doing this day? And was the technology used to synchronize a schedule of frequency hops between a torpedo and an airplane?

So here's where, if this were, you know, hollywood movie, like one of he, his films this single handedly would have like defeated the that ties and all that. Unfortunately, the reality is there, there was no digital computing at the time IT IT wasn't possible. The U.

S. Military tried very hard doing what we're going to make. This happened. The whole other military um they couldn't make IT work because I think about we are trying to do here.

And that vacuum tubes and analog computing was what was happening at the time. You would literally need to put like any act on a torpedo and draw p IT from the sky to make this happen. That was not feasible.

It's worth sharing how they're to type work though. So the way that they prototype this heady in the nineteen or one thousand nine hundred and forties is they took two player piano schools 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 score and the receiver that they did on the transmitter. And they pressed play on the player piano song at the same time. So would know exactly where to hop around.

yes. So there were at a frequency hops in their technical description of the pattern because there are A D eight eap ata. So I guess little, you wouldn't be dropping any air from the sky.

You'd be dropping a piano from, yes, cartoon, totally. okay. So that is the origin that you can make this up, origin of spreading crown technology. That's act one.

Act two, we stay in world war two around the same time, but a few years later there is a Young PHD grad, PHD grad from the master sets institute of technology. They are gust massage, its institute technology, who was working on code breaking for the allies. Very famously, i'd bell labs and at the institute advanced dy in prince in new jersey, where he intersects with luminary like Albert einstein, john funnyman, alan turing.

We're not talking about any those three folks, but by process of elimination, you can probably figure out who we aren't talking about. 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 like digital did not exist before cloud. So during the war, all of this effort culminates in what he publishes after the war is his master work on a mathematical theory of communication, which defines a bit.

The new of field of information theory ushers in the digital era for the world. And combined with the other folks who we mentioned, einstein, turning the annoyance a and bell labs work on transistors during the war, these things come together to create the moderna of humans and the digital computer. So we've described, like the hollywood part we describe here, and act to codge shana, birth of computing. All that, and it's worth.

may be sharing a little bit about information theory. If can I take a second day, of course. right? So I heard people reference information theory or communications theory dozens of times over the years. And every time I open up the wikipedia page, i'd see a bunch of complicated math equations.

And you quickly want to get to like, okay, but what is this? Why does everyone keep describing IT is so important? 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.

There is no communication that happens through nothing. You need some way to send signal from a transmitter to a receiver. And the method by which you communicate the way you send signal is governed by that medium.

And so what I mean by that, in particular, is, let's use the analogy of a conversation. 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. IT needs to be a super clear, super loud message because there's a lot of noise in the room.

Whether if you're in a really quiet room, then you can have kind of A A message with a bunch of noise, imagine someone talking, but there's a bunch of static. Well, that's OK. If the medium itself, the room that you're communicating doesn't have a lot of noise itself. So there's this relationship between how noisy a message can be and how noisy the medium is that you're communicating in.

And I think this is the very interesting aha moment where what he basically to do is, 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 um in the the message that you're trying to describe. So when I say entropy, let's say, David, you're expecting me. You think there's a ninety nine percent chance that i'm coming to deliver the message to you.

I just had breakfast. Well, if it's really loud, noisy room and there's i'm sick and i'm daughter and I tell you I just had breakfast because you were expecting yet, it's fine if it's in a really garbage medium. But if you have no idea what I am about to tell you and I could be everything from like a, hey, you're fired to I had breakfast and you have no idea like we need to have that a pretty pristine environment with really nice volume or gain on the signal. So that sort of the high level concept of of information theory, and more specifically of a shaan heartless theory describing the relationship between signal and medium.

Yeah super, super cool stuff. Um so where this all comes together in act three of our story here, which is gonna a little longer because we're getting getting to welcome as part of this is one early mark Jacobs american, born in one thousand nine hundred and thirty three, as we mentioned in scrappy new bedford master hute. It's which used to be, I believe, the wealthiest town in amErica during the whaling area, as we discuss during standard oil burner. I think so actually .

I was burchill, because forty five years before, or when Jacobs was born in new bedford, the a half way manufacturing, of course.

one thousand nine hundred and thirty three, new bedford was not the new bedford, the whaling era, shall we say? So irwin is a pretty amazing american story. So he grew up in like a very middle school family in this super scrappy a area of the country.

His dad were a bunch of jobs and ended up running a local restaurant called the boston beef market. Irwin was highly gifted in math sciences as a kid, going to school, if you wanted to study math and science, and probably would have wanted to study engineering, if you like, knew that existed college. But his high school guidance councillor famously told him that there is no future for math and science in new bedford. And Frankly, y's high school and county was probably right. So 2， when though had very good grades growing up, the guns councillor 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.

which he did.

which he did go to manager .

this engineering genius, this like american pioneer of the wireless communication industry, that is what he want to college for.

And he would later credit the year and a half that he spent in the hotel management school at corner before transfer to electrical engineering. He would create that you're in a half with really helping him start first link of IT, his first company, and then qualcomm, get out of academies and become an entrepreneur because he actually learned about, like business accounting, the real world applications, and found that like, he kind of love that too amazing.

So after a year and a half a cornel in the hotel managment school, he learns about engineering was like, oh, you can make money with math and science. This is actually like in demand. Maybe not a new bett, but like in the rest of amErica and so he goes to the d in at corner he tells the story that he's like, hello, is sir I soft more cornel? I would like to transfer from hotel management to electrical engineering and the deans like, oh, you mean electable engineering, the hotel management, right? Like, no, no, no, no hotel managed to be two electrical engineering.

No, I want to do the harder work. I want to do the harder stuff. After the dn like picked himself up off the floor, he allowed IT perhaps with the degree of suspicion um which he need not have because iran is another genius and the string of geniuses he would graduate go to a PHD at MIT which he would do in three years finishing his P D in in one thousand nine hundred and fifty nine studying under none other then collage shanon himself who after the war returned to MIT as a professor. It's pretty .

interesting because so many of these stories that we tell, there's an an immense element of genius, no question, or when Jacob s and. And and video and Steve jar geniuses. And also.

there are only ten people in the world who knew this stuff at the time.

and they were among them. Yeah, it's the most incredible right place, right time in history too, because without studying under clod shine and the father of information theory, it's extremely unlikely that ruin Jacobs becomes the urban Jacobs.

He went on to be totally and then without what's going to come later and head elmar that he would start um uh amazing. So 2 when is so Young？ Iran is so talented that um after he finishes his PHD in three years, me like five years removed from being a hotel management major accord and shannon and might ask him to stay on as a professor and MIT like immediately um which he does he spends five years teaching an MIT during which he teaches the first course like for students on digital communications in the world.

I believe you'd like applying shan's theory to like december among like practical engineers being trained at mmt he and a file of fact member write the first textbook on digital communications that is still in use today. You can still like IT is the bible of digital communication theory. You can buy IT on amazon and written by by irwin is still from the father himself of cochrane um he spends five years teaching them and then in one thousand nine hundred sixty four he takes a sebastian and heads out to california to do is the baths at gpl at the propulsion labs working on the U.

S. Space program and communications with with satellite in the U. S. A program at the time where he intersex faithfully with another recent M I T electrical engineering P H D grad one Andrea or Andrew, as IT was anglicized of the teri, a jewish immigrant from italy who got his PHD from MIT in fifty seven, who was working at gpl. And they become fast friends.

So fast friends, in fact, that when irin returns back to boston to cold, snowy, bleak boston near his upbringing in mass musette after his sb ticket, or when then gets a call shortly there after from one of his former professors at cornell that a new engineering school in cnd ago is being started, the new uc second ago, and there's an opportunity for Jacobs to come out and start the electrical engineering department at ucsd. He says, well, I really enjoyed my time out there. I've got this great friend, andy.

Let's do IT. I would make the exact same decision. So he, his family or and his family move out to ucsd. And while he's out there, he continues doing his contracting work with defense contractors and gpl in the U. S.

Space program. And this is sort of one off at at this time. I mean, he's like doing IT under his own name. He hasn't really started a company. It's just kind of a when doing .

contracting total, he is like the first you know like electronic during professor ucsd, that's a full time job. But because is in such close proximity, mity everything going on a gpl and NASA the lake, he's doing that and your kind of like one day a weakish and one day he and andy and another professor from U. C, L.

A are up at at NASA aims in mountain doing consulting work out there. They're flying back and they're all kinds of mental. They like this is super cool that we're doing this. We're making more money than academia were helping our country were participating in the space race. But it's kind of hard to like baLance all this stuff that we're doing.

Maybe, hey, what if the three of us ban together and for a company, kind of a shell company, to just kind of manage this consulting work that we all, again, we could probably get some no efficiencies here, maybe higher and assistance help us out that kind of something. They say, great. No, we don't intend this to be a real company when I going make any products or anything as is just to manager or are consulting um they serve tongue cheek, decide to call IT link a bit like linking a bit, very like academic joke ah.

So who is this third partner in a link a bit? He ends up not kind of jelling with the other two leaves shortly there after his name is then kin rock. And I read that the first time and I was like.

i've heard that name before. I know that name. And i'm going to guess ninety nine percent 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 .

bring about yeah well, you know, first year you read the story. You like man boma for a land he missed out on founding calm. Well, he actually ended up, okay, because instead of founding coal com, he founded the internet.

He literally was the, I think, the founding engineer on the arpanet t project. Yes, darpa.

you many people were involved in the arpanet t then. And one of his grad students at the time at U. C, L, A, like the next year right after this is happened, is all happening.

At the same time, they sent the first message on arpanet. T even like the first internet transmission ever from U. C, L, A to stanford.

He's one of the core founding fathers of the internet so he ended up doing okay. You probably to make as much money but he will be a remembered in history pretty amazing. Um so andy, and iran, they're mostly continuing to work on NASA and navy defense projects in sad because of course india o is A U S.

Navy town. Um and most of what they're doing is working on satellite communications. If you don't want anything about salt like communications, the banned with that you have available to you is very, very narrow and you need to be very, very efficient with your communications.

And that's still true to this day. I mean, any any a company in the sort of emerging space economy, it's a totally different engineering problem then 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 band with and actually make sure you have the right time window to update the code on the satellite. So IT still kind of works the way that computers work thirty, forty years ago.

And so there, you know, IT wasn't demand like this, was the military there is they got exposed to this trolling to find the best, best, most efficient ways to use this narrow band with channel that they had and what ends up getting used. But this old patented spread spectrum technology from the world war two era, invented by head lama and George at deal.

And the timing is perfect because the time of link a bit is this sort of early, where .

the years .

of link a bit before.

oh yeah, yeah, there's a long link a bit is involved. We, you may not know, i've got some good surprises for right? So they start doing more and more of this earl's exercising that like hotel management sort decide of his brain as he doing to see finds that you really enjoys IT. They start bringing on other professors, other grad students into link a bit to kind of build the sort of lake army of the greatest. You information theory and wireless signal minds in the country offer .

defense contracting.

almost offer. I don't think they were doing any commercial work at this point. I think he was all NASA and defense, yes, and almost all sample.

I work. And so they start building the company that eventually, in one thousand nine hundred and seventy one, there's so much going on. Irwin decides he's gonna take us about tic from ucsd and spend a year just organizing the company.

He ends up never going back to ucsd ever, because during that year they get the idea I think I was during this year. Maybe theyd started to have inkling up before. That is really nice.

Theyve got all this technical talent they're consulting on these projects that defense contractors mostly are the prime bitters for delek. Wait a minute. Those guys make all money. Where do you in all the difference? Rentiers like engineering work here. What if we started beating on some contracts ourselves? We will probably make a lot more money has like kind of products like of contract focus services company ourselves rather than just as a sub consultant and on these products.

And that that lesson persists to this day too. If you can pull off being the prime contractor to the government on A A big contract, that the economics are much Better if you ve get sub contracted by one of the primes well.

and like if you can be a prime, I mean the primes back then, primes being prime defense contractors, there's still the prime today like that is a gravy train that like yeah ratio, lucky bowing, all these companies.

So of course, they start doing this, but like there's a reason the primes then know the prime now link a bit is not going to be a prime then or ever, uh, so they need to if they going to do this, they need to move into the commercial sphere. So this is this is like to these just like so good it's it's like history was like made for required. Do you know what the first like contract project that link a bit did? If you knew you would just be like, I don't smiling so wide right now so they hear about, remember, their expertise in satellite communications. They hear about a regional retailer?

no. Did they do walmart satellite network?

Yeah, I did what? yeah. They hear about this excentric, founder of this small middle state regional retailer, that for some reason wants to beams himself talking every day to all of, from hq, to all of the local stores of this, a local outlets of this retailer. Link of its first project is doing the satellite communication system for walmer .

at wild listeners. For anyone who didn't listen to our walmer epo de walmer was, for a very long time the most innovative retailer on the planet. And until amazon, basically. And one of the illustrations of this is in the late seventies and continuing into early eighties, when they actually lived up, they they invested tens of millions of dollars into building a private satellite relay because the ban was available on the internet, was insufficient .

for them at the time.

Phone lines, the public van effectively, or a precursor wan, was insufficient to you send the store data that they had actually been collecting and want to tabulate the results on a daily or weekly basis. But also this like.

yes, sam wanted to broadcast out, you know, the saturday. So great. Wait, there's more walmart to come a little later in the episode ude, literally.

So good news. Cracked yourself. I D this will probably get this from the actual episode we get. Occasionally, we get these reviews for required to like comments that like one host is like really Normal, and the other .

a host is just like gets crazy person.

And i'm like, well, you know, at least they remember me.

we are who we are. Nothing in seven years and not yeah .

I promise you it's not an net. Asked my wife okay. So the next thing that beginnings to is because they're in video. They're in video now with one, and they're doing these two way communications. They build the video scrambling system for pay TV on cable systems. So IT used to be before the link, a bit solution for multiple laxer cable systems, if you like, were even mildly technical or could like play around with like a Allen ranch, you you could get HBO or any of the early paid TV settle for free.

Ah the the catch phrase there is security by obscurity. I was trying, you know find one clever thing that consumers weren't likely to figure out by on screen their box and you moving one wire or something.

And so Jacob s and ferri and all the the brain trust and link a bit. They solve that problem and the HBO uses them. And then all the other, all the other big paid TV channels.

I think that's the inspiration behind the H B O opener but yes.

the scrambled because .

it's like d scrambling and now bringing you this so .

cry that's all in an andy right there. Um so in one thousand nine and eighty they do this for the whole decade of the seventies. Um in one thousand hundred and eighty, the a link of IT.

The company gets acquired by east coast radio technology company called maham I think is how I was pronounced. He used to be actually maham. And then it's like weird eighties branding stuff.

They changed the brand to m flash, a dash com microwave communications. I think anyway, they sell the business for twenty five million box in one thousand nine hundred eighty was not bad for some former academics. Twenty five million box in one hundred eighty dollars like.

And and they had a lot of people at this point. I think there was like over a .

thousand employees he grew within IT was on its way there, but they then grew over the next five years within machat to that back. I don't think IT was agreed to fifteen hundred people eventually like it's a big freak business. So you remember the things were talking about lake.

A lot other retailers started using the satellite networks. A lot of other cable TV you know channels want to use these other and there are other products that they were building like because of huge ah basically they made a big mistake selling the company. They hadn't listen to require. They don't know all the lessons.

They wouldn't had quality of date in the company.

Well, that's true. They made absolutely the right decision. And soiling link bit then um so they stay with maham for five years and then there's a leadership change of maham. And like this is the east coasts technology company.

We'll leave in thousand and eighty five and they sit around for a couple months and they like like we made more money than we ever like dreamed we got to be part of something cool things. But like, we're still Young. And like the wireless communications industry is kind of just getting started. You and this is one thousand nine hundred eighty five. So uh, the cellular telephone industry exists at this point.

I had just started. We had you know how we were on five g now and everybody members is the iphone 3 g that that second phone and the edged network that that the first iphone launch with was two g IT was a little advancement on .

two g this was one which was a og， no digital yet in in cellular, analog.

cellular and cellular had just been an innovation. I mean, this notion that rather than you 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 that could be released. And you had this sort of cilli fiction of all the geography that you needed to cover that was new. 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.

Yes, it's so are we in the andy like there they are first academics. You know it's hopefully we ve told the story here like among the most brilliant minds in the world. But they're also especially iron like incredible business people, market analysts like they're very aware, like the products, they developed a link of IT. They aware that this market is coming and and the reason they're so where like technically that exists now cellar, it's all car phones at this point in time because the way IT works as IT was essentially IT was just like the torpedo s back in the day. IT was essentially a FM radio broadcaster that you would fire up into how our super high power you needed, like a lot of freak power you .

had to put in a car for what you're talking about. And because you couldn't like the there is not a battery available to .

you today running internal combustion engine to public work on the end points, on the end points. And bandwidth was super limited. And like these systems were thousands and thousands of dollars in early eighty dollars.

And despite all that, the consumer demand for car phones was insisting like like this was just like, you know, there were weight less years long for consumers to get car phones installed. And the flagged Carriers at the time, like they only had so much ban what they could fit because literally there's no there's no efficient use of channels. It's just like the torpedos back in the day, like they couldn't keep up with all the demand. And I remember when my parents, who were lawyers, like they had car phones in the eighties.

Did you paint out my great uncle had but IT is interesting thinking about you when you're listening on an F M radio, you have ninety nine point one, and then you click up on the dial and that says one ninety nine point three, and then you click on that says one ninety nine point five and you can even have point two, point four, point six because that's too close. There will be interference.

So you start thinking about, and this is an exactly right, i'm and over simplify this little bit, but you start thinking about, will jess, how many slots are there to communicate in this and og way with a cell tower near me? What can a cell tower handle? Hundred phones, two hundred phones, five hundred phones. Year way. It's not like much.

more than one hundred. yeah. I think about how many radio stations there. Not much on that.

So the link of the folks are, when they see, do this, they know, and they are like, this industry is in its infancy. We see this amazing demand. We are literally the best.

We know there is a Better way to do this. We know you can do this digitally. We know you can do a way Better. We know how to do at the best.

So they found a new company in july of one hundred eighty five with seven, seven and total, andy erwin and five other of the best link of the engineers they meet at irwin's house. And they desired to start this new company. And they name IT coco quality .

communications.

which is short for quality communications, which I had no freaking idea. We do their research, but then you know like, oh, quality communications and then when you know all the history makes sense, like they hear the highest quality, you know, but they know how to do quality communications. This is a communications company and .

they can provide quality and become these household brands. And you don't think what the original so .

totally and because like the industry was still so early and and and you think for a minute about what is involved in building out a cellar telephone network, there is enormous capex like you laying like cable. We have talked a little bit about the cable industry history on required like that required enormous capex. S like this is like literally putting towers in the ground, putting base stations on them, building the thousand million mobile phones. IT requires a lot of money to participate in this.

It's money and it's a bunch of competencies because not only when 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 powers? What's the protocol? What's the technical method that is communicating with phones and making sure that the phones have all the correct hardware.

And it's not just antennas, it's very specialized chips. And so then you're like, okay, will do we need to make phones and do we need to build a consumer brand? And do we need to market to consumers? Do we need to be our own career? Do we sell to Carriers? There is a weight IT sort of like, but i'd try and eat the whole elephant here or you could say, okay, we're just going to try to be one small part of this because we have an idea for how to make this Better.

But if you're just doing one small part of IT and inventing the means by which the the technical method that the phones communicate with the towers, there's a bunch of stakeholders that you gotta get on board with your thing, Carriers, the government, in terms of licensing spectrum phone manufacturers, chip makers, base station makers. So there's a really interesting cracks that they're at, at this point of the company when they're saying we know we can do this Better. We have a specific idea about how to make this Better, which will get two in a second. But there is some trying to figure out how much of the elephant to try to eat themself.

And this story, this totally, this first, you know, forty five minutes, the episode is interesting and fun. Telling this like crazy, were two hollywood into history of all the technical aspect that comes to this, the business history of qualcomm, just like bill gurley said on the blair with this book, IT is one of the most brilliant strategic executions of entering a market period. You like great, large ever like this is on par with video. If not ah honestly more brilliant IT seems more .

difficult because if you would teach me this idea of free as an investor, I would tell you immediately no because I see fifteen 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're a threatning. So the likelihood of success is unbelievably low.

And yet we are talking about quum. So they knew two things at the outside of founding. One, this is a massive opportunity that they eventually wanted to pursue, was bringing their expertise to bringing cellphone terrero cells, one networks, into the digital era and building the dominant corilla company in this soon to be massive industry.

And too, they knew they couldn't do IT yet. So they actually started in the same fashion, the link of IT did they like, okay, we're going to book, strap up by doing consulting work. So one of the first consulting projects they do is with hues like one of the defense primes, hues like Howard d, hues like um pretty awesome. Uh, on a proposal to the fcc for a mobile satellite network like I mobile learning about consumer mobile telephony y services enter the Michael will work on the selling .

network and we're talking like jurassic park SAT phones yeah you know big hawk king thing super expensive. But like when you really need IT, it's nice that they are existing at phone network. yes. So while they .

are working on this, they're like working like, okay, how can we like were the experts that you optimizing satellite communication channels for efficiency? They come up with an application of the spread spectrum to use multiple access, multiple conversations, access the same channels at the same time you that they are, call the the user technique called cdm code division multiple access.

which the first time you hear this phrase sounds like complete jargon like meaningless and and then you start the week the article for a while to try on package one. So break into parts multiple access. Well, that's that's fairly straight forward rather than being broadcast.

So like a TV network, we have multiple end points that all want to communicate with each other using whatever the same communication medium is. So rather than using one single frequency to all church trial pile on there at the same time, which of course won't work in that analogue world that we were talking about, I want to call you on ninety two three. You wanted call bob on ninety two and three.

My mom wants to call my dad on ninety two point three. You quickly get into a situation where like everything's just colliding with each other. So multiple access on just single analog frequency doesn't works. So you've got to divide up and say everybody gets their own frequency and that sort the way that the way the world evolved. So you mentioned code division yeah before we get to code division, can we talk about a different type of division?

Yes, we certainly get.

So before we get to the CD and CDMA code division, let's so we've got the multiple access park, a bunch of people trying to communicate using the same medium. Well, the things that we were talking about before everybody gets their own frequency, that was called fd ma frequency division, multiple access. So a pretty straightforward way that you might divide up the airwaves to have multiple conversations.

And the way the tech communications industry works is member I open the episode saying, is basically a layer set of magic tricks. This is sort of the the next iteration on top. And if you say, okay, rather than sending analogue signals, what if we were sending digital signals? So if i'm talking to David, there's a lot of sort of poses, about half the conversation is actually empty air.

And if two focus out, the audience are talking to each other and a lot of your time is actually empty air. So we don't both need the entire frequency all the time. And if we are communicating using a digital signal instead of an analog signal, then actually we can puzzle up the information into digital packets and just .

rotate the time of when different packets are being so right.

So you know, the very crude example is reported dinner party. I can have my conversation for thirty seconds in a room, and then, you know, I pause and I stop talking. A different conversation can happen for thirty seconds.

Of course, that's too crude and that's are too long in a time division network. What you'd basically do is say, I get some digital packets for these medical seconds, then the next midleton ds you get your digital packets than the next few female second someone else get through digital packets. And we will keep around Robin ing at between the twenty conversations that that we're all having and when IT is reachable LED on the other side by some other phone or something.

And thanks to transistors in digital technology, this can all happen fast enough that like nose yeah you're .

like go the signal maybe sounds a little compressed is not as good as if we're talking to each other actually face to face. But there's no like weird blips or poses in the conversation. Even though were all borrowing different time slots on the same frequency, IT actually sounds pretty smooth to me. So that's the .

next where europe was wait for the ahead in the U. S. Euro was basically ready to implement this time division multiple access digital standard in europe for european and cellphone technology. And that was driven by ericson, the big european infrastructure provider.

So so I think like just a pause and reflect big innovation going from maybe twenty, thirty, fifty x, 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 signals digital because of time division. This is the movement from frequency division multiple access, F, D, M, A to time division multiple access.

or T D M A. And it's actually who said thirty, fifty, maybe now that kind is. But like back then, he was three to five x really.

I think the rain analogy is like IT is time sharing. Time sharing is what IT is. And it's kind of like the old computing model of like time sharing on a teletype on a mainframe, that's what's going on here.

And so over the call comes so they're thinking about doing this. This satellite communication thing and member iran studied with caught shannon. 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. And he sort of looking at T, D, M, A, and they're like, I think there's something even more efficient than this, and we need something more efficient than this for this satellite network.

And these guys were all around the beginning of the internet. Don't think about if you know anything about how the internet .

works under .

the network's general. It's watching.

It's not time sharing. No IT is everybody compresses their data as much as they possibly and into a digital packet. They fired IT off and IT bounces around a series of places until IT hits the other side, gets decoded and hopefully the protocol is written. Collect correctly where as your sort of opening your packets and and sequencing them all in the right way IT seems perfect and how the message was .

originally intended to be when I was A A D D. And that's what these guys figure out. They're like ah we just use code and then like everybody, i'll send all the conversations all the same time all across all the different channels, will maximum efficiently use all the spectrum allegations and will just depend the little code to the beginning of each digital conversation. You'll be reassembled on the back end so basis the same way the internet works yeah .

so to break that down further. So you've got this really interesting situation now where all messages are encoded digitally. And I keep like going back to this analogy that they using the telephonically industry of the dinner party.

So rather than the sort of frequency the fd ma model of everybody's in their own room having their own conversation, that's not super efficient or t dma, which is you put five or ten people in a room, but they need to wait their turn to have their conversation. Well, what code division basically is that? The, as the analogy goes, is well, everybody can communicate in whatever room they want. They're all just communicating in their own language. And the person that they're communicating to understands that they can sort of listen and and disregard noise that's coming in like are saying .

if i'm expecting your message to be I had breakfast this morning and then like I don't care how much noises and you don't care how much either know you said that you didn't say that.

right? You're like i'm disregarding all the spanish and i'm just listening for english. That sounds something sort of like describing someone state of breakfast and that's an over simplification.

If you really wanted to sort of dig into IT, what you're basically doing is, uh, you run any given packet through like literally an encoding. So maybe my encoding one zero, zero, one zero, so you detect, so you encode whatever the pack of information is. You run IT through sort of add IT IT to one zero zero, one zero.

And then you end up with this signal that you can sort of stack on top of other messages. So imagine a digital signal, like a digital wave, where all of our messages are layered on top of each other. So the top of the peaks of some of the wave are extra high, and the trouts are extra low for others.

And when IT all arrives all together on the other side, the other side knows how to decode all of our messages or would individually subtracts all of our messages, which are layered all on top of each other off the very same digital signal until IT basically IT has all of our messages spread apart. 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 one zero zero one zero or whatever code I just made up uh, and that is the stick for CDMA and .

what these guys do, just this brilliant, like they saw that they had the background. They had the engineering late. They like everything right place, right time and the business sense.

They developed this, and they're freezing. Patented in one thousand and eighty six, well before years before caucus gets actually directly involved in the cellar industry at all. They patent the method and technique for code division mutilate applied to terrestrial cellular networks in one thousand and eighty six in us. Patent number four million nine hundred and one thousand three hundred and seven, which is one of the most valuable patents in history. You unreal, like literally they played such a long game when they thread a needle needed after middle, that was just the first.

And and when you think about why that is so valuable, when you really do still down what the CDMA pattern is, IT was the very first time that you could say, well, rather than think about one one specific frequency, just imagine you of 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 open, by the way, you don't even need to do IT with super high power. So it's good for a battery life and and that sort of thing because .

sentence quoted an internal combustion in the power.

This thing, right? The other side knows what it's looking for. So this is the equivalent of ve. There's a bunch of people with ing in a gigantic house to each other, all in different languages. So it's this like way more efficient way to use a given medium to have the absolute maximum amount of conversations. Or signal transmission .

in that medium. Okay, so call come found in one thousand hundred and eighty five pattern issued one thousand and eighty six or applied for one thousand nine hundred eighty six.

which is worth remembering. Solar expire in two thousand and six.

That's right. That's right. Look in ahead for shattering a qualcomm doesn't enter the wireless industry until one thousand nine hundred eighty nine. What happens in the interim? This is, this is the next one more so good, easily to can make this stuff up, uh, so they get approached to build on another contract, a flagon quote does from a company called armenia, which has this idea that they think the qualcomm ks are gonna perfect to implement.

They want to make a mobile satellite network specifically to connect commercial semi trucks on the roads in amErica and network them up to the distinction centers for retailers. Other are people who are companies who ship a lot of things in the U. S.

This is right in their whales, 夸， come and and or when. Like, great, we're going to be d on this contract. They win IT. They start working with all the net and they make a work. And one of the very first customers is, of course, walmart, which implements about their own propriety fleet of trucks, building further their technical advantage over just about every other retailer in america.

And at this point, theyve walked away from the satellite contract, right?

They sort of like the the huge satellite thing that that actually just never happened.

So they develop this technology, they patent. They were like, oh.

but there's no money here because the satellite classic park phones not going to be a think.

right. So instead, they are focused on this on net.

they focused on this. And they also have like a lot of the business relationships already from the previous generation of what they were doing, link of IT, including with warmer and many the other large companies and retailers.

I believe its sneider trucking um becomes one of actually the first customer, I think for that um so they work on building that IT becomes pretty clear like this is gonna to be the interm main product called common only net merge. In one hundred eighty eight they raise three point five million dollars in funding is part of that. They bring the product to market at the end of one thousand nine hundred eighty eight, as omonia tracks, people might divert IT. IT was part of walking for a long time before, I believe, and then have getting spent out to private equity. And in nineteen ninety nine, in the first year of business for almond tracks, they do thirty two million dollars in revenue in thousand nine hundred eighty nine.

which is something like it's like inflation adJusting. One hundred million dollars is .

a lot of money and there's a lot, lot of demand for .

this product in the first year of the product, year one. Now there's a lot of cogs like this isn't .

saw no yeah talking about and there's particular lot of cogs because one of the things they learn from doing this, someone of the reasons that companies emerge, the first kind of like the link of bit is you can remember walmart was their customer for the link of bit satellite. You think walmart is very happy to integrate and implement technology themselves. Most other customers are not. So they go around and their like you pitching this to trucking companies and retailers and the leg and and most of them were being like, all this is like, cool. But we're not not going to Operate our our own dispatch centers and messaging.

We try to have a small and I T department as possible. Are you asking to do all this work and just handing us this pile of technology?

yeah. So herman is like, well, what if what if we just Operate IT for you and we by a whole full stack solution, we don't sell you a technology. We sell you a solution .

which is like every enterprise company that you ever you know, a company has become enterprise e when they cross the casm and their website no longer has like products, pricing about and IT changes to solutions.

Yes, solutions. They they make the business scary of solutions.

We also to say like this is a tremendously delude of financing event that this is qualm, saying we need money so badly to fund the development of army tracks for this this customer armi net that the most attractive option for us is to sell half the equity in our company. So everyone gets deleted fifty percent by merging with the customer themselves in order to get just a few million dollars to continue funding this effort. It's a pretty different time then today where you go rise a seed round and you sell five, ten, twenty percent. Your business.

I don't know, too many c rounds that are happening for five percent solution these days. But but they were they were.

And so it's it's a very it's crazy to think the position that they were in where everyone was looking at her when and he was like, I think this is literally the best path, ford, in order for us to get the few million dollars we need to do.

I think some people were pretty Better about.

I totally. And you could imagine to you, it's not like an idea, like they had done a bunch of work already. This was going to happen.

They were going to go to market. They were just a couple years away from making one hundred million dollars and inflation adjust to dollars. And yet they had to give up half the company.

They literally were a couple years away from making actual hundred billion because the business doubles every year for like five years from a thirty two million dollar big for them. So now that this is in place, they like, aren't we have both a cash flow speak IT that we can use and now like a base of business that we can finance and like borrow against in raise quality against to pursue the real big idea and our original pattern.

And here here's the other just brilliant thing. What happened originally was not, in fact, there were other people who knew about code division, multiple access. The other folks could have been in a position to pat on this and pursue IT. But at the time, nobody believed that could actually work because you needed such sophisticated processing power on both the end points on the base stations and the end points to actually make this work like IT sounded completely freaking crazy.

IT needs to happen in real time. I mean, people need to have conversations without a perceptable delay. And you are cutting a you're first doing the the analog digital encoding where you're taking their voice and you're actually turning IT into a digital signal.

You're cutting IT up and to a bunch of packets. You're encoding those packets with every users unique code. You're sending IT over the airwaves to your most local cell tower. That cell tower is reeling yet across 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.

on the hand, on the hand. So this is the thing like, mean, believe you could do this processing on me, on the base stations, on the infrastructure side. But the idea that like a car, like something powerful by an internal conversion, you like in a car having formed not car, like a mobile phone, like a zc worse phone, that know somebody would hold in their hand, that you could do this on something like that was crazy in one thousand ninety six.

But the cotton guys, they know about more law, like most people didn't know about at that time. They, like you, pretty sure you give me one or two more turns of the cracks on law here. And like, I think we could maybe do this.

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 mores law would be at the time that they shift their .

product ah so at the time of shipping, no, it's not possible today. But when we're going to shift this, which is still going to be several years in the will be possible then think like so cool. I I like think this is like there were so far people that knew that then and like crazy, all right, listeners are next sponsor is a new friend of the show. Huntress entrance is one of the fastest growing and most loved cybersecurity companies today. Its purpose built for small emd size businesses and provides enterprise grade security with the technology, services and expertise needed to protect you.

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So in september of one thousand nine hundred eighty eight, all these factors, you know, you've got the financing capability to take swing at this. They see a path with more law with being technically feasible. They've got the patent.

They are the only ones that can do this. And then the market timing. So in september one thousand nine hundred eighty eight, the us. Salary telemundo ation industry association, or CT I A, as most people know, IT. And then it's related entity, the tia, the telecoms cations industry association. They release performance requirements are they speak for performance requirements for the planned upgrade of the us 点 networks from the analog one g networks to the digital to g networks。

And this is just the us. One europe posture .

well on its way. Gm, erick and td, ma, it's all happening here in the calm folks. Of course, they eagerly anticipate the release of the spec and they look at and oh my god, this could not have been written Better.

It's written for us is a dream. It's writing for us. They realized two things. One course T, D, M, A is the the front runner and eric and south that like do the us. Two, because they're successful ly doing in europe.

And and not only is that being done in europe, IT makes sense to add in the U. S. Two because it's kind of ied to have a global standard because it's quite believable.

Like, okay, one big thing I have to believe is were switching to digital. I can believe that 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. Okay, I can believe that. But gosh, how much new stuffer are you trying to invent all at the same time? Anything harder than that feels like I take a leap of faith and show me .

can work and ericson's well on the way to like pilots proving showing that works.

This actually works. Big companies, they've succeeded before. They're the right vendors that everyone trusts.

So the spect that the cti a publishes COO guys so this just must just feel like beaming here to air ah they realized that T D M A because of the capacity limit of t dma. It's not going to meet back like you're going to the best information implementation of T D M A. It's not gonna allow for enough compression to actually meet the speck that the U.

S. Wants to hit. So here this is a haven't i've been like waiting to bring this thing up.

So at this point in history, the U. S. Standards body is correctly forecasting the incredible popularity of cellphones in the us.

So they're sitting a really high bar for the amount of phones that need to be able to use this network. And the reason that they have sense changed their tune is in one thousand nine hundred eighty. This is a fun bit of trivia. Nt, who has been the in company for a hundred years on all things tele communications, commissioned mckinsey and company to predict .

cell phone and back of in to predict .

the cell phone usage in the united states in the year two thousand. So IT flash for twenty years in the future, the consulting group argued that cellular telephony would be a niche market. Of course, they forecasts nine hundred thousand people would be subscribed to a cellar telephony network in the year two thousand.

I I have nine hundred thousand cellar connections personally.

So as you know, that number was off by over one hundred x there were one hundred and nine million people, not nine hundred thousand hundred. Nine million subscribed in the year two thousand. So IT does make the point that in one thousand nine hundred and eighty IT was super not obvious that you had some of the smartest people in the world, both in domain dep, that A T N T and just good business model thinkers at mckinsey, wildly with forecasting this. And to illustrate how big the this was, att eventually bought macos ellum for twelve point six billion dollars to become att wireless, which is the nt we actually all know today, and catch up in mobile telephony so that this, like two g spec that was written, is is right around the time that a lot of the people in the industry are starting to realize like, uh, where we've super wrong in what we all thought just a few years. The potential of this thing .

was so that's like going back to the original eblana could starting the epo de of like creativity like one act following another, enabled by IT suggested to suggesting the next like this is the next lake needle day thread, you know, domino, that falls of td ma didn't hit this back. And they could kind of foresee this because they know what the demand was and they knew tedia wasn't going to be able to do IT. So here's the next. This is cool like I didn't expect to get into kind of geopolitics on this, but the one great that into the us has like a tonoi er accuracy and regulation like all of this being like you know case in point. But one incredible I think this took .

five years to eventually like .

these standards bodies. And like I like this isn't not the free market like by any means, but the one difference in the us. Process for all this versus the eur, an process and IT was the difference that made all of the difference was the us.

Government said the industry associations, you guys can set aspects and all that and that can be official, but it's not Mandatory. So like and are a bit was like Mandatory like the T D M A, which dsm was based on like Mandatory or that's IT and plenty other countries you Mandatory. The us.

Is like this is the industry standard. And like we recommend that any mobile Carrier follows IT. But if you wanted, do your own thing. Like as long as IT meets the performance spec, you can use whatever technology you want.

And importantly, standards bodies are decoupled from government agencies. So the fcc allocated spectrum, but the standards bodies are literally just .

industry social 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. Otherwise the innovation doesn't happen because no one knows what to build against. No one can sort of effectively collaborate enough.

So once the standard comes out quite come immediately, like goes to washington, like iran and they go they go to dc and they're like, hey, just to make sure we just want to like the 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, as long as they used to speak like that's cool, that's not illegal, right? They're yes, that's the case.

Okay, cool. Thank you. We will be back. So I was like the next middle, they thread, they're totally adapted.

They go and a great we can go pitch individual Carriers on using CDMA as technologies, so they start a sales process. This is now the beginning of one thousand nine hundred ninety nine. They start a road show.

They go out pitching this new novel, C. D, M, A standard, with the C. D. M, A industry standard. And this starts what known, literally, I tweet this day, other day, in the wikipedia entry for all this. This is like economically known as the holy wars of wireless, and is so much telecomm nurses and really is holy worse because .

about believe, so many people were just like, I don't believe you that CDMA will work.

And a IT was literally only the quick on folks who thought that would work and not to see, i'm reminded of the don valentine like I knew the future based on that.

They didn't know the future persse, but based on all their experience, they were very, very confident that I would work and IT would win despite the seemingly overlapping odds because they knew a secret, which was that at the end of the day, as long as there was not government enforce standardized regulation, they knew that economics would win in the market. And there are so many benefits of CDMA versus T D D M. A.

We have covered some of them. Of the other ones is that like the voice quality is actually much Better than T D M A. It's all like there's a literally is much Better.

I think he is originally created for the government to beam stuff up and down to satellite. Another huge one is literally, if you're Operating a cell network and you can have more subscribers per unit of infrastructure is literally cheaper. So you you're gna be up lower cost technology.

This is the thing. So there's one benefit that actually matters. All the others are like a nice to have on a future spect. There's one benefit that is going to allow them to be super sure they are going to win, which is that IT is like an order of three to five x more efficient to Operate. Unfortunately.

they originally pitched forty x. That's the standard that everyone was bencher .

was precious animal VS animal, I think three to five back more than T D M. Ah so that mean if you were a Carrier and you went with this crazy cdm thing and IT actually worked, you could fit on a given set of spectrum that you were Operating with. You could fit three to five x more subscribers, three to five acts, more monthly revenue on that same fixed cost base than your competitors who are using t dma. And if you know anything about like if we've learned anything and acquired about economics of industries and power and hamilton hammer and all that, like if you have a scale advantage like 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.

You can do this if if a customer is worth more to me than they're worth to you and we can offer them the same value there, i'm gna win. Yeah, because you can just lower .

Prices and get all the customers and make more profits along the way.

And there's we've only sort of scratch the surface on this episode of reasons to doubt that code division was the right technology. There were all these other crazy hoops they had to jump over. One of them is the the near far interference.

if you think about IT.

So like, let's keep the whispers ing analogy going. 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 uh to communicate with each other. So it's much more efficient than these all these other um high gain, high power, high volume signals that everyone else is trying to to use.

Well, if i'm using a really low gain signal, i'm far from my the base station from the cell tower. That's an issue because the people who are really close are going to sort to drown me out. Imagine we're all all whispers ing, but I miles away.

Well, you're going to hear the person whispers ing right next to you. So you know, there were very early days in powerful chips, powerful powers management. And you ve got walkon pitching the industry that are going to.

And people are like weight, but you have to turn down the game on anybody really close to the towers and turn up the game on anybody really far from the towers. And you have to know in real time and adjust in real time, all of that. So you have to be good at power management ships also.

How are you going to know how far away someone is from the tower? And they're like, well, we will 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 that needs to go up or down. And this is blowing people's minds in middle.

Like are you we got that in real time.

You're going to modify a signal based on what you're currently hearing from that signal. And then qualcomm comes in way over the top and says, oh, also, there's this new thing called GPS that is coming out and working you about from the military, basing the technology on GPS. So we know how far away someone is from the cell tower based on gp, which doesn't really exist yet. Like there is 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. Back to the magic thing, like just the technological magic that went into this at every stage of the way they are like, yeah, we got this figured out, and they pattern every single piece of this. Yes, every single piece.

Like, and really the first pattern we talked about is the most valuable. But like there is a whole string of veto, dozens, hundreds, thousands of other patterns that come after this that are just incredibly valuable. So they start the rich o pretty quickly.

In february of one thousand nine hundred eighty nine, one of the largest Carriers in the southern alive nia area. Pactel wireless is interesting because they get IT like the economic argument, like it's you. Basically they're like I if this works, like, yeah, you ve got us so they put up a million dollars to fund a prototype like OK prove to us that this works, build a prototype.

The quotation for the rest year works. On this november one thousand nine hundred eighty nine, they host a demo you with the packed tel money, but they invite the whole rest of the industry in syndic. O and there's a famously little hick up well, like they're about to irwins giving like a big speech intonation ing IT.

Then they going to do the actual demo. They're vans driving around the city and then like a base station back at qualm hq, you're going to make IT all work he's doing. The interests to one of the engineers is like frantically waving in the back.

Keep talking. Keep talking with the end. Reboot the GPS system.

And so like he's he makes a little quip of like as a former professor, he was easy for me to keep talk. He's told the story like a million times. Anyway.

there is something funny to about this original demo where they're not a consumer hardware manufacturer yet. They've never built a phone. There are a bunch of academics and consultants and electrical engineers. And so for this demo, the the cell phone that they build a basic looks like a mini fridge with like a handset hanging off of IT.

I mean, they build the most of it's awesome, will come back to building handsets in the sec. Um so IT works packed like great we're in and then which tell, by the way, would eventually get rolled up.

And the verizon, and I think they're basic of verizon west coasts Operator at this .

going some of the other industry folks who come, they're well, this is impressive that works, but like and ages a pretty forgiving environment for salute technology like this is a very like geography ics, easy city to Operate if terms of wireless signals prove to us that this can work in like an urban jungle environment. And cow comes like, okay, how about new york? And like, well, we will see there.

So in february of one thousand nine hundred ninety, they do a successful demo in manhadoes in new york city on the back. At that they sign nine nine six mobile, which is one of the artist new york Carriers. And then in August they sign a maritime ch, which is one of the largest O I.

Chicago, yes, I think got a big chunk of the midwest st. And then another really moved to start going international. So like here in the us, there's all just like ford momentum that already happened with the one g analog services and you know, the TV man and all that.

Like what if we go out the countries where it's just tabula like clean slate and we pitch this as like the obvious best technology and famously, south korea? I like government Mandates, standards. The south korean government is like, yes, this is clearly the best government Mandated all they were building up the first call phone networks in seven in south korea.

They're not going to be these digital the next year. networks. Yeah all C D M A, all com a. South korea for a time was I think close to forty percent of qualcomm revenues because the whole country like and IT was one of the most advanced mobile countries. All this using qua.

There's lots of benefits to the free market and freedom, and there's .

also benefits, regulatory and .

government capture. Coming in over the top of .

an edict is also Better special in december of one thousand nine hundred. And you on the back as they go public, there is a paltry sixty eight million dollars in their .

IPO a series.

B yeah totally. Twenty twenty one series. Be so. Um finally, in one hundred and ninety three, the U S. Industry associations of C T, I, A.

And the tia actually adopt t CDMA as a second standard. Officially is like, okay, now you have our blessing. And what doesn't matter, we already got like hf, the industry signed up with us anyway.

You know thanks for nothing. Um at that point, qualcomm is a secondary offering. There is another hundred and fifty million on the public markets. Couple years later, they do or maybe a year later, there is another five hundred million on the public markets. So very well, capital.

And why are they raising all this money back to the other tracks? And like this solutions discovery of like enterprise, you know, the people that their pitching is their core customers, the wireless Carriers, they are sophistic ted Operators, but there is a whole ecosystem of technology providers to them. And they already accept.

In the case of south korea, they built out like tower is inflationary, replace all that. And so no, it's a big ask. Even with the economic advantage, it's a real big ask for a pactel or you know that if .

you're packed, tell you're like that sounds great to me that you are going to have this much Better standard and this much Better technology.

You're onna, replace my towers and you're onna replace my base stations. Are you going to replace all of my customers? Handsets.

like all of our customers, buy phones from phone manufacturers. So are those from manufacturer signed up?

Yeah, right. This is quickly becomes a radner of a industry dependencies because they like this. You still relatively small c and the ego, you know, technology started up.

They can do all this. So they do start signing some partnerships with both base station infrastructure providers and hands seta kers. They sign nokia, big win, big european manufacturer as a partner.

But they realized you to do this whole solution like specifically there, there's kind of four parts to making a CDMA wireless network work. We've talked about all them. But just to enumerate them here, you need the core I P and technology that we've talked about.

How comes got APP for sure. You need the infrastructure, the CDMA like base stations that go on the towers, all that like the back ends switching all that you need that infrastructure needs to be CDMA old stuff not going to work with IT. The t dma stuff is not going to work with IT um need handsets for consumers to work.

Same deal is got to be CDMA. And then probably most importantly, in order to make those two sets of inner structure work, you need the silicon, the semiconductors that go into them. And so somebody he's got to do all four of those things, like all for those things need to happen while comes for sure.

That number one covered the question is, who's going to do two, three, four come like the science starting partners. But they are like, know, we really need to spur adoption. I think we kind of gotto do everything ourselves.

We need to offer the complete solution.

complete solution. And this is a major undertaking. This is why they rays all this money in the public markets.

which is quite interesting because despite I mean, none of us are buying qualcomm phones today, but I could all on brand dia phones today.

Spoiler quote, today is the largest fabulous. So I conductor company in the world.

crazy bigger than in video.

bigger than in video. And they don't make don't make infrastructure, think biter .

bigger than apple. H yeah. In terms of numbers of orders, their placing with chip foundry ies caul come as the biggest.

So how do you get from there to here?

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 most.

So they do another just brilliant move. They create two joint ventures. I believe I believe both of them. I know the hands I won, but I believe both. We're fifty one percent on by calm, forty nine percent on by the partner. And the infrastructure said they partner with northern telecom nortel to do A J, V to manufacturer C, D, M A V station equipment. And then in another wonderful acquired full circle moment.

they call up our friends in japan.

They call up our friends in japan who at the time their U. S. Manufacturing headquarters was based in san ago.

That's convenient. California, very convenient. Our friends SONY I against OK amErica was running IT yeah at that point time. Yes, the SONY corporation to partner in A J V to make concepts. So I I actually had to quit the handsets back in the day. And ah well that was a lawsuit with motor a you know I had a phone like a small brick not as eco brick, but a small break is cocom phone has made by the J V. Was SONY there was a SONY phone with calm branding.

But they're doing all this to be able to answer yes when Carriers coming them and saying, well, great will be CDMA. But quark question question as the quality comes like and yep, we make all that stuff, yes, you should feel .

safe adopting us IP infrastructure, handsets, silicon that goes into both. We get all IT. So we just talk about one, two and three and talk about the silicon.

And to be clear, on the silicon people know the snapp dragon and brand today. This is not snapdragon s. This is not systems on a chip CPU. This is not a competitor to apples a fifteen. This is literally the silicon to power the radios and just that it's to do the encoding decoding power management of literally just attenuating the airwaves to send CDMA encoded till have any back and forth.

You you're making IT sound trivial, but this is actually, this is. This is the final, I not mean .

his own trim.

Well, that I can. You do IT yeah, right? You do IT. This is the final, just brilliant master stroke in this long series of brilliant master strokes that are when and caught com a did at this time.

I don't know any other chain of just bRiley brilliant strategic decisions, one after the other. If this had been ten years earlier, they would have to do the same thing with silicon. They would have a partner with the entel or no.

And they are somebody T A R, T. I text one of the man, one of the little man that had fbs. Of course, we're referring to AMD founder.

CEO, I think, story Jerry, who once said that real men have babbs and of course was proven desperate wrong over. They would have had .

to do the same thing they did with SONY and nortel on the semiconductor side. And maybe, you know, they could have had some value from the cocom IP, but they would have had a partner to make this stuff. But thanks to our acquired superhero morus chain, fabulous semiconductors in one thousand ninety nine.

one thousand ninety ninety one.

just just starting to become a thing .

so they could design their own ships without having to actually have a foundry in house to make them.

And they could outsor that they could actually do all the important value added work like it's totally it's a rigging, bentos and smiling curve in this industry. If you go for a wonderful of the IP, the two manufacturing and then the semiconductors, all the value, all the differentiation in this industry is in the IP, in the semi conductors and the manufacturing as a commodity.

And welcome would have been a great company if they're just captured the first, they captured the first and the last, they got all of the value. Like all of the value is just like we talked about on the invidia episodes. IT was equally crazy. And like future seeing to know that fabulous was a thing that founders ies were a thing to be willing to work with founders ies um and quality did IT. It's like how many .

times as this company going to be in the right place at .

the right time and just you know .

that silicon and know IT yeah and right .

and right sees IT and the we're going to talk more about silicon and well as as we go here um but you know just to paint the punchline here are today qualcomm total revenue is what close to forty billion and only I think of which eighty five percent is their semi conductor business. yes.

So like without thirty seven billion of their forty four billion of revenue is so.

But for this strategic decision, eighty five percent of today's calker revenue would not exist like and they are the largest famous semiconductor company in the world. Bigger than in video, who's number two.

crazy.

totally crazy and makes sense. They started a couple years before in video. So you compounding it's a thing.

So they pull this whole frequent thing off. It's just crazy. There's nothing more to say. It's just one of the most impressive business stories I have ever heard.

CDMA gets adopted that as a major to g standard for the next set of phones. And they come out .

fifty seven percent market chair in the U. S. In two g hundred percent market sharing countries like south korea, they end up getting, I should know this, I either hundred percent massive market here in china, which is adopting mobile service for the first time.

And like this is so much so, the first one thousand nine hundred ninety five is the first year that these networks go life in the us. And and international. How come does three hundred and eighty three million dollars in revenue in thousand nine hundred eighty five? In one hundred eighty six they do eight hundred and fourteen million dollars in within here.

Oh my god. But here's here's a crazy day. So here's another like just while you can make this stuff up, you would think wall street would love the stock.

Wall street bets would be going nuts for this stack. The equivalent at the time, not at all the case. The stock is like basically flat wall street kind of hates IT because the manufacturing Operations in the gbs require so much capital they're hanging up. All the profits of the company IT gets .

the stock gets punni shed basically all the way up until january of one thousand and ninety nine. And a few interesting things happen or U. K. Jump in in ninety nine.

Yeah, great. Let's I was .

going there anyway. So few interesting things happen in ninety nine. One com starts to realize it's a pretty serious drag on our business to have this supercapitalist tensions, manufacturing Operations.

There were all of this money that could be free cash flow for the business or could let us reinvest in new R N, D. Into making phones and making base stations. We something about this. So in march of ninety nine, they sell their infrastructure business, the base stations to eriksen loss .

settings deal of all the lawsuits that popped up between the two companies long the way, like, oh, great will tell you are manufacturing to this.

I mean, and this is basically them looking and saying, I don't think we need that to boot strap our strategy anymore. I think at this point, we've got enough momentum that we don't need to make our own base stations. We don't need to make our own cellphones. So one thousand of the ninety five hundred qualcomm employees become erick, an employees. Then they look over at their mobile phone business.

One fun, little, not fun at the time, but fun now little. But note on that sailed ericson. The the employees that got transferred as part of that were so freaking pss that they lost their cock stock options. They can I don't think they would ve got equally, eric, at all. They actually the class action loss you against cock, they're get their stock options back.

I mean, over the next eighteen months, the stock would basically be tesla stock. That's this crazy moment that we're about to talk about december in one thousand and ninety nine q saba's. Qualcomm mobile phone business.

So they now officially just cell chips that they call qt c ah the qualcomm CDMA technologies group. And then they've got a second group, qt l, which is cocom technology licensing. Just the plot is now set.

They make silicon, they make licenses, they make they sell up very high margin revenue licenses to their patent warchest. That's the business model for the future. They no longer have this drag .

on them and they sell relatively high margin, said my conductor designs because they don't fab any the demise.

And when they're selling these designs, they're not just saying, here's a chip, give me five dollars for IT. They're saying how much you sell those phones for yeah will take five percent of that and you say what what if I want to raise Prices on my phones and coal com says you'll still pay us five percent of that and you're like, what do you mean i'll just go somewhere else and they're like, where you're going na.

go we all the buttons.

And by the way, in addition to paying us five percent of the phones, I think you should pay us to license these patterns too. And all the customers go, what and welcome goes where else you going to go.

So you make them a sound so evil. I mean.

they didn't invent IT all. So they do have a right to artist IT.

But apple did, and the D, O, J did not there. The ftc see them for that trust oilers look, get to that the punch line of all this after the december and ninety nine offload of the handset business to a KO there, which is actually uh japanese a company. I also iphones growing up. Um you about .

all the good ones.

I got all the good ones you were on you on A T my network I .

was on singular which was A G work which became me in less .

but IT doesn't matter IT all becomes c and as we see um in the year two thousand after the sale, the height of the tech bubble. You know this is like on the best mark of this is we're talking about ebay e boys benchMarks to making billions of dollars yahoo's go and not slake. It's it's the internet bubble. It's the tech bubble and people .

are looking around. They're like what powers the internet and what's going to .

power the next generation of the internet. The single best performing stock for the entire year two thousand is IT appreciates the calcomp stuck appreciates two thousand six hundred and twenty one percent the three hundred and sixty six days of the year two thousand. And I think he was a beer.

Yeah it's yeah unreal. Twenty six, twenty two x in the public markets in one year, the best performing stack of the crazy st year until twenty one until last year. And stock markets.

however, you would have had to know just the right moment to sell because I did not stay up there for very long. IT would crash down over the next year such that eighteen months, such that I became only a four x from its pre one thousand and ninety nine high. But if you bought on the way up.

you lost a lot. I take for x on my twenty twenty one investments all day long these days. Yeah, pretty great. So no, that's that's like the core is crazy business story.

Call him to take IT from there to today the next generation of cell phone networks three g which that and I ably vivid I remember probably many folks listening you do to um three g there. That's when there was a lot of debate, especially in the U S. B, bt, gsm, vers CDMA. And I like not evenly, you would think at the time, like, oh, well, all the folks were going to gsm like this bad for calm gsm switch to CDMA. So like all basically all three g was CDMA.

This is different flavors just worldwide. I mean, they they just ran the .

table and and the reason for that was three g was all about data speeds, broadband internet data speeds. And CDMA was just like the vastly superior technology for totally.

You didn't have you didn't have to encode anything from analog to digital. When you're talking into your phone, you ve got to encode the signal. But if you're downloading a website or you're sending an eyes message or you're sending a tweet, all that digital information anyway, it's already packets IT like IT lends itself perfectly to cdm digital .

required infrastructure totally. Um then in two thousand five, irwin retires as as CEO um I believe also as as as chairman um of cocom. And interestingly his son one of his spot c clubs takes over, becomes the company's CEO.

Paul actually has A P H D in electrical engineering as well. Spent his whole career com rose through the ranks, becomes the CEO. So an important thing member.

I put a pin in the idea that twenty years from one thousand nine hundred eighty five, when they filed that first pattern, something else, what happened? So paw jc has become CEO also in two thousand and five calcombe ys. Florian technologies for six hundred million dollars.

Now florian did some interesting like they had some interesting products, but they had a lot of patterns that would become essential for four G E. So when we talk to some industry analysts about this, one view was, and I quote, IT was to refill the part of missile that cocom promises not to fire at their customers if they pay additional money. So the key's set of technologies here were O F D M A, which is we're not going to get into IT.

but IT was start up. G becomes that .

four g was based on fd ma instead of CDMA or sogne frequency to sion max. Yeah, we're not going to dive into IT, but IT was more efficient than CDMA CDMA. Well, IT was the definitely the night shining armor versus the previous set of technologies. IT didn't quite hold up to the claims or the future proofing of sort of its evolution path that which .

makes my this point time. It's two twenty year old technology.

So but what we do see here now is after the flurry, an acquisition com is able to continue their same exact business model because all of the patterns that would be required for four g and lt. And that going forward.

they own a lot of those too. Yeah, it's interesting. So the paul project obs era of cocom from two thousand five to two thousand thirteen I think thirty fourteen someone about a decade yes.

Um I think it's very viewed a very mixed light. Um his big strategic initial was getting com into IoT biot. He didn't really become a thing, at least at that time.

And the same maybe it's start to work now, but yeah it's starting working now. But like none the time yeah, everyone thought I did. And IT was kind like a lost era for cock. But know when you look back on IT two things that actually like we're really great. And one was that acquisition and getting because initially qualcomm was fighting O O F T M and trying to have CDMA still be the standard for four g eventually they did be IT in and get into fdd. So that was kind of an initial wrong move, but a pivot, a save um but too, that's when they start building the snapdragon you and be a mobile systems on a chip and CPU and taking a more the processing on the early predecessors to smart phones and that would just put them in such a good position for the modern smart phone.

Here they sell the high and android ship. today. I mean, the world has sort of standardized around apple makes the a series chips for your iphone. And if you're buying a high and android IT took close com whatever, I don't know all the model numbers, but series eight, ten, one or something is this napa dragon dragon .

and they now brand everything's snow dragon.

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 weight but that's just an rf tenne hok man says snapdragon and they're like, yeah feature out like that's the whole point of calling everything snapdragon.

I mean, just to be fair, like the silicon engineering and the chip design is so completely even for lake oh, just an rf, and like that is like a million times as more complex than like any processor in a phone in ten years ago. O IT is truly differentiated work that they are doing. But that was no obvious ly a huge win. And I know the plain, I think today com makes on average about twenty dollars for every smart phone sold in the world, including apple phones.

yes. So let's let's get into that. So i've got the time line from here.

So going to two thousand and nine, this is when, like all the litigation really starts to happen and people's flit from welcome, we think really highly of you. And you're a pioneer of technology and true inventors, which they are. They still spend a ton of the companies revenue and reinvested in R N D. But where they really start to be known by their customers and the media and the ecosystem as value capture pioneers. And so they lose lot how .

you cap your power. That's a new that's another acquired. Teach you capture by or what's .

there with phrase that I used for apple, maximum extractive over the ecosystem. So qualcomm loses a lawsuit with road com in two thousand and nine, has to pay nine hundred million dollars in two thousand and twelve. Paul Jacob s, well, at the home makes a really bad. Bad, maybe is a good, bad, but bad outcome on a reflective display technology called miracle, a billion dollar fab to make IT, they actually made a fab. There's all these zero customers for this.

Next time the promise of companies .

don't have fabs. IT was supposed to be like a screen that looks like a magazine page.

but they were never really able to reproduce.

The man that was the future twenty thirty.

the ipad was the future.

Yes, Steve man comes comes in and becomes CEO ice was gets promoted to become CEO very technical leader.

He was so before.

was so before. But the problems, problems, they keep growing revenue. They keep doing well as a company, but the the ecosystem issues for them and ecosystem reputation continues.

So in two thousand fifteen, they enter into not just an issue with other companies, but now with nations. So they have a licensing dispute with china. You have an activist investor who comes in that same year, johna partners to try to split up the licensing. And the cheapest that that activist investors is kind of saying, why do these need to be the same company? The licensing business is printing cash.

And at this point time, many the public companies have split out the actual lake chip Operations. And the IP, like a lot of old micon ductor companies, are basically just litigation companies at this point. yeah.

So that's the broadcom model. So it's interesting to say, okay, what is broadcom at this point? Broadcom is actually a company called a voo where the CEO of that basically made a bet and said, I think the semi ductor industry is no longer experiencing growth.

I think that industry should be harvesting profits because I think I think it's predicated on girls law decelerating, but basically saying, I don't think that this industry be reinvesting as much in R N D anymore because it's it's a settled frontier. And what should be happening is we should be rolling up these companies. So a algo by broadcom takes broadcom name some other stuff like Alice, I logic, logic.

Oh, big oil down valentines. One of his first very investments and is really the broad come strategy is to roll up the semiconductor industry, squeeze them well as much as possible. In fact, they're basically a private equity firm. Broadcom is borrowing lots and lots of debt to make the acquisitions that they're making and then freezing them for profitability.

So you got my favorite piece of broken m history trivia that eva o the sort of core of the you what broke come is um actually started its life as pulp packards chip tiv. What a sad state of affairs.

Yep, twenty fifteen the company shakes off jana partners and doesn't split out the two businesses. I think that was the right call, and i'll tell you why. And in playbook um but we were talking about broadcom.

Twenty and eighteen broadcom comes in and tries to do a hostile takeover at a one hundred and seventeen billion dollar valuation. And interestingly, IT was financed by one hundred and six billion dollars of debt. So that company for the rest of its life, I mean that that would basically just be qualcomm servicing the debt. So interestingly, the trump administration got involved and said that would be a national security concern and block the deal. And while that may have been true for the reason that the singapore based broadcom was sort of .

joined at the hip with a of this.

I think ends up being a big win for qualcomm. I think they had great relationships with the U. S. Government, and always have since the early days in being a government contractor. And a lot of people that we talk to, viewed early that I talk to, views this has quon being able to call in a favor and say, yeah, this is a national consecutive.

Don't you think we're call IT in the favor now? Yeah, it's totally true. I mean, like this deal was gonna through and quantum was gonna be everything you were just talking about with broadcom, which would have been very especially now like we know about like some my conductor like every like it's just like this is one of the huge winds of the trump administration you for like amErica was keeping calm and independent american company like whether IT was quite on calling in a favor or just went, like, I think we can all look back in twenty twenty two and be like .

this was an enormous win so um in twenty seventeen um going back one previous year um both the U. S. Federal trade commission and apple sue cocom for basically the same thing saying that welcome was using its market position as the dominant smartphone modem supplier to force into paying excessive fees.

And this is one that I want to sort of dive in on. We spend a bunch of time advancing through the time line to really get to this particular point, which I think is is a great place to zoom in on welcome strategic position today. Is, is this apple lawsuit?

So some background, apple has always used either samsung processors in the first iphones until they switch to their own, but they still had to pay quon patent royalties for whatever rf stuff they were using. So whether let's treat the CPU, it's completely own world transitioning from samsung to the a series processors, apple probably has to buy stuff from from qualcomm. Maybe they could look somewhere else, but either way, they're paying qualcomm the licensing for today.

Apple does use qualcomm sailor or modems, which started in twenty eleven, and there was just one year where they used in where they did not use cocom. Talk about that. So the way that I essentially perceive this and why eventually initiated the lawsuit is welcome, got greedy.

They had patterns on technologies that were part of standards that were set by industry consortium all over the world. And they leverage those patterns in basically every way possible. And here's the economic, as far as I can, sort of suss IT out.

So they asked apple for seven dollars and fifty cents per phone sold, which comes about two billion dollars a year, plus an additional eat to ten when they were going to raise Prices later. And so you quickly get to a situation or that the cow com was sort of expecting apple to pay seventeen dollars, just two license patents, which no PS on top of the Price that they were paying for those baseball chips. So record for a baseball ship when in baseball ships with the same thing as a sort of cellular modes ah is thirty dollars a chip. And it's not actually thirty dollars. It's more like five percent of whatever the average celling phone Prices.

Oh, guess my phones have a really high average selling race iphones.

And so if you think about two hundred and and fifty million phones a year, that is seven and a half billion dollars a year that apple would be paying cocom, that would be twenty percent of the Q C T revenue, twenty percent of all of the chip revenue, that that quality ics.

And further, if you back out the fourteen million year from the from qc t their chip segment, that doesn't come from uh the chips for hand set specifically, but rather there's some other stuff they're working on automotive IoT. And this new thing that they are calling the R F front and radios product line, which will also talk about apple could make up up to one third of qualcomm handset chip revenue. Now analysts have estimated that apple negotiated down from thirty dollars to ten dollars.

Apple's general council during the lawsuit let the number eighteen dollars slip. So whether it's ten, eighteen or thirty box of pop, that is an this amount of revenue that apple pays quite calm. Again, not for a snaps dragging, not for the CPU, not for the system of chip, just for the rf sillar modem wild.

So there are some other interesting .

things that came out in this lawsuit. Calm asked apple to speak out against wimax, which is a competing technology, and they were like, we need to have vocally speak out that our competitor is of bad piece of technology. 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 cause they would oh, quite a billion dollars.

So what apple is basically doing is biting their time for there to be an actual credible competitor. And they're wait all the way up until the four g 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 competition to qualcomm right now. We think you're selling or modern business is like close enough where our customers won't notice the difference. And we can tell walham that we're going to use you and try .

to get a little what .

welcome interpret that as is. Well, now you us a billion dollars because look at our original deal, we did the what this basically comes down to from a legal perspective is because quark owns patterns that are a part of an industry standard. They have to charge a Price that is fair, reasonable and non discriminatory.

Or friend is the industry terminology and apples basically alleging, look, you're abusing the market because it's not fair, reasonable and non IT. You're highly, highly unreasonable in the way that you're charging us this. So uh, around the time of the iphone tennis and ten r those phones actually did use intel modems.

But what was basically happening is the intel modems were following further and further behind cocom. Apple was realizing o crap 5g because there's no chance that intel catches up right and can actually develop a credible five g chip。 And so they end up settling and sort of backing off the their big lawsuit with what this .

way that for we're going to escape our technical level of confident cy quickly, if we haven't already. But like five g, like it's pretty cool. This is where like you were talking about patterns.

The song sounds so like ici, but like the amount of engineering and like I P and like work that has to go into like what we described originally back and like that we're we're too and then they like that was so crazy complicated to make this stuff work back then. Now it's just like a factor of a million, more like the amount of processing the what mores laws had to come up the curve to enable something like five g is unreal. Like there's a dedicated processor in front now of the rf stack yet to do all the crazy multiple fixing that is required for five g band wise to work. great.

yes. So this R, F, front end. okay. So here's a fun little. So what is five g IT actually is an open question. When five g 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 if I IT just requires incredibly sophisticated and electronics to make IT work, not only that, but when you have really high frequency, another again, and we're right on the edge of our competence here. But when you have really high frequency radios, uh, they can transmit through a lot of stuff. IT doesn't handle concrete well.

And so you end up needing a little way station on every street corner. Now I can give you like ten gig internet. That is crazy, but that needs to be really close to you. And so as the the telecoms are starting to build this out, of course, the initial review, they they say, weren't we now have five g in fact, they even rebranded a bunch of lte stuff to be five g so would show up as five .

g and t do this right? Like they were like all the sun. I was an att at the time used to say four g and .

then all the sun set five g really? No, that's exactly the same stuff I was using before. But now you've reprinted IT. So occasionally you'd walk by something that actually had a millimeter wave tower, and I would always be like, oh my god, this is the fastest internet I ever experienced. Then you'd like walk across the street member .

at the verge doing like.

yes, yeah, yeah.

Like on a specific street corner in, like new york city is six six .

o get like .

and then you take one step to the back on.

So here we are, twenty twenty five years after the initial hub b about five g started for consumers. And what is five g well, the industry has decided to a lot two more areas of spectrum that are not millimeter wave and are easier to work with and our cheaper to build infrastructure for and our slower as five g also. So now what that does to chip makers is that says if you're building a cellar modem in your phone, you have to have a really complex rf front end or what qualcomm calling their r ffi business. The rf front end basically needs to, at a negative point, adjust in real time depending on what flavor of five geox cess.

So many different windows of spectrum. Yes, so far across the spectrum bands they are like yet is I meant thinking about like back to the original heavy learn frequency hopping. Like this is all within one band. Now we're talking to about have a crazy number of bands.

So apple look, going back to apple last suit. Apple sort of realizing worse group here. If we don't have qual come as our customer.

So they settled with qualcomm, and this is in two thousand thousand, and apple says we will continue using qualcomm radios. For now. I think they negotiated some discount to the exorbitant is that they were having to pay qual com.

The apple also paid four billion now switching over to the licensing side of the house to secure the pattern licenses over the next six years. I think it's four and half billion dollars for a six year deal. It's actually unclear who really wins here. I think qualm wins in the short term because apples backup solution of intel modem filled entirely behind. 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 cellar modems in house. We know based on I don't know, that was a slip of the tongue or an intentional thing, but we know from the most recent quark mornings called a week ago that uh, the next version of the iphone that comes out in november of twenty twenty three will continue use cocos chips like even though apple has been working on their own .

trying to do the P M. A. moyes.

It's ludicrous, sly, hard to build the stuff that qualcomm has built. So even next year, as iphone will have call calm, well, our reference ds, and I think they use our reference and seller modems. But after that, apples definitely going to try and take this in house.

But Christianna, the CEO of cow comes out of the most recent earnings call. After that, we do anticipate having almost zero dollars come from apple in our chips business, so at least there for shadowing to their shareholders. Cocom is that they think apples going to succeed at this. It's just going to .

take a couple years. Well, this feels like the perfect time to talk about the other strategic chest made the quack I made here.

Yes, novia novia. So this is another twenty, twenty one move. So qualm bot, this company called neuva for one point four billion dollars.

What is novia? While novia was founded by former apple silicon people, including the chief architect of the a series chips. That seems like a good get. yeah.

And so to P A M I.

yes. So this one way to look at IT is this is qualcomm ticket into the laptop CPU slash system on a chip market. They already make snapp dragons for the high and android phones, and soon they'll be able to make a competitor to apples m series chips for black tops and dust tops, and may be even servers and phones too.

I mean, like ipads, phones, tablets. Like, so is crazy.

This is work. It's interesting. So snapp dragon ons, for anyone who listen to our ARM episode, you'll remember, the difference between ARM makes a instructions at architecture that you can license, or you can go big with them and just buy one of the actual armed design ships of the shelf.

buying a solution, you might say yes.

snapdragons using off the shelf ARM design for their CPU. Apple just uses the ARM instruction set, but has done their own custom design to get the .

most performance. And that's why so far ahead.

yes, of competition, the new via team can just do their own custom design of chips and actually be differentiated from stock ARM CPU, just like apple is doing, unfortunately, like cause everything cool about the the snapdragon chip doesn't actually include the CPU. The CPU is just .

a standard issue dish .

ARM ARM design.

So here's this is cool. So this is the path for snapdragon to get on par without a silicon.

yes, and for their CPU to actually exactly so, but one copy yet to this whole thing about like maybe we'll do laptops may've do servers cocom actually doesn't really want to do any of that. Cocom historically has failed every time they've try to do servers or watches or smart home or display is like every time they're strayed too far from their core confidences y IT IT hasn't been good.

And really what what really wants is twenty weeks from apple for every iphone.

I think that's a reasonable path forward. The city. Pitching a much broader story than that to shareholders these days. So what cocom actually wants is for the new via team, sort of like invest where they see the frontier going, where they see a much bigger time where where qualcomm sees a mult hundred billion dollar opportunity, and that is IoT automotive and the r front end.

And so they 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 the growth business as the frontier. interesting.

But either way, novia seems to be the ticket because if you can custom design chips using the ARM I sa but be like the performance of apple silicon. I don't care what you're putting those in. That's a really good yeah powerful thing.

What is I even like for technology? The technology industry is large to have. Just like with android, you had a you know iphone revelling Operating system available off the shelf for any kind of application that let a million flowers bloom. You to have the same thing for apple silicon way. That's pretty ool.

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Yeah, fanta is the perfect example of the quote that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually gone to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. IT plays a major role enabling revenue because customers and partners demand IT. But yet IT adds zero flavor to your actual product that IT takes care.

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So whether you are start up or a large enterprise and your company is ready to automate compliance and streamline security, like vantage seven thousand customers around the globe and go back to making your beer taste Better, head on over to vantage outcomes sh required and just tell them that ban and David sent you and thanks to friend of the show, Christina anta CEO, all acquired listeners get a thousand dollars of free credit venta com slash acquired. There are two other small things that happen that I think let's just sort of skip imagine them briefly, but let's get to do analysis. Paul Jacobs got kicked off the board of welcome in twenty eighteen. He tried to take the company private through a buyout when there was all this sort of tumbles about is IT going to be bought by broadcom, all this stuff and the board said, if you're going to try and make a hostel, take over an lbo the company yourself um you can get right off the board and so there are no members of the Jacobs family on the board of directors anymore the other thing that happened, twenty sixteen to twenty eighteen, paul come tried to acquire NXP semi conductors. But I think eventually china sort of just like drag .

their feet enough to kill tied up in the whole.

But quick review of where they are today, and they will go into analysis. Quok ham today has a one hundred and twenty billion dollar market cap. Which two things? One that's astonishing, that's impressive.

They're technological pioneers. They're amazing at value capture too. That is the same Price that IT was worth at the peak of the .

dot com bubble. wow. And I just about the same about the about to buy.

Yep.

which is interesting. You buy revenue, I think revenue and probably also number of chips. They are the largest famous. So I connect your company in the world bigger than in video, but a way lower market .

cap than in video yeah I mean, I going to make a Better like here's my view on quality converses and video. Do you bet on the intelligent connected edge as as the C. E.

O Christian would put IT? Or do you bet on AI and like they're both mega trends? AI has a far bigger potential, in my opinion than the intelligent connected edge, which is wonderfully. But although I do really .

have a genuine appreciation after doing this effective, really like the amount of engineering that goes into wireless technological advances, which almost than a mors law like, well, much slower than mors law lik Epace, but a steady rub have continued to improvements. I mean, now there's like no difference between five g and like home broadband, like and that's like .

standing on the right street corner. Okay, they do forty four billion in revenue. Chips make up most of that at thirty seven billion.

Licensing fees make up only seven billion. But the licenses are a much higher margin business. It's a sixty nine percent margin, I think its earnings before tax margin on licensing versus only thirty four percent for the chips.

So there's a super efficient business they are in licensing revenues are growing thirty two percent. Earnings are growing forty seven percent year over year. This is an amazingly hikes growth rate company party.

They almost doubled the revenue over the last couple years, too. So Christian is doing a good job. Christian is the new CEO.

As of last year, I think he's been for been in for a Better year. So in the analysis, what power do you think that will come? Well.

parents is at a quarter .

resource of court.

I think that is a quarter resource. Oh, I think yeah, hamilton in seven powers. I think he does say patterns are recorded. I think they're in economical distribution of a court service staff. For sir, they had at least maybe we still do have network economies in the infrastructure side of the total industry and the hands outside, like you have one.

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. Have all the handsets use xy zy standard than the infrastructure of it's like being able to control both yeah, I think there actually wasn't network effect there.

I also think there's scale economies. If you are a fabulous chip company, then is worth all the R, D.

creating a snapshot.

designing and creating A A snapdragon and realized across a huge number of customers. So like it's really hard to start the next qual calm. If the front, the frontier you want to compete on is making a Better snapdragon, that's not going happen.

I've got a fun one here. There's been fun to talk about because that always is. But I think actually, as I feel reasonable, confident and I think caul calm during the golden years that we told the history of had real process power, I think that was equivalent to the pixar interest like that set of people working together under those set of circumstances were holy, unique in the industry, the world. And actually it's interesting, like I really you know all besides the local equation book from dave mark is amazing. There's a ton of history out there about calum, especially in like local Sandy, like the lots of local CD ago publications and history books and stuff.

especially because the Jacobs has given hundreds .

of millions of dollars to support. We can talk about the win is one of the great for anthrops of the past, if undoubtedly. But to ucsd, the uc says, i'm so much like so much of building infrastructure in cnd ago comes from quark m in the different family.

So going and doing all the research, all these local CD ago publications and know historical documents. They all talk about the like wealth, the wealth ring of startups and other technology companies. They came out of cock and indeed they are like you link a bit and there are like a hundred plus um in the C D ago area that came out of cocom.

But you compare that to like the silicon value, like what came out of intel, what came out of fair share, what came out of trader. Say there's not the same diaspora of success in cork. I like the plenty of success in solon and told is part of the quality come to diaspora. So like there's none, but not at the same scale. And I think that actually defect to shows there was processed wer and we give was that unique group of people in that unique situation.

Interesting sort, like proof by example.

a deductive of proof.

Do you want to talk about the barren bulcke for the company? I have a few OK over. All right? So here's the bare case.

Col com has very real competition from the low end that we didn't talk about a an example as an media attack who not only makes the based band modem ship, but also systems on a chip using the stock ARM CPU designs. So media tech systems are weight epr than qualm, and I think they actually just surpassed qualm in terms of number of units ship. And so all the low and mid and android phones are using media attack. And so caught m kind of needed to buy new via in order to differentiate the CPU and not just be using the stock ARM design that media attack and everyone else is using .

on much cheaper chips.

Historically, they failed that everything that was not a phone that we talked about before. And now that sort of saying the future is IoT and automotive, these things that are not phones, we'll see they're just constantly in lawsuits. I mean, we didn't talk about this, but like china's, south korea, eu, taiwan, all these company.

all these nations have sued, making a fortune off of right industry.

And the last one for the the bare case for me is I really think that they finally poke the there talking about their customers enough to make them want to actually do something about IT. The goal for qualcomm should have been make as much money as you can without pissing people off too much.

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. And so now that there's very viable alternatives for silicon that people can either use in house or competitors coming around at different angles, 靠。 May lose their leverage to actually get a royalty out of each phone sold.

Now licensing business is going to continue to be A A jog, not smaller and revenue but higher in margin. Um you know that that is the sort of bare case on the current silicon business. Now the bullet case, like maybe the lawsuits thing is actually a bulcke.

They managed to keep making more and more money and have been reformed over over again in a unch of jurisdictions that you know they set on their way out of these lawsuits or they whatever, but they're able to keep making tons of money. Um the big bad case is you believe that this shift to automotive IoT and uh five G R F front end is real. And so for those kept track at home, everything i'm about to say is a part of the chip segment that does that thirty seven billion dollars in revenue.

Automotive does two billion in revenue. That's a very real business. The R F front and business that we were talking about that does four billion dollars .

a year in revenue. It's interesting. I mean in a car here in lisbon um and for the family. And of course, IT has a data built four or five g data, right? As as just like just about every card these days.

the IoT segment is now doing over seven billion dollars a year. Calm things overall, this is a one hundred billion dollar opportunity. There is a bigger narrative that Christiano is trying to a spouse around this intelligent connected edge that they call a seven hundred billion dollar opportunity that I know that reminds me a lot of the the n video lie that talks about their trillion dollar time.

I mean, they're executing very well, but I think they're trying to sell a story in terms of addressable market that is head wave are right playbook. So in the early days, this is a thing that we didn't talk about. We talk about the 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.

No phone company was going to take a dependency on the CDMA technology when just one vendor existed. And so they need to evanier and create their own competitors so that their customers could feel safe with this new technology. But of course, as long as they kept something secret of how to eat out the absolute best performance from the innovations, they actually could still be the leader. So I was like, figure out how to get a bunch of other people just good enough, which is fascinating.

And it's such an amazing case. City in bootstrapping .

and industry, yes, yes. Similarly, they had a clever tactic in their IP strategy. So at cocom, where I think they have something like seventeen thousand patterns now there's a decision every time there's a novel piece of technology about whether they should pattern IT or keep IT a trade secret. And there's enough things patented so that you 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 cocom. But they don't patent everything because they wanna keep an advantage for like consulting revenue or evolution of fees or signing big deals where they say not only do you get access to our patterns, which makes hire at some point, but if you work directly with us, you get access to the trade secrets and you can pay us, you know, basically generate services revenue for you to work with our engineers. Because I was talking about .

this for playbooks because we are going to there's this really interesting dynamic to this industry that lends itself well to the IP and pattern monodist ation scheme. The cow com is adopted, which is that the successive generations of wireless network you know jees happened just fast enough that it's within the pattern lifetime yes. Ah so that like all that core sedia made patent, like all those patterns are expected now but IT doesn't matter because were so many generations beyond that like those patterns are now worthless yes, see you get all the useful life during the protection period of the pattern. And then when I see though it's not like a generic drug, the way like you know advt is still a titine or whatever is still like you know useful, right?

That's a great point. It's also interesting that if you miss the window, like if qualcomm had missed the window in the early ideas of evAngelizing the technology for two g they made out of survive long enough to catch the next window ten years later for three g 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.

Ah another one that I thought was pretty resting because I mentioned I think the business is actually makes sense together. The licensing business offers quon predictable high march and revenue that they can basically use to fund R N D. So because they know they're going to to keep getting that and because it's a big revenue stream, IT lets them sort of take back on new R N D.

And when they do more R N D, that fuels to fly wheel, where they both get new products and they get more IP that they can continue putting into the licensing fly wheel. So there is I think there is a credible argument of why you want to keep them together. There is also a that totally there are not very credible argument.

Is this things a cash? Because we want to keep our rich uncle around to make this a nice place to work. And you know like they have several and give nine airplanes like it's it's a it's a relatively cushy company from what I understand. I'll same goes .

a very nice place. Yes.

I do think the big picture is that the U. S. Government's pattern system has granted cocom of monopoly.

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. Regulatory system.

They basically said and then we affirmed in a lot of these rulings, you are allowed to capture a ton of value from this and there are so many good debates about whether the pattern system exists and serves its intended purpose of enabling, uh, people to spread the news about their innovations so other people can add IT and the way we compensate you as we give you a twenty year exclusivity window, or whether something like this is an abuse of the system. But there is no way to argue that this is anything but a perfect execution of the game on the field. You IT strength .

me telling this whole story that, like, think that early stage bencher capital company building in the lake, you know, and you said ban, who would tell the way if you're IT given a venture capitalist, the cocom pitch. And like there's so many, they're like at least six or seven different hops where x ani IT looks like well and then a miracle happens and then we succeed that and then another miracle happens and then we succeed that.

And like usually, you know, my pattern matching as the investor in early stage companies is like any time there's a single and then a miracle happens, automatic pass like because if you're betting on me, but but sometimes if you have a team because this wasn't just like and then a miro happens if you listened closely and like really knew this team, they like really new. They had really high degree of confidence that all of these tight threatened the middle moments we're going to happen and really do a degree that just blows my mind. I've never heard anything like IT and IT just makes me think that like some like maybe just be a little more open to that. You know that like some like some person off that walked in off the street and said, like gave you the quon pitch for sure, you would not work for sure.

And and the hardest thing about being a technology investor or someone participating in the ecosystem in anyway is it's a parallel dynamic. This is a business of exceptions.

and i've seen to so many kind of fractures to where incredibly credible team walking off the streets with miro, like then a miro happens and yeah, IT still doesn't work click.

you know. But sometimes but sometimes, but I never works, but sometimes IT.

So what makes our industry fun?

All right. So we're gonna do grading because we've decided to kill grading until the otherwise resurrect IT. But I do think it's worth articulating a little bit of I take away. So my take away on qualcomm is the 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. And in order for the next decade to be as successful, they need to be absolutely correct about their growth businesses around iit, 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. 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 and and are to squeeze from a bunch of different directions.

Well, yes, total grim. I think to paint the best version of the intelligent connective adds that I ve heard, Christiana articulate, is you sort put plainly like we all agree that like cloud is like I think like we did the AWS episode. There's over one hundred billion dollars in like revenue backlog in the club.

Now we talk about on the aid of the U. S. Episode like snowball and snowball like getting data to and from the cloud, like still like one of the major pieces of lock. And and like you think about how data gets in the out of the cloud, most of its not by snowmobile. Also most of IT is wireless connected on the edge. And so if you think about IT like that, you like, okay, I can do, I can buy that this is trillion dollar market, but how do you capture value in that? And can they capture IT in the same way that they haven't to pass like very much open questions?

Oh, listeners, that was a total blast, David. Crazy to do a live show like that with no guest for two and a half hours on stage. Just uni?

yes. And they professionally Operated boomer camera? yes. If you haven't .

watched the video version of this, uh, just go check IT out on on youtube positive anywhere, just to see what that looked like. IT was a very fun spectacle to get to do that. Our huge thank you to the celano foundation for hosting us at break point this year is really great event in fun to be in lisbon when you finish this episode.

Come talk with us. Acquired dot F M, slash, slack, thirteen thousand other smart, thoughtful, kind people. If you want some of that sweet acquired merch everyone is talking about, go to acquired dot F M flash store. I know in the next few weeks there's going to be a couple new designs dropping, inspired by catch phrases from episodes where I applied my graphic design skills for Better or for worse.

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