Qualcomm

Qualcomm, or “Quality Communications” — despite being one of the largest technology companies in the world, few people know the absolutely amazing technological and business history behind it. Seriously, this story is on par with Nvidia, TSMC and all the great semiconductor giants. Without this single fabless company based in San Diego, there’s almost no chance you’d be consuming this episode on whatever device you’re currently listening on — a fact that enables them to earn an incredible estimated $20 for every new phone sold in the world. We dive into this story live at the perfect venue: our first-ever European live show at Solana’s Breakpoint conference in beautiful Lisbon, Portugal! *Links:* - The Qualcomm Equation: https://www.amazon.com/Qualcomm-Equation-Fledgling-Telecom-Company/dp/0814408184/ - Principles of Communications Engineering by Irwin Jacobs and John Wozencraft: https://www.amazon.com/Principles-Communication-Engineering-Jacobs-Wozencraft/dp/B075GX66QM/ - Episode sources: https://www.acquired.fm/episodes/qualcomm#sources *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  I walked in and the first thing I saw was the bottom of the big crane boom arm with the weights. And I was like, why are there Olympic weights here? And then I was like, oh, because we've got a professional boom arm camera. This is amazing. All right, let's do it.

• 0:32Ben Gilbert?

  Welcome to season 11, episode six of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 0:46David Rosenthal?

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

• 0:51Ben Gilbert?

  And we are your hosts. There's an incredible property of the universe where electromagnetic signals can be broadcast and travel through space at the speed of light to be received at a different point in the universe. Now, a tiny fraction of these frequencies are detectable by humans as visible light. Some other frequencies can be dangerous, like X-rays or gamma rays. But there's a part of the spectrum that is not detectable to humans, and it's not harmful at modest doses, that can be used to transmit invisible messages all around us all the time, without any of us having any idea.

• 1:29David Rosenthal?

  It's like magic.

• 1:31Ben Gilbert?

  Yeah. These frequencies have been used for over a century to broadcast TV and radio shows, presidential messages, and important news updates. In the last 50 years, humans have gotten tremendously clever at purposing some parts of the RF 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 concurrently sending megabytes or gigabytes 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 Qualcomm. And today, we will dive into their entire history and strategy, unpacking their products,

• 2:15Ben Gilbert?

  which, to the outside observer, is really best described as a layered series of magic tricks.

• 2:21David Rosenthal?

  And spoiler alert for listeners, this is an incredible story. I had no idea before we dove into the research. Like this one is up there with like Nvidia, TSMC. There is so much stuff you can't make up in this story. It's incredible.

• 2:34Ben Gilbert?

  Largest fabless chip company in the world.

• 2:37David Rosenthal?

  Indeed.

• 2:38Ben Gilbert?

  The other thing we should say, listeners, this was super fun to do this episode live in person in Lisbon. Our huge thank you to the Solana Foundation for hosting us at Solana Breakpoint. Many longtime listeners will know Austin Federa from the Slack. He was kind enough to invite us and, and really fun to do it there, especially given Solana's tie to Qualcomm with Anatoly having worked there for over 10 years.

• 3:02David Rosenthal?

  Indeed.

• 3:03Ben Gilbert?

  All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:22David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 3:43Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:05David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:23Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. After this episode, come talk about it with us. There are 13,000 other smart, kind people in the Slack, acquired.fm/slashSlack. Without further ado, on to our live show at Solana Breakpoint. And listeners know that this is

• 5:07Ben Gilbert?

  not investment advice. David and I may have investments in the companies we discuss, and the show is for information and entertainment purposes only.

• 5:14David Rosenthal?

  Well, one small bit of ado before we dive into the story is we owe a big thank you to Dave Mock, the author of the incredible book, The Qualcomm Equation,

• 5:26Ben Gilbert?

  Yep.

• 5:27David Rosenthal?

  which is not well-known, but is the definitive history of Qualcomm and ranks right up there with among the best business books, that business histories that we've used as a source on acquired throughout the whole history of the show. It's awesome.

• 5:39Ben Gilbert?

  And the book's not even really published under like a real publisher. It's published under an industry association. There's no audiobook. There's no Kindle. You have to read the physical book.

• 5:47David Rosenthal?

  Yeah, it's you. It's amazing. I literally the other day texted Ben a photo that I noticed on the back cover, and Ben, of course, had seen it too, of one of the blurbs. I'm going to I'm going to read it here now. It says, "Dave Mock helps uncover the single most important business story, single most important business story that has yet to be told. How Qualcomm came to rule the wireless industry. Think of it as a recipe book for one of the most innovative and leveraged business models of all time." Whose words does that sound like, Ben?

• 6:20Ben Gilbert?

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

• 6:26David Rosenthal?

  And is willing to go find the rare gems, the rare diamonds in the rough. That is written and said by none other than Bill Gurley of Benchmark Capital for this almost unknown book. I bet it's going to be a lot more known after this episode.

• 6:40Ben Gilbert?

  Yep.

• 6:41David Rosenthal?

  Well, Dave starts the book, and it's such an apt place to start with a quote by Edwin Land, who I was not familiar with until recently, when David Senna on the Founders Podcast familiarized us with Edwin. Edwin was the founder of Polaroid and Steve Jobs's hero. And he had this quote that Dave starts this book with, "True creativity is characterized by a succession of acts, each dependent on the one before and suggesting the one after." So with Act One of the Qualcomm story, we start in Austria, here in Europe, in the

• 7:20David Rosenthal?

  mid 1930s, in the pre-World War II era, as Hitler and Mussolini and the Nazis were rising to power.

• 7:30Ben Gilbert?

  Also, is this the first time we've been able to say "here in Europe" unacquired?

• 7:33David Rosenthal?

  It is the first time. It is the first time. And we start, you might think, if you know anything about Qualcomm history, you're thinking mid 30s, you're like, "Oh, I didn't know Erwin Jacobs, co-founder and CEO of Qualcomm, was born in Europe." He was not. He was born in New Bedford, Massachusetts. We start with somebody very different. We start with one of the most famous film actresses, Hollywood film actresses of all time, a woman named Hetty Lamar.

• 8:03Ben Gilbert?

  Side note, the fact that we're starting with Hetty Lamar on the story of how modern telecommunications came to be is so cool. I remember, we reached out to the NZS Capital folks and said, "Hey, do you have any great resources on Qualcomm?" And they sent back this excerpt of, "You should go read up on Hetty Lamar." I was like, "Are they trolling me right now?"

• 8:22David Rosenthal?

  Yeah. You cannot make this stuff up. This is like why we do the show. So Hetty was an incredible, she was like, just an incredible human being. She was world famous, incredibly talented actress, incredibly beautiful. She would later be billed, like the way MGM, she was one of the MGM starlets marketed her, was as the most beautiful woman in the world. She was also a genius. So she starred in Samson and Delilah, Ecstasy, Ziegfeld Girl, many, many more. But what most people at the time, even up until her death, did not know, and certainly her husband at the time in Austria in the mid 1930s did not know,

• 9:04David Rosenthal?

  was that she had incredible powers of observation and was way more intelligent than anybody else around her. So this said husband, that's quite the character, his name was Friedrich Mandl, and he was not a good dude. He was a Nazi arms dealer, which made him very rich at the time, which is probably how he met Hetty, and they became married. Hetty, though, probably unknown to Friedrich and certainly unknown to his business associates, including Hitler and Mussolini, Hetty was Jewish. And so Friedrich would bring his

• 9:44David Rosenthal?

  beautiful, you know, film actress, world-renowned film actress bride, to his business meetings, you know, with the Nazi military powers. And Hetty was listening in to everything that was going on. And as the situation deteriorated, in 1937, she disguised herself as a, as one of her maids and escaped to Paris. And then from Paris, made it to the US, went to Hollywood and lived in Hollywood for most of the rest of her life. When she came to the US, though, she knew like an incredible amount of inside information about the Nazi war effort. And she was incredibly motivated because obviously she was from

• 10:26David Rosenthal?

  a Jewish family. She hated the Nazis, hated her former husband, and wanted to contribute. And specifically, she knew that the Nazis were working on and using to great effect a radio jamming technique for radio-guided torpedoes that would be dropped from airplanes to attack Nazi submarines.

• 10:49Ben Gilbert?

  It's also pretty amazing at this point in history that we had as humans the capability to- Radio guide the 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 30s.

• 11:05David Rosenthal?

  This is crazy. The computer does, the digital computer doesn't exist yet. The concept of digital doesn't exist yet because we're going to get to that in a minute. This is all being done essentially with FM radios. And so Hetty wants to contribute to the Allied War effort.

• 11:23Ben Gilbert?

  And when you say with FM radios, therefore pretty easy to jam. If you know that someone's broadcasting on, you know, jamming 92.3 and you start another signal on 92.3, you disrupt their signal and they're not able to hit their target with the weapon.

• 11:36David Rosenthal?

  Totally. So Hetty teams up with her new Hollywood neighbor, a composer, a music composer named George Antheel, bear with us here, I promise this is getting to Qualcomm, who is a film music composer. And they, with her ideas and his musical prowess, they develop a concept that they patent and they get issued a confidential patent that stays confidential for decades in the US military.

• 12:05Ben Gilbert?

  By the way, this, I believe, did not become declassified until 1981. That's how long it was buried inside the US government.

• 12:14David Rosenthal?

  It was issued in 1942. So four decades that this history was completely unknown. They develop a novel technique to defeat RF frequency jamming by using frequency hopping. And what they describe becomes the origin of something called spread spectrum technology. So if you're familiar at all with like the wireless world or Qualcomm or anything, you hear spread spectrum and you're like, oh, that sounds familiar. Spread spectrum technology, this is the first like description of it in a technical document and a patent. By these two incredibly unlikely people.

• 12:51Ben Gilbert?

  And what it basically means is any way that you're going to transmit a single message across a variety of spectrums. So rather than just on, I'm going to keep saying jam a 92.3 to grounded 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 evade anyone trying to jam the signal and move to a different frequency.

• 13:17David Rosenthal?

  And the reason she teamed up with a music composer for this is that the way you make this happen is you have incredibly precise time syncing on, in this case, the two ends, but in wireless case, all endpoints of the communication channel, incredibly precise syncing so that all endpoints know when to hop frequencies. And you're hopping frequencies like dozens or hundreds of times a second. And this can defeat jamming. This is great for cryptography. This is great for sending coded messages. It turns out, this was not on anybody's radar, pun intended at the time, it turns out that this is also the most efficient way to use radio bandwidth.

• 13:59Ben Gilbert?

  But 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 knows 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, David? What's the technology used to synchronize a schedule of frequency hops between a torpedo and an airplane?

• 14:33David Rosenthal?

  So here's where, if this were a Hollywood movie, like one of Hedy's films, this single-handedly would have defeated the Nazis and all that. Unfortunately, the reality is there was no digital computing at the time. It wasn't possible. The US military tried very hard during World War II to make this happen, the whole Allied military. They couldn't make it work. Because like, think about what you're trying to do here. And that vacuum tubes and analog computing was what was happening at the time. You would literally need to put like ENIAC on a torpedo and drop it from the sky to make this happen. That was not feasible.

• 15:08Ben Gilbert?

  It's worth sharing how their prototype worked, though. So the way that they prototype this, Hetty, in the, you know, 19, early 1940s, is they took two player piano scrolls that had the same, basically, song, and they mapped each note to a new frequency, and they put the same player piano in the receiver, the same scroll in the receiver that they did on the transmitter, and they pressed play on the player piano song at the same time. So it would know exactly where to hop around.

• 15:39David Rosenthal?

  Yeah, so there were 88 frequency hops in their technical description of the patent because there are 88 keys on a piano. So I guess literally, you wouldn't be dropping ENIAC from the sky, you'd be dropping a piano from the sky.

• 15:48Ben Gilbert?

  Yes, like a cartoon.

• 15:50David Rosenthal?

  Oh, totally. Okay. So that is the origin, but you can't make this up, origin of spread spectrum technology. That's act one. Act two, we stay in World War II, around the same time, but a few years later. There is a young PhD grad, PhD grad, from the Massachusetts Institute of Technology, the August Massachusetts Institute of Technology, who was working on code breaking for the Allies, very famously, at Bell Labs and at the Institute for Advanced Study in Princeton, New Jersey, where he intersects with luminaries like Albert Einstein, John von Neumann, Alan Turing.

• 16:33David Rosenthal?

  We're not talking about any of those three folks, but by process of elimination, you can probably figure out who we are talking about. 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 Claude. So during the war, all of this effort culminates in what he publishes after the war, his masterwork, A Mathematical Theory of Communication, which defines a bit, the new field of information theory, ushers in the digital era for the world. And

• 17:15David Rosenthal?

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

• 17:31Ben Gilbert?

  Yep.

• 17:32David Rosenthal?

  So, we've described like the Hollywood part, we described here in Act Two Claude Shannon, you know, Birth of Computing, all that.

• 17:39Ben Gilbert?

  And it's worth maybe sharing a little bit about information theory. Can I take a second, David?

• 17:43David Rosenthal?

  Of course.

• 17:44Ben Gilbert?

  All right, so I had heard people reference information theory or communications theory dozens of times over the years, and every time I'd 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 as 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's 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.

• 18:24Ben Gilbert?

  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. Whereas if you're in a really quiet room, then you can have kind of a message with a bunch of noise. Imagine someone talking, but there's a bunch of static. Well, that's okay if the medium itself, the room that you're communicating in, 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

• 19:06Ben Gilbert?

  in. And I think this is this very interesting aha moment, where what he basically deduces is, there is a theoretical limit to the amount of signal that you can pump through any given medium, based on how noisy the medium is, and based on the level of entropy or randomness. In the, 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 99% chance that I'm coming to deliver the message to you. I just had breakfast. Well, if it's in a really loud, noisy room and you know, there's, I'm, I'm sick and I'm coughing and I tell you, I just had breakfast. Because you were expecting it, it's fine if it's in a really garbage medium.

• 19:49Ben Gilbert?

  But if you have no idea what I'm about to tell you, and it could be everything from like, uh, hey, uh, you're fired to, I just had breakfast and you have no idea. Like, we need to have that in a pretty pristine environment with really nice volume or gain on the signal. So that's sort of the high level concept of, of information theory and more specifically of, um, uh, Shannon Hartley theorem describing, uh, the, the relationship between signal and medium.

• 20:14David Rosenthal?

  Yeah. Super, super cool stuff.

• 20:18David Rosenthal?

  The, so where this all comes together in act three of our story here, which is gonna be a little longer because we're gonna get into Qualcomm as part of this, uh, is one Erwin Mark Jacobs, an American born in 1933, as we mentioned, in scrappy New Bedford, Massachusetts, which used to be, I believe, the wealthiest town in America during the whaling era, as we discussed during Standard Oil or Berkshire? I think it was Berkshire, actually.

• 20:48Ben Gilbert?

  It was Berkshire because 45 years before Erwin Jacobs was born in New Bedford, the, uh, Hathaway Manufacturing Company was started.

• 20:59David Rosenthal?

  In New Bedford.

• 21:00Ben Gilbert?

  In New Bedford.

• 21:00David Rosenthal?

  Right.

• 21:01Ben Gilbert?

  Before it merged with Berkshire and before, of course, Warren Buffett.

• 21:04David Rosenthal?

  Even by, uh, 1933, New Bedford was not the New Bedford of the whaling era, shall we say. So Erwin is a pretty amazing American story. So he grew up in like a very middle-class family in this super scrappy, uh, area of the country. His dad worked a bunch of jobs, uh, and ended up running a local restaurant called the Boston Beef Market. Erwin was highly gifted in math and sciences as a kid going through school. He wanted to study math and science and probably would have wanted to study engineering if he like knew it existed in college.

• 21:45David Rosenthal?

  But his high school guidance counselor famously told him that there's no future for math and science in New Bedford. And frankly, his high school guidance counselor was probably right. So Erwin, though, had very good grades growing up and the guidance counselor encouraged him to go to the world famous Cornell School of Hotel Management so that he could learn the hospitality management business and come back and work in the family business at the Boston Beef Market.

• 22:15Ben Gilbert?

  Which he did.

• 22:16David Rosenthal?

  Which he did go to the School of Hotel Management.

• 22:19Ben Gilbert?

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

• 22:27David Rosenthal?

  And he would later credit the year and a half that he spent in the hotel management school at Cornell before transferring to electrical engineering. He would credit that year and a half with really helping him start first Linkamit, his first company, and then Qualcomm, get out of academia and become an entrepreneur because he actually learned about like business, accounting, the real world, applications and found that like he kind of loved that too.

• 22:52Ben Gilbert?

  Yep.

• 22:53David Rosenthal?

  Amazing. So after a year and a half at Cornell in the hotel management school, he learns about engineering and is like, oh, you can make money with math and science. This is actually like in demand, maybe not in New Bedford, but like in the rest of America. And so he goes to the dean at Cornell. He tells this story and he's like, hello, sir, you know, I sophomore at Cornell. I would like to transfer from hotel management to electrical engineering. And the dean's like, oh, you mean electrical engineering to hotel management, right? And he's like, no, no, no, no, hotel management to electrical engineering.

• 23:26Ben Gilbert?

  No, I want to do the harder one.

• 23:27David Rosenthal?

  I want to do the hard stuff. After the dean like picked himself up off the floor, he allowed it, perhaps with a degree of suspicion, which he need not have because Erwin is another genius in this string of geniuses. He would graduate, go on to a PhD at.

• 23:46David Rosenthal?

  MIT, which he would do in three years, finishing his PhD in 1959, studying under none other than Claude Shannon, himself, who after the war returned to MIT as a professor.

• 23:59Ben Gilbert?

  It's pretty interesting because so many of these stories that we tell, there's an immense element of genius, no question. Erwin Jacobs and Jensen at Nvidia and Steve Jobs, geniuses. And also-

• 24:13David Rosenthal?

  There were like 10 people in the world who knew this stuff at the time, and they were among them.

• 24:17Ben Gilbert?

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

• 24:31David Rosenthal?

  Totally. And then, without what's going to come later in Hedy Lamarr, that he would start Qualcomm. Amazing. So Erwin is so, young Erwin is so talented that after he finishes his PhD in three years, you know, mere like five years removed from being a hotel management major at Cornell, and Shannon and MIT ask him to stay on as a professor at MIT, like immediately, which he does. He spends five years teaching at MIT, during which he teaches the first course, like, for students on digital communications in the world, I believe. You know, like, applying Shannon's theories

• 25:14David Rosenthal?

  to like disseminate amongst like practical engineers being trained at MIT.

• 25:18Ben Gilbert?

  Yep.

• 25:19David Rosenthal?

  He and a fellow faculty 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 Erwin, distilled, you know, from the father himself of Claude Shannon. He spends five years teaching there. And then in 1964, he takes a sabbatical and heads out to California to do a sabbatical at JPL, at Jet Propulsion Labs, working on the US Space Program and communications with satellites in the US Space Program at the time, where-

• 25:57David Rosenthal?

  He intersects faithfully with another recent MIT Electrical Engineering PhD grad, one Andrea, or Andrew, as it was anglicized, Viterbi, a Jewish immigrant from Italy, who got his PhD from MIT in 1957, who was working at JPL, and they become fast friends. So fast friends, in fact, that when Erwin returns back to Boston to cold, snowy, bleak Boston near his upbringing in Massachusetts, after his sabbatical, Erwin then gets a call shortly thereafter from one of his former professors at Cornell, that a new engineering

• 26:42David Rosenthal?

  school in San Diego is being started, the new UC San Diego, and there's an opportunity for Jacobs to come out and start the Electrical Engineering Department at UCSD. 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 and his family, Erwin and his family, move out to UCSD. And while he's out there, he continues doing his contracting work with defense contractors and JPL and the US Space Program.

• 27:16Ben Gilbert?

  And this is sort of one-off 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 Erwin doing contracting.

• 27:24David Rosenthal?

  Totally. He is like, the first, you know, like, Electrical Engineering professor at UCSD. That's his full-time job. But because he's in such close proximity to everything going on at JPL and NASA and the like, he's doing that on, you know, kind of like, one day a week-ish. And one day, he and Andy and another professor from UCLA are up at NASA Ames in Mountain View, doing consulting work up there. They're flying back, and they're all kind of lamenting. They're like, "This is super cool that we're doing this. We're making more money than academia. We're helping our country. We're participating in the space race. But it's kind of hard to like, balance all this stuff that we're doing." And they're like, "Hey, what if the three of us band together and form a company, kind of a shell

• 28:06David Rosenthal?

  company, to just kind of manage this consulting work that we all get? We could probably get some, you know, efficiencies here. Maybe hire an assistant, help us out, that kind of stuff." And they say, "Great. You know, we don't intend this to be a..." Real company, we're not gonna make any products or anything, this is just to manage our consulting. They sort of tongue in cheek decide to call it Link a Bit, like linking a bit. Very like academic joke. So who is this third partner in Link a Bit? He ends up not kind of gelling with the other two, leaves shortly thereafter. His name is Len Kleinrock. And I read that the first time and I was like,

• 28:48Ben Gilbert?

  I've heard that name before.

• 28:49David Rosenthal?

  I know that name.

• 28:50Ben Gilbert?

  And I'm gonna guess 99% of listeners haven't heard that name, but if you're you and me and all we do all day is study tech history and the history of the internet, that name should ring a bell.

• 28:58David Rosenthal?

  Yeah. Well, you know, at first you read this history and you're like, man, bummer for Len, he missed out on founding Qualcomm. Well, he actually ended up okay because instead of founding Qualcomm, he founded the internet.

• 29:10Ben Gilbert?

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

• 29:16David Rosenthal?

  Many people were involved in the ARPANET project.

• 29:18Ben Gilbert?

  I guess at ARPA? I don't know if it's-

• 29:20David Rosenthal?

  ARPANET, yeah. ARPANET, which was the precursor to DARPA, which was the precursor to the internet. Len and one of his grad students at the time at UCLA, like the next year, right after this has happened, this is all happening at the same time, they sent the first message on ARPANET ever, like the first internet transmission ever from UCLA to Stanford. He's one of the core founding fathers of the internet. So he ended up doing okay. He probably didn't make as much money, but he will be remembered in history. Pretty amazing. So Andy and Irwin, they're mostly continuing to work on NASA and Navy defense projects in San Diego, because of course, San Diego is a US Navy town.

• 30:04David Rosenthal?

  And most of what they're doing is working on satellite communications. If you know anything about satellite communications, the bandwidth that you have available to you is very- Very narrow and you need to be very, very efficient with your communications.

• 30:20Ben Gilbert?

  And that's still true to this day. I mean, any, any company in the sort of emerging space economy, it's a totally different engineering problem than you're used to today. Because if you ship code up to your satellite and you find a bug, it's like very expensive and very slow to go get enough bandwidth and actually make sure you have the right time window to update the code on the satellite. So it still kind of works the way that computers worked 30, 40 years ago.

• 30:46David Rosenthal?

  Yep. And so they're, you know, it wasn't them. Like this was the military that was as they got exposed to this trolling around to find the most best, most efficient ways to use this narrow bandwidth channel that they had. And what ends up getting used but this old patented spread spectrum technology from the World War II era invented by Hedy Lamar and George Antheel.

• 31:10Ben Gilbert?

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

• 31:17David Rosenthal?

  Early seventies.

• 31:18Ben Gilbert?

  Oh, link of its early seventies.

• 31:19David Rosenthal?

  Yeah.

• 31:20Ben Gilbert?

  They have like 15 years of link a bit before.

• 31:23David Rosenthal?

  Oh, yeah. Oh, yeah. There's a long. Link of it is involved. Oh, we are. You, you might not know. I've got some good surprises for you.

• 31:30Ben Gilbert?

  All right.

• 31:31David Rosenthal?

  So they start doing more and more of this. Erwin's exercising the like hotel management sort of side of his brain as he's doing this. He finds that he really enjoys it. They start bringing on other professors, other grad students into link a bit to kind of build this sort of like army of the greatest, you know, information theory and wireless signal minds in the country.

• 31:57Ben Gilbert?

  All for defense contracting.

• 31:59David Rosenthal?

  Almost all for, I don't think they were doing any commercial work at this point. I think it was all NASA and defense.

• 32:04Ben Gilbert?

  Yep.

• 32:05David Rosenthal?

  And almost all satellite work. And so they start building the company that eventually in 1971, there's so much going on, Erwin decides he's going to take a sabbatical from UCSD and spend a year just organizing the company. He ends up never going back to UCSD ever because during that year, they get the idea, I believe it was during this year, maybe they'd start to have inklings of it before that, um, you know, it's really nice. They've got all this technical talent. They're consulting on these projects that defense contractors mostly are the prime bidders for. They're like, wait a minute.

• 32:45David Rosenthal?

  Those guys are making all the money. We're doing all the differentiated like engineering work here. What if we started bidding on some contracts ourselves? We would probably make a lot more money as like a kind of product, like, you know, contract focused services company ourselves, rather than just as a sub consultant on these projects.

• 33:06Ben Gilbert?

  And that that lesson persists to this day, too. If you can pull off being the prime contractor to the government on a big contract, that's the economics are much better than if you get subcontracted by one of the primes.

• 33:17David Rosenthal?

  Well, and like, oh, man, if you can be a prime, I mean, the primes back then, primes being prime defense contractors, they're still the primes today. Like, that is a gravy train that like, yeah, Raytheon, Lockheed, Boeing, all these companies. So, of course, they start doing this, but like, there's a reason the primes then are the primes now. Lincoln is not going to be a prime then or ever. So they need to, if they're going to do this, they need to move into the commercial sphere. So this is, this is like one of these just like, so good. It's like history was like made for acquired. Do you know what the first, like, contract project that Lincoln did was, if you knew, you would just be like,

• 33:57Ben Gilbert?

  No, I don't.

• 33:58David Rosenthal?

  smiling so wide right now. So they hear about, remember, their expertise is in satellite communications. They hear about a regional retailer.

• 34:10Ben Gilbert?

  No. Did they do Walmart's satellite network?

• 34:15David Rosenthal?

  Yeah, they did.

• 34:16Ben Gilbert?

  What?

• 34:17David Rosenthal?

  Yeah. They hear about this eccentric founder of this small Midwestern regional retailer that for some reason wants to beam himself talking every day to all of, you know, from HQ to all of the local stores of this, a local outlets of this retailer. Lincoln's first project is doing the satellite communication system for Walmart.

• 34:39Ben Gilbert?

  That's wild. Listeners, for anyone who didn't listen to our Walmart episode, Walmart. Was for a very long time, the most innovative retailer on the planet. I mean, until Amazon, basically. And one of the illustrations of this is in the late 70s and then continuing into the early 80s, when they actually lit it up, they invent, they invested tens of millions of dollars into building a private satellite relay because the bandwidth available on the internet was insufficient for them at the time.

• 35:07David Rosenthal?

  Oh, there was no, it was just the ARPAN, it was the Kleinrock.

• 35:09Ben Gilbert?

  Or whatever, phone lines, the, the, the public WAN effectively, or precursor to WAN, was insufficient to, you know, send the store data that they had actually been collecting and want to tabulate their results on a daily or weekly basis, but also this like

• 35:24David Rosenthal?

  Yeah, Sam wanted to broadcast out the, you know, the Saturday.

• 35:26Ben Gilbert?

  Yeah.

• 35:27David Rosenthal?

  Oh, Phoenix, so great. Wait, there's more Walmart to come a little later in the episode. Stay tuned. Uh, literally.

• 35:36David Rosenthal?

  So, um.

• 35:37Ben Gilbert?

  God, you just crack yourself up.

• 35:38David Rosenthal?

  I know. This is why, we'll probably cut this for the actual episode. We get, occasionally we get these reviews, uh, for a choir to like comments that like, one host is like really normal and the other host is just like

• 35:52Ben Gilbert?

  laughs at his own jokes.

• 35:53David Rosenthal?

  Crazy person.

• 35:56David Rosenthal?

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

• 35:58Ben Gilbert?

  We are who we are. Nothing's changed and at seven years in, we're not, yeah.

• 36:02David Rosenthal?

  I promise you, it's not an act. Ask my wife.

• 36:06David Rosenthal?

  Okay, so the next thing that they get into is, um, because they're in, they're in video, they're, they're, they're in satellite, they're in video now with Walmart, uh, and they're doing these two-way communications. They build the video scrambling system for pay TV on cable system. So it used to be before the link a bit solution for, uh, multiple access cable systems. If you like, were even mildly technical or could like play around with like an Allen wrench, you could do, you could get HBO or any of the early pay TV channels for free.

• 36:43Ben Gilbert?

  Yeah, the, the, the catchphrase there is security by obscurity.

• 36:47David Rosenthal?

  Yeah, exactly.

• 36:47Ben Gilbert?

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

• 36:56David Rosenthal?

  So Jacobs and Viterbi and all the the Brain Trust at Link of it, they they solve that problem. And the HBO uses them and then all the other, all the other big pay TV channels.

• 37:08Ben Gilbert?

  I think that's the inspiration behind the HBO opener.

• 37:12David Rosenthal?

  Yes, the scrambled.

• 37:14Ben Gilbert?

  Because it's like de scrambling and now bringing you this.

• 37:17David Rosenthal?

  So great. That's Irwin and Andy right there. So in 1980, they do this for the whole decade of the 70s. In 1980, the Link of it, the company, gets acquired by a East Coast radio technology company called MACOM, I think is how it was pronounced. It used to be actually MACOM and then it, you know, this like weird 80s branding stuff. They changed the brand to M slash A dash C O M. Microwave Communications, I think. Anyway, they sell the business for 25 million bucks in 1980, which like

• 37:52Ben Gilbert?

  Nice early win.

• 37:53David Rosenthal?

  Not bad for some former academics. 25 million bucks in 1980 dollars like

• 37:58Ben Gilbert?

  And they had a lot of people at this point. I think there was like over 1,000 employees.

• 38:02David Rosenthal?

  It grew within, it was on its way there, but then it grew over the next five years within MACOM to that big. So I don't think it was, it grew to 1,500 people eventually. Like this is a big freaking business. Like you can imagine the things we're talking about. Like, a lot of other retailers started using, you know, satellite networks. A lot of other cable TV, you know, channels wanted to use these like, and there were other products that they were building. Like, this is a huge, like, basically, they made a big mistake selling the company. You know, they, they hadn't listened to acquire, they didn't have all the lessons.

• 38:31Ben Gilbert?

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

• 38:33David Rosenthal?

  Well, that's true. They made absolutely the right decision in selling Link of it then. So they stay with MACOM for five years. And then there's a leadership change at MACOM. And like, this is an East Coast technology company. So they all leave. In 1985 and they sit around for a couple of months and you know they're like like we made more money than we ever like dreamed we would. We got to be part of so many cool things but like we're still young and like the wireless communications industry is kind of just getting started. And this is 1985. So the cellular telephone industry exists at this point.

• 39:15Ben Gilbert?

  It had just started. We had the you know how we were on 5G now and everybody remembers the iPhone 3G, that that second phone and the edge network that that the first iPhone launched with was 2G. It was a little advancement on 2G. This was 1G.

• 39:30David Rosenthal?

  This was 1G, which was analog. No digital yet in cellular. It was analog cellular.

• 39:35Ben Gilbert?

  And cellular had just been an innovation. I mean, this notion that rather than, you know, communicating over long distances, we were actually going to put cell towers so that you only needed to communicate with your local tower and that that could be relayed. And you had this sort of cellularification of all the geography that you needed to cover.

• 39:57Ben Gilbert?

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

• 40:03David Rosenthal?

  Yeah, that's great. So, you know, Erwin and Andy, like they're they are first rate academics. You know, as hopefully we've told the story here, like among the most brilliant minds in the world, but they're also like especially Erwin, like incredible business people, market analysts, like they're very aware, like the products they developed, the link of it, they're aware that this market is coming. And and the reason they're so aware, like technically it exists now, cellular, it's all car phones at this point in time, because the way it works is it was essentially, it was just like the torpedoes back in the day. It was essentially a FM radio broadcaster that you would wire up into your car.

• 40:44Ben Gilbert?

  Super high power.

• 40:44David Rosenthal?

  Super high power. You needed like a lot of freaking power.

• 40:47Ben Gilbert?

  You had to put it in a car for what you're talking about and because you couldn't like there was not a battery available to.

• 40:55David Rosenthal?

  You needed a running internal combustion engine to make this thing work.

• 40:58Ben Gilbert?

  To power this thing.

• 40:58David Rosenthal?

  Yes, on the endpoints, on the endpoints. And bandwidth was super limited and like these systems were thousands and thousands of dollars in early 80s dollars. And despite all that, the consumer demand for car phones.

• 41:16David Rosenthal?

  Was insane. Like, this was just like, you know, there were wait lists years long for consumers to get car phones installed. And the fledgling carriers at the time, like, they only had so much bandwidth they could fit because literally, it's, you know, there's no, there's no efficient use of channels. It's just like the torpedoes back in the day. Like, they couldn't keep up with all the demand. I remember when my parents, who were lawyers, like, they had car phones in the 80s. Did your parents have one?

• 41:47Ben Gilbert?

  Uh, no, my great uncle had one. But it is interesting thinking about, you know, when you're listening on an FM radio, you have 99.1, and then you click up on the dial, and it says 99.3, and then you click up, and it says 99.5. And you can't even have .2, .4, .6, because that's too close. There would be interference. So you start thinking about, and this isn't exactly right, I'm going to oversimplify this a little bit, but you start thinking about, well, geez, how many slots are there to communicate in this analog way with a cell tower near me? What can a cell tower handle? 100 phones, 200 phones, 500 phones? Either way, it's not going to scale.

• 42:23David Rosenthal?

  Not like much more than 100.

• 42:24Ben Gilbert?

  Yeah.

• 42:25David Rosenthal?

  Yeah. I mean, you think about how many radio stations there are. Like, it's not much more than that. So, you know, the Linkabit folks, Erwin and Andy, they see this. They know. And they're like, oh, this industry is in its infancy. We see this amazing demand. We are literally the best. We know there's a better way to do this. We know you can do this digitally. We know you can do it way better. We know how to do it the best. So they found a new company in July of 1985 with seven, seven in total, Andy, Erwin, and five other of the best Linkabit engineers. They meet at Erwin's house, and they decided to start this new company. And they name it Qualcomm.

• 43:08Ben Gilbert?

  Quality Communications.

• 43:09David Rosenthal?

  Which is short for Quality Communications, which I had no freaking idea when we did the research. But then you're like, oh, duh, Quality Communications.

• 43:18Ben Gilbert?

  Yeah.

• 43:19David Rosenthal?

  And then when you know all this history, it makes sense. Like, they are the highest quality, you know, but they know how to do quality communications. This is a communications company and they can provide quality that nobody else can.

• 43:29Ben Gilbert?

  There's so many companies named this way, too. These things become these household brands and then it's like, you don't even think about what the original meaning was.

• 43:35David Rosenthal?

  Totally, totally. Because like the industry was still so early and you think for a minute about what is involved in building out a cellular telephone network. There is enormous capex, like, you know, laying like cable. We've talked a little bit about the cable industry history on acquired. Like, that required enormous capex. Like, this is like literally putting towers in the ground, putting base stations on them, building these thousand dollar mobile phones. It requires a lot of money to participate in this.

• 44:04Ben Gilbert?

  It's money and it's a bunch of competencies because not only are you thinking about the real estate for the tower and putting in the tower and putting the base stations on the tower. Well, then you need to figure out, well, how are those towers? What's the protocol? What's the technical method that it's communicating with phones? And making sure that the phones have all the correct hardware. And it's not just antennas, it's very specialized chips. And so then you're like, okay, well, do we need to then make phones? And do we need to build a consumer brand? And do we need to market to consumers? Do we need to be our own carrier? Do we sell to carriers? There's a way to sort of like bite and try and eat the whole elephant here. Or you could say, okay, we're just going to try and be one small part of this because we have an idea for how to make this better.

• 44:49Ben Gilbert?

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

• 45:22David Rosenthal?

  And this story, you know, this, hopefully this first, you know, 45 minutes of the episode was interesting. We had fun telling this like crazy World War II Hollywood, you know, history of all the technical aspect that comes to this. The business history of Qualcomm, just like Bill Gurley said on the blurb of this book, it is one of the most brilliant strategic executions of entering a market, period, you know, like writ large ever. Like this is on par with Nvidia, if not, honestly, more brilliant.

• 45:53Ben Gilbert?

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

• 46:14David Rosenthal?

  And yet, here we are talking about Qualcomm. So they knew two things at the outset of founding. One, this is a massive opportunity that they eventually wanted to pursue, was bringing their expertise to bringing cell phone, terrestrial cell phone networks into the digital era and building the dominant guerrilla company in this soon to be massive industry. And two, they knew they couldn't do it yet. So they actually started in the same fashion that Lincoln did. They're like, okay, we're going to bootstrap up by doing consulting work. So one of the first consulting projects they do is with Hughes, you know, like one of the defense primes, Hughes, like Howard Hughes, pretty awesome, on a proposal

• 46:59David Rosenthal?

  to the FCC for a mobile satellite network. They're like, all right, what we'll learn about consumer mobile, you know, telephony services, enter the market, we'll work on the satellite network.

• 47:07Ben Gilbert?

  And we're talking like Jurassic Park sat phones.

• 47:10David Rosenthal?

  Yes.

• 47:11Ben Gilbert?

  You know, that, that's like big honking thing, super expensive, but like when you really need it, it's nice that there exists a sat phone network.

• 47:19David Rosenthal?

  Yes. So while they're working on this, they're like, working on like, okay, how can we like, we're the experts at, you know, Optimizing satellite communication channels for efficiency. They come up with an application of spread spectrum to use multiple access, multiple conversations, access the same channels at the same time.

• 47:39Ben Gilbert?

  Yep.

• 47:39David Rosenthal?

  That they call, that they, they use a technique called CDMA. Code, division, multiple access.

• 47:48Ben Gilbert?

  Which the first time you hear this phrase, sounds like complete jargon, like meaningless, and, and then you stare at the Wikipedia article for a while to try and unpack each one. So we'll break it into parts. Multiple access. Well, that's, that's fairly straightforward. Rather than being broadcast, so like a TV network, we have multiple endpoints that all want to communicate with each other using whatever the same communication medium is. So rather than using one single frequency to all try to pile on there at the same time, which of course wouldn't work in that analog world that we were talking about. I want to call you on 92.3. You want to call Bob on 92.3. My mom wants to call my dad on 92.3. You quickly get into a situation where like, everything's just colliding with each other.

• 48:34Ben Gilbert?

  So multiple access on just a single analog frequency doesn't work. So you got to divide up and say, everybody gets their own frequency. And that's sort of the, the, the way that, um, the way the world evolved. So you mentioned code division.

• 48:47David Rosenthal?

  Yeah.

• 48:47Ben Gilbert?

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

• 48:52David Rosenthal?

  Yes, uh, we certainly can.

• 48:54Ben Gilbert?

  So before we get to the CD and CDMA, code division, let's, so we've got the multiple access part. A bunch of, a bunch of people trying to communicate using the same medium.

• 49:04Ben Gilbert?

  Well, the things that we were talking about before, everybody gets their own frequency, that was called FDMA, frequency, division, multiple access. So a pretty straightforward way that you might divide up the airwaves in order to have multiple conversations. And the way the telecommunications industry works is, remember I opened the episode by saying it's basically a layered set of magic tricks. This is sort of the, the next iteration on top. And if you say, okay, rather than sending analog signals, what if we were sending digital signals? So if I'm talking to David, there's a lot of sort of. About half the conversation is actually empty air. And if two folks out in the audience are talking to each other, a lot of your time is actually empty air. So we don't both need the entire frequency all the time.

• 49:48Ben Gilbert?

  And if we are communicating using a digital signal instead of an analog signal, then actually we can parcel up the information into digital packets.

• 49:57David Rosenthal?

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

• 50:00Ben Gilbert?

  Right. So, you know, the very crude example is if we're at a dinner party, I can have my conversation for 30 seconds in a room. And then, you know, I pause and I stop talking. A different conversation can happen for 30 seconds. Of course, that's too crude and that's far too long. In a time division network, what you'd basically do is say, I get some digital packets for these milliseconds. Then the next milliseconds, you get your digital packets. Then the next few milliseconds, someone else gets their digital packets. And we'll keep round robin-ing it between the 20 conversations that we're all having. And when it gets reassembled on the other side by some other phone or something.

• 50:38David Rosenthal?

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

• 50:43Ben Gilbert?

  Yeah, you're like, oh, the signal maybe sounds a little compressed. It's not as good as if we're talking to each other actually face to face. But there's no like weird blips or pauses in the conversation. Even though we're all borrowing different time slots on the same frequency, it actually sounds pretty smooth to me.

• 51:00David Rosenthal?

  Yep.

• 51:00Ben Gilbert?

  So that's the next iterative invention.

• 51:02David Rosenthal?

  This is a case where Europe was way farther ahead than the US. Europe was basically ready to implement this time division multiple access digital standard in Europe for European cellphone technology. And that was driven by Ericsson, the big European infrastructure provider.

• 51:19Ben Gilbert?

  So I think like, just to pause and reflect, big innovation going from maybe 20, 30, 50x. Like you get a lot more capacity by saying, instead of just one person gets a frequency at any given time, you now get a whole bunch of people who can use that frequency because the signal's digital, because of time division. This is the movement from frequency division, multiple access, FDMA, to time division, multiple access, or TDMA.

• 51:44David Rosenthal?

  It's actually. He said 3050, maybe now that kinda is, but like back then it was 3 to 5X. Really, I think the right analogy is like, it is time sharing. Time sharing is what it is. And it's kinda like the old computing model of like time sharing on a teletype on a mainframe. That's what's going on here.

• 52:00Ben Gilbert?

  Yep. And so, over to Qualcomm. So they're thinking about doing this satellite communication thing. And remember, Erwin studied with Claude 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's sort of looking at TDMA and they're like, ah, I think there's something even more efficient than this and we need something more efficient than this for this satellite network.

• 52:31David Rosenthal?

  And, these guys were all around the beginning of the internet.

• 52:34Ben Gilbert?

  Yes.

• 52:35David Rosenthal?

  And like, you think about, if you know anything about how the internet works

• 52:38Ben Gilbert?

  And packet switching networks generally.

• 52:39David Rosenthal?

  Packet switching, it's not time sharing.

• 52:41Ben Gilbert?

  No, it is. Everybody compresses their data as much as they possibly can into a digital packet. They fire it off and it bounces around a series of places until it hits the other side, gets decoded, and hopefully the protocol is written correctly where as you're sort of opening your packets and sequencing them all in the right way, it seems perfect and how the message was originally intended to be when it was encoded in the first place.

• 53:06David Rosenthal?

  And you said the magic word, decoded. And that's what these guys figure out. They're like, duh, we'll just use code. And then like, everybody will send all the conversations all at the same time, all across all the different channels, will maximally efficiently use all the spectrum allocated, and we'll just append a little code to the beginning of each digital conversation and it'll get reassembled on the backend. Which is basically the same way the internet works.

• 53:32Ben Gilbert?

  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 use in the telecommunications industry of the dinner party. So rather than the sort of frequency, the FDMA model of everybody's in their own room having their own conversation, you know, that That's not super efficient, or TDMA, which is you put five or 10 people in a room, but they need to wait their turn to have their conversation. Well, what code division basically is, 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 language.

• 54:15Ben Gilbert?

  They can sort of listen and disregard noise that's coming in.

• 54:19David Rosenthal?

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

• 54:26Ben Gilbert?

  You don't care how much Spanish.

• 54:27David Rosenthal?

  I either know you said that, or you didn't say that.

• 54:29Ben Gilbert?

  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's state of breakfast.

• 54:36David Rosenthal?

  Yeah.

• 54:36Ben Gilbert?

  And that's an oversimplification. If you really wanted to sort of dig into it, what you're basically doing is you run any given packet through, like, literally an encoding. So maybe my encoding is 10010. So you detect, so you encode whatever the packet of information is. You run it through, sort of add it to 10010. 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 troughs 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.

• 55:21Ben Gilbert?

  So it individually subtracts all of our messages, which are layered all on top of each other, off the very same digital signal, until it basically has all of our messages spread apart. It disregards any of the ones that doesn't match the code that I'm looking for, that I'm listening for, and it says, I just care about the message that came from Ben, which was 10010, or whatever code I just made up.

• 55:44David Rosenthal?

  And then it reassembles it.

• 55:45Ben Gilbert?

  The shtick for CDMA.

• 55:48David Rosenthal?

  And what these guys do, just this brilliant, like, they saw it, they had the background, they had the engineering, they like, everything, right place, right time, and the business sense. They developed this, and they freaking patented it. In 1986, well before, years before Qualcomm gets actually directly involved in the cellular industry at all, they patented the method and technique for code division multiple access applied to terrestrial cellular networks in 1986 in US patent number 4,901,307, which is one of the most valuable patents in history.

• 56:29Ben Gilbert?

  Yep.

• 56:30David Rosenthal?

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

• 56:37Ben Gilbert?

  And, and when you think about why that is so valuable, when you really distill down what the CDMA patent is, it was the very first time that you could say, well, rather than thinking about one, one specific frequency, just imagine you have all the frequencies available to you, and everybody can all the time broadcast their message on whatever the next available frequency is, and we have the technology to just figure it out on the other side. Oh, and by the way, you don't even need to do it with super high power, so it's good for battery life and that sort of thing, because since it's encoded-

• 57:08David Rosenthal?

  You don't need an internal combustion engine to power this thing.

• 57:10Ben Gilbert?

  Right. The other side knows what it's looking for. So this is the equivalent of, there's a bunch of people whispering 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.

• 57:31David Rosenthal?

  Okay. So Qualcomm founded in 1985, patent issued 1986, or applied for in 1986.

• 57:39Ben Gilbert?

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

• 57:42David Rosenthal?

  No, that's right, that's right. Looking ahead, foreshadowing. Qualcomm doesn't enter the wireless industry until 1989. What happens in the interim? This is, this is the next Walmart. Oh, it's so good. You literally just can't make this stuff up. So they get approached to bid on another contract, fledgling Qualcomm does, from a company called OmniNet, which has this idea that they think the Qualcomm folks are going to be perfect to implement. They want to make a mobile satellite network specifically to connect

• 58:23David Rosenthal?

  commercial semi trucks on the roads in America. And network them up to the distribution centers for retailers and other people who, companies who ship a lot of things in the US. This is right in their wheelhouse. Qualcomm and Erwin are like, great, we're going to bid on this contract. They win it. They start working with OmniNet. And they make it work. And one of the very first customers is of course Walmart, which implements it on their own proprietary fleet of trucks, building further their technical advantage over just about every other retailer in America.

• 59:01Ben Gilbert?

  And at this point, they've walked away from the satellite contract, right? They sort of like-

• 59:05David Rosenthal?

  Yeah, the Hughes satellite thing, that actually just never happened.

• 59:09Ben Gilbert?

  So they developed this technology, they patented, they were like, oh, but there's no money here because the contract-

• 59:14David Rosenthal?

  Yeah, the FCC was like, yeah, satellite Jurassic Park phones, not going to be a thing.

• 59:18Ben Gilbert?

  Right. So instead, they're focused on this OmniNet.

• 59:21David Rosenthal?

  So they focus on this and they also have like a lot of the business, you know, relationships already from the previous iteration of what they were doing and link of it, including with Walmart and many of the other large companies and retailers. I believe it's Schneider Trucking becomes one of, actually the first customer, I think, for that. So they work on building that. It becomes pretty clear, like, this is going to be the interim main product. Qualcomm and OmniNet merge in 1988. They raise $3.5 million in funding as part of that. They bring the product to market at the end of 1988 as OmniTrax. People might have heard of it. It was part of Qualcomm for a long time before I believe it ended up getting spun out to private equity.

• 1:00:07David Rosenthal?

  And in 1989, in the first year of business for OmniTrax, they do $32 million in revenue in 1989.

• 1:00:15Ben Gilbert?

  Which is something like, it's like inflation adjusted $100 million.

• 1:00:19David Rosenthal?

  It's a lot of money and there's a lot of demand for this product.

• 1:00:22Ben Gilbert?

  In the first year of the product launch.

• 1:00:23David Rosenthal?

  Year one.

• 1:00:25Ben Gilbert?

  Now, there's a lot of COGS, like this isn't SaaS revenue.

• 1:00:27David Rosenthal?

  No, yeah, yeah.

• 1:00:28Ben Gilbert?

  Talking about.

• 1:00:29David Rosenthal?

  And there's particularly a lot of COGS because one of the things they learned from doing this and one of the reasons the companies merge, they first, kind of like the Linkabit days, you know, remember Walmart was their customer for the Linkabit satellite, you know, thing. Walmart is very happy to integrate and implement technology themselves. Most other customers are not. So they go around and they're like, you know, pitching this to trucking companies and retailers and the like. And, and most of them are being like, well, this is like, cool, but um, we're not going to operate our own dispatch centers and messaging.

• 1:01:00Ben Gilbert?

  We try to have as small an IT department as possible.

• 1:01:02David Rosenthal?

  Yeah.

• 1:01:03Ben Gilbert?

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

• 1:01:08David Rosenthal?

  Yeah. So Erwin is like, well, what if, um, what if we just operate it for you? And we provide a whole full stack solution. We don't sell you a technology, we sell you a solution.

• 1:01:21Ben Gilbert?

  Which is like every enterprise company that you ever, you know, a company has become enterprisy when they cross the chasm and their website no longer has like, products, pricing, about, and it changes to solutions.

• 1:01:32David Rosenthal?

  Yeah, solutions. They, they, they make the business discovery of solutions.

• 1:01:38Ben Gilbert?

  We all should say like, this is a tremendously dilutive financing event. This is Qualcomm saying, we need money so badly to fund the development of OmniTrax for this, this customer OmniNet, that the most attractive option for us is to sell half the equity in our company. So everyone gets diluted 50% by merging with the customer themselves in order to get just a few million dollars to continue funding this effort. It's a pretty different time than today where you go raise a seed round and you sell 5, 10, 20% of your business for.

• 1:02:16David Rosenthal?

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

• 1:02:21Ben Gilbert?

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

• 1:02:33David Rosenthal?

  And I think some people were pretty bitter about this.

• 1:02:35Ben Gilbert?

  Totally. And you could imagine too, 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 of years away from making $100 million in inflation adjusted dollars. And yet they had to give up half the company.

• 1:02:49David Rosenthal?

  They literally were a couple of years away from making actual 100 million because the business doubles every year for like five years from a $32 million base. Like freaking awesome. So now that this is in place, they're like, all right, we have both a cash flow spigot that we can use and now like a base of business that we can finance and like borrow against and raise equity against to pursue the real big idea and our original patent. And 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. You know, other folks could have been in a position to patent this and pursue it. But at the time, nobody believed it could

• 1:03:32David Rosenthal?

  actually work because you needed such sophisticated processing power on both the endpoints, on the base stations and the endpoints to actually make this work. Like it sounded completely freaking crazy.

• 1:03:45Ben Gilbert?

  It needs to happen in real time. I mean, people need to have conversations without a perceptible delay and you are cutting a, you're first doing the analog to digital encoding where you're taking their voice and you're actually turning it into a digital signal. You're cutting it up into a bunch of packets. You're encoding those packets with every user's unique code. You're sending it over the airwaves to your most local cell tower. That cell tower is relaying it across a variety of other cell towers to where the other person on the end of the conversation is having the call. And then the whole pipeline is happening in reverse.

• 1:04:18David Rosenthal?

  On the handset.

• 1:04:19Ben Gilbert?

  On the handset.

• 1:04:20David Rosenthal?

  And so this is the thing, like maybe you could believe you could do this processing on the. On the base stations on the infrastructure side, but like the idea that like in a car, like something powered by an internal combustion engine like in a car or or heaven forbid not a car, like a mobile phone, like a Zack Morris phone that, you know, somebody would hold in their hand, that you could do this on something like that was crazy in 1986. But the Qualcomm guys, they know about Moore's Law, which like most people didn't know about at that time. And they're like, yeah, I'm pretty sure you give it one or two more, you know, turns of the crank on Moore's Law here. And like, I think we could maybe do this.

• 1:04:53Ben Gilbert?

  There are so many things that we've talked about in the last, I mean, on acquired generally, but especially in the last year, where their success came from correctly forecasting where Moore's Law would be at the time that they shipped their product.

• 1:05:06David Rosenthal?

  Yeah.

• 1:05:06Ben Gilbert?

  So knowing that something was possible today.

• 1:05:08David Rosenthal?

  At the time of shipping, like it's not possible today, but when we're going to ship this, which is still going to be several years in the future, it will be possible then.

• 1:05:15Ben Gilbert?

  It's amazing.

• 1:05:16David Rosenthal?

  So cool. And like the fact that it's like, there were so few people that knew that then. And like, ah, crazy.

• 1:05:22Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 1:05:36David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:05:50Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 1:06:00David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 1:06:17Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:06:33David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:06:50Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:06:59David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So in September of 1988, all these factors, you know, they've got the financing capability to take a swing at this. They see a path with Moore's Law to it being technically feasible. They've got the patent. They're literally the only ones that can do this. And then the market timing. So in September 1988, the US Cellular Telecommunications Industry Association, or CTIA, as most people know it, and then its related entity, the TIA, the Telecommunications Industry

• 1:07:40David Rosenthal?

  Association, they release performance requirements, the spec for performance requirements for the planned upgrade of the US's cellular networks from the analog 1G networks to the new digital 2G networks.

• 1:07:56Ben Gilbert?

  And this is just the US one. Europe has its own.

• 1:07:58David Rosenthal?

  Europe's already well on its way. GSM, Ericsson, TDMA, it's all happening here in Europe. The Qualcomm folks, of course, they eagerly anticipate the release of the spec and they look at it and they're like, oh my God, this could not have been written better.

• 1:08:12Ben Gilbert?

  It's written for us.

• 1:08:13David Rosenthal?

  This is a dream. It's written for us. They realize two things. One, of course, TDMA is the frontrunner and Ericsson, all that to like, you know, do the US too, because they're successfully doing it in Europe.

• 1:08:21Ben Gilbert?

  And not only is it being done in Europe, it makes sense to adopt in the US too, because it's kind of nice to have a global standard and because it's quite believable. Like, okay, one big thing I have to believe is we're 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, you know, different time windows. Okay, I can believe that. Believe that, but gosh, how much new stuff are you trying to invent all at the same time? Anything further than that feels like I gotta take a leap of faith.

• 1:08:50David Rosenthal?

  And show me it can work and Ericsson's well on the way to like pilots proving, showing it works. This actually works.

• 1:08:55Ben Gilbert?

  They're big companies. They've succeeded before. They're the right vendors that everyone trusts.

• 1:08:59David Rosenthal?

  So the spec that the CTIA publishes, the Qualcomm guys, this must have just been like beaming ear to ear.

• 1:09:06David Rosenthal?

  They realized that TDMA, because of the capacity limits of TDMA, it's not going to meet spec. Like you could have the best implementation of TDMA. It's not gonna allow for enough compression to actually meet the spec that the US wants to hit.

• 1:09:20Ben Gilbert?

  So here, this is a, I've been, I've been like waiting to bring this thing up. So at this point in history, the US standards body is correctly forecasting the incredible popularity of cell phones in the US. So they're setting a really high bar for the amount of phones that need to be able to use this network. And the reason that they have since changed their tune is in 1980, this is a fun bit of trivia. AT&T, who has been the incumbent for 100 years on all things telecommunications, commissioned McKinsey and Company to predict cellphone.

• 1:09:54David Rosenthal?

  It all goes back to McKinsey always.

• 1:09:56Ben Gilbert?

  Always. To predict the cellphone usage in the United States in the year 2000. So flash forward 20 years in the future. The consulting group argued that cellular telephony would be a niche market.

• 1:10:08David Rosenthal?

  Ah, yes, of course.

• 1:10:09Ben Gilbert?

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

• 1:10:16David Rosenthal?

  I think I have 900,000 cellular connections personally.

• 1:10:21Ben Gilbert?

  So as you know, that number was off by over 100x. There were 109 million people, not 900,000, 109 million subscribed in the year 2000. So it does make the point that in 1980, it was super not obvious. Like you had some of the smartest people in the world, both in domain depth at AT&T and just good business model thinkers at McKinsey. wildly misforecasting this. And to illustrate how big the miss was, AT&T eventually bought Macau Cellular for $12.6 billion to become AT&T Wireless, which is the AT&T we actually all know today, and catch up in mobile telephony. So that this like 2G spec that was written is

• 1:11:03Ben Gilbert?

  is right around the time that a lot of the people in the industry are starting to realize like, uh-oh, were we super wrong in what we all thought just a few years ago, the potential of this thing was?

• 1:11:13David Rosenthal?

  So that's like, you know, back to the original Edwin Land quote starting the episode of like creativity, like one act following another, you know, enabled by it suggested suggesting the next like, this is the next like needle day thread, you know, domino that falls of TDMA didn't hit the spec. And they could kind of foresee this, you know, because they knew what the demand was and they knew TDMA wasn't going to be able to do it. So here's the next, this is cool. Like, I didn't expect to get into kind of like geopolitics on this, but the one great that, you know, the US has like a ton of bureaucracy and regulation, like all of this being like, you know, case in point. But one incredible

• 1:11:51Ben Gilbert?

  I think this took five years to eventually

• 1:11:53David Rosenthal?

  and like these standards bodies and like, oh, like, this is not the free market, like, by any means. But the one difference in the US process for all this versus the European process, and it was the difference that made all of the difference, was the US government said, the industry associations, you guys can set the specs and all that, and that can be official, but it's not mandatory. So like in Europe, it was like mandatory, like the TDMA, which DSM was based on, like mandatory, that's it. And plenty of other countries, you know, mandatory. And the US was like, this is the industry standard and like, we recommend that any mobile carrier follows it. But if you want to do your own thing,

• 1:12:37David Rosenthal?

  like, as long as it meets the performance spec, You can use whatever technology you want.

• 1:12:42Ben Gilbert?

  And importantly, standards bodies are decoupled from government agencies. So the FCC allocates spectrum, but the standards bodies are literally just industry.

• 1:12:50David Rosenthal?

  They're industry associations, yeah.

• 1:12:52Ben Gilbert?

  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 and no one can sort of effectively collaborate enough.

• 1:13:08David Rosenthal?

  So once all this, the standard comes out, Qualcomm immediately like goes to Washington, like Irwin and Andy, they go to DC and they're like, hey, just to make sure, we just want to like be crystal clear, can you confirm to us that even though this other thing is the standard, if a given carrier, mobile operator, wanted to use something different, as long as it used a spec, like that's cool, that's not illegal, right? And they're like, yep, that's the case. They're like, okay, cool, thank you, we'll be back. And so that was like the next needle they thread. They're totally undaunted. They go, and they're like, great, we can go pitch individual carriers on using CDMA as a technology. So they start a sales process. This is now the beginning of 1989.

• 1:13:54David Rosenthal?

  They start a roadshow, they go out pitching this new novel CDMA standard versus the TDMA industry standard. And this starts what is known, literally, I tweeted this the other day, in the Wikipedia entry for all this, this is like canonically known as the holy wars of wireless. And there's so much telecom nerdery.

• 1:14:16Ben Gilbert?

  And it really is holy.

• 1:14:17David Rosenthal?

  It really is holy wars.

• 1:14:18Ben Gilbert?

  Because it's about belief. So many people were just like, I don't believe you that CDMA will work.

• 1:14:23David Rosenthal?

  And it was literally only the Qualcomm folks who thought it would work.

• 1:14:31David Rosenthal?

  And not just, you know, I'm reminded of the Don Valentine, like I knew the future. Based on all, they didn't know the future per se, but based on all their experience, they were very, very confident that it would work and it would win despite the seemingly overwhelming odds because they knew a secret.

• 1:14:50David Rosenthal?

  Which was that at the end of the day, as long as there was not government enforced, standardized regulation, they knew that economics would win in the market. And there are so many benefits of CDMA versus TDMA. We've covered some of them. One of the other ones is that like the voice quality is actually much better than TDMA. Like it's all like, there's a whole litany of benefits.

• 1:15:12Ben Gilbert?

  Security is much better. I mean, it was originally created for the government to beam stuff up and down to satellites. Another huge one is it literally, if you're operating a cell network and you can have more subscribers per unit of infrastructure is literally cheaper. So you're, you're gonna, it's a lower cost technology.

• 1:15:30David Rosenthal?

  This is the thing. So there's one benefit that actually matters. All the others are like, nice to have on a feature spec. There's one benefit that is going to allow them to be super sure they're going to win, which is that it is like an order of three to five X more efficient to operate.

• 1:15:48Ben Gilbert?

  Unfortunately, they originally pitched 40X. That's the standard that everyone was benchmarking.

• 1:15:52David Rosenthal?

  Oh, that was versus animal versus analog. I think it was three to five X more than TDMA.

• 1:15:56Ben Gilbert?

  Yeah.

• 1:15:56David Rosenthal?

  So that meant if you were a carrier and you went with this crazy CDMA thing and it actually worked, you could fit on a given set of spectrum that you are operating with, you could fit three to five X more subscribers, three to five X more monthly revenue.

• 1:16:12Ben Gilbert?

  Yep.

• 1:16:13David Rosenthal?

  On that same fixed cost base than your competitors who are using TDMA. And if you know anything about like, if we've learned anything on acquired about economics of industries and power and Hamilton, Helmer 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.

• 1:16:33Ben Gilbert?

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

• 1:16:41David Rosenthal?

  Yeah. Cause you can just lower prices and get all the customers and make more profits along the way.

• 1:16:46Ben Gilbert?

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

• 1:16:59David Rosenthal?

  Oh yeah, this is like.

• 1:17:00Ben Gilbert?

  Like, if you think about it, so like, let's keep the whispering 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 gain in our signal to communicate with each other. So it's much more efficient than all these other high gain, high power, high volume signals that everyone else is trying to use. Well, if I'm using a really low gain signal and I'm far from the base station, from the cell tower, that's an issue because the people who are really close are going to drown me out. Imagine we're all whispering, but I'm miles away. Well, you're going to hear the person whispering right next to you.

• 1:17:40Ben Gilbert?

  So we're very early days in powerful chips, powerful power management, and you've got Qualcomm pitching the industry that they're going to do this. And people are like, wait, but you have to turn down the gain on anybody really close to the towers and turn up the gain on anybody really far from the towers. 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 chips. Also, how are you going to know how far away someone is from the tower? And they're like, well, we'll be able to just observe the signal that is coming back from the tower, or perhaps do it on the tower, observe the signal coming from the phone itself, and we will in real time determine if it needs to go up or down.

• 1:18:25Ben Gilbert?

  And this is blowing people's minds in the mid-'80s. They're like, oh, don't worry, 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. Which they knew about from the military. And we're going to start basing the technology on GPS so we know how far away someone is from the cell tower based on GPS, which doesn't really exist yet. Like, there's all these impossibilities with the system that theoretically is better, but... We've never witnessed any of the building blocks that are going to go into it actually work in practice yet.

• 1:19:02David Rosenthal?

  Back to the magic thing, like just the technological magic that went into this. At every stage of the way, they're like, yeah, we got this figured out. And they patent every single piece of this.

• 1:19:16Ben Gilbert?

  Yep.

• 1:19:16David Rosenthal?

  Every single piece, like unreal. The first patent we talked about is the most valuable, but like there is a whole string of, you know, dozens, hundreds, thousands of other patents that come after this.

• 1:19:27Ben Gilbert?

  Yep.

• 1:19:27David Rosenthal?

  That are just incredibly valuable. So they start the roadshow pretty quickly in February of 1989. One of the largest carriers in the Southern California area, Pactel Wireless, is interested because they get it like this economic argument like it's, you know, basically they're like, all right, if this works, like, yeah, you got us. So they put up a million dollars to fund a prototype. Like, okay, prove to us that this works, build a prototype. Qualcomm, for the rest of the year, works on this. November of 1989, they host a demo, you know, with the Pactel money, but they invite the whole rest of the industry in San Diego. And there's famously a little hiccup where like they're about to, you know, Irwin's giving like a big speech introducing it, then they're going to do the actual demo.

• 1:20:11David Rosenthal?

  They've got vans driving around the city and then like a base station back at Qualcomm HQ and they're going to make it all work. He's giving the interest speech and one of the engineers is like frantically waving in the back like, keep talking, keep talking. They had to reboot the GPS system. And so like he's, you know, he makes a little quip of like, as a former professor, it was easy for me to keep talking. He's told this story like a million times. Anyway.

• 1:20:32Ben Gilbert?

  There is something funny too 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, you know, the electrical engineers. And so for this demo, the, the cell phone that they build, it basically looks like a mini fridge with like a handset hanging off of it.

• 1:20:52David Rosenthal?

  Yeah.

• 1:20:52Ben Gilbert?

  I mean, they build the most.

• 1:20:53David Rosenthal?

  There's a photo of it in the book. It's awesome. It's awesome. We'll come back to building handsets in a sec.

• 1:21:00David Rosenthal?

  So it works. And then like Pactel's like, great, we're in. And then some of the other

• 1:21:03Ben Gilbert?

  Which Pactel, by the way, would eventually get rolled up into Verizon. I think they're basically Verizon's West Coast operator at this point.

• 1:21:09David Rosenthal?

  Yeah. Some of the other industry folks who come, they're like, well, this is impressive. It works. But like, San Diego is a pretty forgiving environment for cellular technology. Like, this is a very, like, geographically easy city to operate wireless, in terms of wireless signals. Prove to us that this can work in, like, an urban jungle environment. And Qualcomm's like, okay, how about New York? And they're like, well, we'll see you there. So in February of 1990, they do a successful demo in Manhattan, in New York City. On the back of that, they sign 9X, 9X Mobile, which is one of the largest New York carriers. And then in August, they sign Ameritech, which is one of the largest

• 1:21:51Ben Gilbert?

  Chicago, I think.

• 1:21:52David Rosenthal?

  Chicago, yeah. I think it had a big chunk of the Midwest. And then, they make another brilliant move. They start going international. So like, here in the US, there's all this, like, forward momentum that's already happened with the 1G analog services and, you know, the TDM and all that. They're like, what if we go out to countries where it's just tabula rasa, like, clean slate? And we pitch this as, like, the obvious best technology. And famously, South Korea, back to the, like, government-mandated standards, the South Korean government is like, yep, this is clearly the best, government-mandated, all, you know, they were building up the first cellphone networks in South Korea that were going to be these digital, you know, next-gen networks.

• 1:22:30Ben Gilbert?

  Yep.

• 1:22:30David Rosenthal?

  All CDMA, all Qualcomm. South Korea, for a time, was, I think, close to 40% of Qualcomm's revenues.

• 1:22:39Ben Gilbert?

  Wow.

• 1:22:39David Rosenthal?

  Because the whole country, like, and it was one of the, you know, most advanced mobile countries. All the season Qualcomm.

• 1:22:45Ben Gilbert?

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

• 1:22:48David Rosenthal?

  There's also benefits to regulatory and government capture.

• 1:22:51Ben Gilbert?

  Yes. Coming in over the top with an edict is also beneficial.

• 1:22:54David Rosenthal?

  Yeah. In December of 1991, on the back of all this, they go public. There is a paltry $68 million in their IPO.

• 1:23:04Ben Gilbert?

  Like a Series B.

• 1:23:06David Rosenthal?

  Yeah, totally. A 2021 Series B.

• 1:23:11David Rosenthal?

  So finally, in 1993, the US Industry Associations, the CTIA and the TIA, does actually adopt CDMA as a second standard officially. It's like, okay, now you have our blessing. It's like, well, it doesn't matter. We already got like half the industry signed up with us anyway. You know, thanks for nothing. At that point, Qualcomm does a secondary offering. They raise another 150 million on the public markets. A couple of years later, they do, or maybe a year later, they raise another 500 million on the public markets. So they're very well capitalized. And why are they raising all this money? Back to the omni-tracks and like this, you know, solutions discovery of like enterprise, you know, the people that they're pitching as their core

• 1:23:51David Rosenthal?

  customers, the wireless carriers, they are sophisticated operators, but there's a whole ecosystem of technology providers to them. And they already, except in the case of South Korea, you know, they already have built out like towers, infrastructure, they kind of replace all that. And so, you know, it's a big ask, even with the economic advantage, it's a real big ask for a Pactel or, you know, 9X or any of these folks.

• 1:24:17Ben Gilbert?

  If you're Pactel, you're like, it sounds great to me that you are going to have this much better standard and this much better technology.

• 1:24:26David Rosenthal?

  Are you going to replace my towers? Are you going to replace my base stations? Are you going to replace all of my customers' handsets?

• 1:24:31Ben Gilbert?

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

• 1:24:38David Rosenthal?

  Yeah, right. It quickly becomes a rat's nest of industry dependencies. Qualcomm, they're like this, you know, still relatively small San Diego, you know, technology startup. They can't do all this stuff. So they do start signing some partnerships with both base station infrastructure providers and handset makers. They sign Nokia. Big win, big European manufacturer as a partner. But they realize, you know, to do this whole solution, like specifically, there's kind of four parts to making a CDMA wireless network work. We've talked about all them, but just to enumerate them here. You need the core IP and technology that we've talked about. Qualcomm's got that for sure. You need the infrastructure, the CDMA, like base stations that go on the towers, you know, all that, like the backends, the switching, all that. You need

• 1:25:22David Rosenthal?

  that infrastructure. Needs to be CDMA. The old stuff's not going to work with it. The TDMA stuff's not going to work with it. You need the handsets for consumers to work. Same deal. It's got to be CDMA. And then probably most importantly, in order to make those two sets of infrastructure work, you need the silicon, the semiconductors that go into them.

• 1:25:42Ben Gilbert?

  Yeah.

• 1:25:42David Rosenthal?

  And so somebody's got to do all four of those things. You know, like all four of those things need to happen. Qualcomm's for sure got number one covered. The question is, who's going to do two, three and four? I was like, you know, they sign, start signing partners, but they're like, you know, we really need to spur adoption. I think we kind of got to do everything ourselves.

• 1:26:01Ben Gilbert?

  We need to offer the complete solution.

• 1:26:02David Rosenthal?

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

• 1:26:09Ben Gilbert?

  Which is quite interesting because despite, I mean, none of us are buying Qualcomm phones today. Like no, Qualcomm brand your phones.

• 1:26:17David Rosenthal?

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

• 1:26:24Ben Gilbert?

  Isn't that crazy? Bigger than Nvidia.

• 1:26:25David Rosenthal?

  Bigger than Nvidia and they don't make handsets and they don't make infrastructure.

• 1:26:28Ben Gilbert?

  I think.

• 1:26:29David Rosenthal?

  Bigger.

• 1:26:30Ben Gilbert?

  Bigger than Apple.

• 1:26:31David Rosenthal?

  Oh, yeah, yeah.

• 1:26:31Ben Gilbert?

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

• 1:26:36David Rosenthal?

  Yeah.

• 1:26:37Ben Gilbert?

  So.

• 1:26:37David Rosenthal?

  How do you get from there to here?

• 1:26:39Ben Gilbert?

  So they did need to run this really interesting playbook where even though it wasn't going to be the thing that they necessarily did long term, in order to get their solution adopted, they had to do it in the moment.

• 1:26:49David Rosenthal?

  Strap it up. So they do another just brilliant move. They create two joint ventures. I believe, I believe both of them, I know the handset one, but I believe both were 51% owned by Qualcomm, 49% owned by the partner. On the infrastructure side, they partner with Northern Telecom, Nortel, to do a JV to manufacture CDMA base station equipment. And then another wonderful acquired full circle moment.

• 1:27:19Ben Gilbert?

  They call up our friends in Japan.

• 1:27:20David Rosenthal?

  They call up our friends in Japan who at the time their US manufacturing headquarters was based in San Diego.

• 1:27:29Ben Gilbert?

  That's convenient.

• 1:27:29David Rosenthal?

  California, very convenient.

• 1:27:32David Rosenthal?

  Our friends.

• 1:27:33Ben Gilbert?

  Sony.

• 1:27:33David Rosenthal?

  I guess, uh, Akio Morita was running it.

• 1:27:36Ben Gilbert?

  Yeah.

• 1:27:36David Rosenthal?

  At that point in time.

• 1:27:37Ben Gilbert?

  Yep.

• 1:27:37David Rosenthal?

  The Sony Corporation to partner in a JV to make handsets. So I actually had a Qualcomm handset back in the day.

• 1:27:45Ben Gilbert?

  Did you?

• 1:27:45David Rosenthal?

  Probably a lot of.

• 1:27:45Ben Gilbert?

  Like one of those little flip phones?

• 1:27:46David Rosenthal?

  Yeah, uh, well, that was a lawsuit with Motorola. No, no, I had a brick phone, um, like a small brick, not a Zack Morris brick, but a small brick. It was a Qualcomm phone. That was made by the JV with Sony. That was a Sony phone, um, with Qualcomm branding.

• 1:28:00Ben Gilbert?

  But they're doing all this to sit, to be able to answer a yes, when a carrier is coming to them and saying, well, great, we'll be CDMA, but question mark, question mark, question mark. Qualcomm's like, yep, yep, and yep. We make all that stuff.

• 1:28:12David Rosenthal?

  Yep, yep, yep.

• 1:28:12Ben Gilbert?

  You should feel safe adopting us.

• 1:28:14David Rosenthal?

  IP, infrastructure, handsets, silicon that goes into both. We got all of it. So we just talked about one, two, and three.

• 1:28:22Ben Gilbert?

  And.

• 1:28:22David Rosenthal?

  We didn't talk about the silicon.

• 1:28:23Ben Gilbert?

  And to be clear on the silicon, people know the Snapdragon brand today. This is not Snapdragons. This is not systems on a chip, CPUs. This is not a competitor to Apple's A15. 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 telephony back and forth.

• 1:28:51David Rosenthal?

  You, you're making it sound, um, uh, trivial, but this is actually, this is, um, this is the final.

• 1:28:59Ben Gilbert?

  I'm not making it sound trivial.

• 1:29:00David Rosenthal?

  Well, that's trivial. I mean, I couldn't.

• 1:29:02Ben Gilbert?

  You do it.

• 1:29:03David Rosenthal?

  Yeah, right. You do it.

• 1:29:06David Rosenthal?

  This is the final just brilliant masterstroke in this long series of brilliant masterstrokes that Irwin and, and Qualcomm, you know, did at this time. I don't know any other chain of just brilliant, brilliant strategic decisions, one after the other. If this had been 10 years earlier, they would have had to do the same thing with silicon. They would have had to partner with Intel or, you know, AMD or somebody.

• 1:29:27Ben Gilbert?

  Yep.

• 1:29:27David Rosenthal?

  Or TI, Texas Instruments.

• 1:29:29Ben Gilbert?

  One of the real men that had.

• 1:29:30David Rosenthal?

  One of the real men that had fabs, of course, we're referring to, um, AMD founder, CEO.

• 1:29:36Ben Gilbert?

  I think so.

• 1:29:36David Rosenthal?

  Jerry, Jerry, forget his last.

• 1:29:39Ben Gilbert?

  Who once said that real men have fabs and of course was proven desperately wrong over the.

• 1:29:43David Rosenthal?

  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 capture from the Qualcomm IP, but they would have had to partner to make this stuff. But thanks to our acquired superhero, Morris Chang, Fabulous Semiconductors in 1989, 1990, 1991.

• 1:30:04Ben Gilbert?

  Just starting to become a thing.

• 1:30:05David Rosenthal?

  Are just starting to become a thing.

• 1:30:07Ben Gilbert?

  So they could design their own chips without having to actually have a foundry in-house to make them and they could outsource that to the.

• 1:30:14David Rosenthal?

  They could actually do all the important value-added work. Like, it's totally, it's a freaking Ben Thompson smiling curve in this industry. If you go from, you know, one to four of the IP, the two manufacturing, and then the semiconductors. All the value, all the differentiation in this industry is in the IP and the semiconductors. And the manufacturing is a commodity. And Qualcomm would have been a great company if they had just captured the first. They captured the first and the last. They got all of the value, like, all of the value. And it's just, and, and, you know, like we talked about on the Nvidia episodes, it was equally crazy and, like, future-seeing to know that Fabulous

• 1:30:57David Rosenthal?

  was a thing, that foundries were a thing, to be willing to work with foundries.

• 1:31:03David Rosenthal?

  And Qualcomm did it.

• 1:31:04Ben Gilbert?

  It's like, how many times is this company going to be in the right place at the right time?

• 1:31:08David Rosenthal?

  And, and just to, you know, the silicon.

• 1:31:10Ben Gilbert?

  And know it.

• 1:31:11David Rosenthal?

  Yeah, and right, and right!

• 1:31:13Ben Gilbert?

  Seize it.

• 1:31:13David Rosenthal?

  And the, um, you know, we're going to talk more about silicon and Qualcomm as, as we go here. But, you know, just to, to, you know, paint the punchline here, today, Qualcomm's total revenue is, what, close to 40 billion annually, I think?

• 1:31:28Ben Gilbert?

  Yeah.

• 1:31:29David Rosenthal?

  Of which 85% is their semiconductor business.

• 1:31:33Ben Gilbert?

  Yep.

• 1:31:34David Rosenthal?

  So like, without.

• 1:31:35Ben Gilbert?

  37 billion of their 44 billion of revenue is selling.

• 1:31:39David Rosenthal?

  So but for this strategic decision, 85% of today's Qualcomm revenue would not exist. Like, and they are the largest Fabulous semiconductor company in the world, bigger than Nvidia, who's number two.

• 1:31:51Ben Gilbert?

  Crazy.

• 1:31:52David Rosenthal?

  Totally crazy. It makes sense. They started a couple of years before Nvidia. So, you know, compounding, it's a thing.

• 1:31:58Ben Gilbert?

  That's right.

• 1:32:00David Rosenthal?

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

• 1:32:10Ben Gilbert?

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

• 1:32:16David Rosenthal?

  57% market share in the US in 2G, 100% market share in countries like South Korea. They end up getting, I should know this, I'm either 100% massive market share in China, which is adopting, you know, mobile cell for the first time. And like, this is so much, so the first, 1995 is the first year that these networks go live in the US and internationally. Qualcomm does $383 million in revenue in 1995. In 1996, they do $814 million in revenue. Oh my gosh. But here's the, here's the crazy thing. So here's another like just wild, you can't make this stuff up.

• 1:32:58David Rosenthal?

  You would think Wall Street would love the stock, that Wall Street bets would be going nuts for this stock, 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 and the JVs require so much capital and they're tying up all the profits of the company.

• 1:33:19Ben Gilbert?

  It gets, the stock gets punished basically all the way up until January of 1999. And a few interesting things happen. Are you okay jumping to 99?

• 1:33:28David Rosenthal?

  Yeah, great. Let's go, I was going there anyway.

• 1:33:29Ben Gilbert?

  So a few interesting things happened in 99. One, Qualcomm starts to realize it's a pretty serious drag on our business to have this super capital intensive manufacturing operations. We're funneling all this money that could be free cash flow for the business or could let us reinvest in new R and D into making phones and making base stations. We got to do something about this. So in March of 99, they sell their infrastructure business, the base stations to Ericsson, which was formerly one of their competitors.

• 1:33:59David Rosenthal?

  Big competitor.

• 1:34:01Ben Gilbert?

  They're.

• 1:34:02David Rosenthal?

  It was part of a licensing deal of all the lawsuits, or a settlement deal of all the lawsuits that popped up between the two companies along the way. They're like, oh, great, we'll sell you our manufacturing.

• 1:34:12Ben Gilbert?

  This, I mean, and this is basically them looking and saying, I don't think we need that to bootstrap. 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 cell phones. So 1,000 of the 9,500 Qualcomm employees become Ericsson employees. Then they look over at their mobile phone business.

• 1:34:33David Rosenthal?

  One fun little, not fun at the time, but fun now, little footnote on that sale to Ericsson. The employees that got transferred as part of that were so freaking pissed that they lost their Qualcomm stock options and they got Ericsson. And I don't think they even got equity at Ericsson at all. They actually filed a class action lawsuit against Qualcomm to like get their stock options back.

• 1:34:56Ben Gilbert?

  I mean, over the next 18 months, the stock would basically be Tesla stock. Like that's this crazy moment that we're about to talk about. December 1999, Kiosera buys Qualcomm's mobile phone business. So they now officially just sell chips that they call QTC, the Qualcomm CDMA Technologies Group. And then they've got a second group, QTL, which is Qualcomm Technology Licensing.

• 1:35:20David Rosenthal?

  It's just one in four.

• 1:35:22Ben Gilbert?

  The business model is now set. They make silicon, they make licenses, they make, they sell very high margin revenue licenses to their patent war chest. That's the business model for the future. They no longer have this drag on them.

• 1:35:37David Rosenthal?

  And they sell relatively high margin semiconductor designs.

• 1:35:41Ben Gilbert?

  Yep.

• 1:35:42David Rosenthal?

  Because they don't fab any of the semis.

• 1:35:43Ben Gilbert?

  And when they're selling these designs, they're not just saying, here's a chip, give me $5 for it. They're saying, how much you sell those phones for? Yeah, we'll take 5% of that. And you say, what? What if I want to raise prices on my phones? And Qualcomm says, yep, you'll still pay us 5% of that. And you're like, what do you mean? I'll just go somewhere else. And they're like, where are you gonna go? We own all the patents.

• 1:36:07David Rosenthal?

  We own all the patents.

• 1:36:08Ben Gilbert?

  And by the way, in addition to paying us 5% of the phones, I think you should pay us to license these patents too. And all the customers go, what? And Qualcomm goes, where else are you gonna go?

• 1:36:19David Rosenthal?

  You make them sound so evil.

• 1:36:22Ben Gilbert?

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

• 1:36:26David Rosenthal?

  And Apple did, and the DOJ did, not the FTC sued them for antitrust.

• 1:36:31Ben Gilbert?

  Well, spoilers.

• 1:36:32David Rosenthal?

  We'll get to that. The punchline of all this, after the December of 99 offloading of the handset business to Kyocera, which is actually a Japanese company. I also had Kyocera phones growing up.

• 1:36:45Ben Gilbert?

  Boy, you bought all the good ones.

• 1:36:46David Rosenthal?

  I got all the good ones. Well, you were on, you were on a TMA network, right?

• 1:36:51Ben Gilbert?

  I was on Singular, which was a GSM network, which became, which got bought by AT&T Wireless.

• 1:36:56David Rosenthal?

  It doesn't matter. It all becomes CDMA anyway, in a sec, as we will see.

• 1:37:01David Rosenthal?

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

• 1:37:17Ben Gilbert?

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

• 1:37:21David Rosenthal?

  The single best performing stock for the entire year 2000 is Qualcomm. It appreciates, the Qualcomm stock appreciates 2,621% for the 366 days of the year 2000. I think it was a leap year. Yeah. It's, yeah, unreal. 26.2X in the public markets in one year, the best performing stock of the craziest year until 2021, until last year in the stock markets.

• 1:37:59Ben Gilbert?

  However, you would have had to know just the right moment to sell because it did not stay up there for very long. It would crash down over the next year such that it, 18 months, such that it became only a Forex from its pre-1999 high. But if you bought it on the way up, you lost a lot.

• 1:38:18David Rosenthal?

  I'll take only a Forex on my 2021 investments all day long these days. Yeah, pretty great. So, you know, that's, that's like the core, just crazy business story of Qualcomm to take it from there to today. The next generation of cellphone networks, 3G, which.

• 1:38:38David Rosenthal?

  Ben and I probably vividly remember probably many folks listening

• 1:38:41Ben Gilbert?

  Yep.

• 1:38:41David Rosenthal?

  Do too. 3G, you know, that's when there was a lot of debate, especially in the US about GSM versus CDMA. And all you know, and I'll think like naively, you would think at the time like, oh, well, all the folks were going GSM like this bad for Qualcomm. GSM switched to CDMA anyway. So like all basically all of 3G was CDMA.

• 1:39:03Ben Gilbert?

  In Europe and in the US, just worldwide. I mean, they just ran the table.

• 1:39:07David Rosenthal?

  Yeah. And the reason for that was 3G was all about data speeds, broadband internet data speeds. And CDMA was just like the vastly superior technology for.

• 1:39:17Ben Gilbert?

  Totally. You didn't have to, you didn't have to encode anything from analog to digital. When you're talking into your phone, you got to encode the signal. But if you're downloading a website or you're sending an iMessage or you're sending a tweet, all that's digital information anyway. So it's already packets. It like it lends itself perfectly to CDMA's digital required infrastructure.

• 1:39:35David Rosenthal?

  Totally. Then in 2005, Erwin retires as CEO, I believe, and also as chairman of Qualcomm. And interestingly, his son, one of his four sons, Paul Jacobs, takes over and becomes the company's CEO. Paul actually has a PhD in electrical engineering as well. Spent his whole career at Qualcomm, rose through the ranks, becomes the CEO.

• 1:40:02Ben Gilbert?

  So an important thing, remember I put a pin in the idea that 20 years from 1985, when they filed that first patent, something else would happen. So Paul Jacobs becomes CEO. Also in 2005, Qualcomm buys Flarian Technologies for $600 million. Now Flarian did some interesting, like they had some interesting products, but they had a lot of patents that would become essential for 4G. So when we talked to some industry analysts about this, one view was, and I quote, "It was to refill the pot of missiles that Qualcomm promises not to fire at their customers if they pay additional money." So the key set of technologies here were OFDMA, which is, we're not going to get into it, but it was sort of.

• 1:40:47David Rosenthal?

  That's what 4G. It becomes its sort of

• 1:40:48Ben Gilbert?

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

• 1:40:53David Rosenthal?

  Division, multiplexing.

• 1:40:54Ben Gilbert?

  Yeah, we're not going to dive into it, but it was more efficient than CDMA. CDMA, well, it was the definitely the knight in 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

• 1:41:11David Rosenthal?

  Which makes by this point in time, it's 20 year old technology.

• 1:41:13Ben Gilbert?

  Totally.

• 1:41:15Ben Gilbert?

  So but what we do see here now is after the Flarean acquisition, Qualcomm is able to continue their same exact business model because all of the patents that would be required for 4G and LTE and all that going forward, they own a lot of those too.

• 1:41:28David Rosenthal?

  Yeah, it's interesting, you know. So the Paul, the Paul Jacobs era of Qualcomm from 2005 to 2013, I think, 13, 14, so somewhere about a decade.

• 1:41:39Ben Gilbert?

  Yep.

• 1:41:40David Rosenthal?

  You know, I think it's like very viewed at a very mixed light. His big strategic initiative was getting Qualcomm into IOT. IOT didn't really become a thing, at least at that time. And so I mean, maybe

• 1:41:50Ben Gilbert?

  It's starting to work now, but

• 1:41:51David Rosenthal?

  Yeah, it's starting to work now, but like not, not in the time everyone thought it did.

• 1:41:56David Rosenthal?

  And it was kind of like a lost era for Qualcomm, but you know, when you look back on it,

• 1:42:02David Rosenthal?

  two things that actually like were really great then, one was that acquisition and getting because initially Qualcomm was was fighting OFDM and trying to have CDMA still be the standard for 4G. Eventually they did pivot and get into OFDM. So that was kind of a, you know, an initial wrong move, but then a pivot and a save. But two, that's when they start building the Snapdragon unit and you know, mobile systems on a chip and CPUs and taking on more of the processing on the early predecessors to smartphones and that would just put them in such a good position for the modern smartphone era.

• 1:42:37Ben Gilbert?

  They they sell the high end Android chip 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 end Android phone, it's a Qualcomm, whatever. I don't know all the model numbers, but series eight, gen one or something is the Snapdragon.

• 1:42:53David Rosenthal?

  Snapdragon.

• 1:42:54Ben Gilbert?

  Yeah.

• 1:42:54David Rosenthal?

  And they now brand everything Snapdragon.

• 1:42:56Ben Gilbert?

  They do, which makes teasing some of this apart very confusing because they've just slapped the Snapdragon label on so much that you're like, wait, but that's just an RF antenna. How come it says Snapdragon? And they're like, yeah, fake you out. Like, that's the whole point of calling everything Snapdragon.

• 1:43:09David Rosenthal?

  I mean, I guess to be fair, like the Silicon engineering and the chip design is so complex, even for like, oh, just an RF antenna. Like, that is like a million times more complex than like any processor in a phone 10 years ago. So it is truly differentiated work that they're doing. But that was, you know, obviously a huge win. And I, you know, to the point, I think today Qualcomm makes on average about $20 for every smartphone sold in the world, including Apple iPhones.

• 1:43:43Ben Gilbert?

  Yes, so let's, let's get into that. So I've got the timeline from here. So going to 2009, this is when like all the litigation really starts to happen and people's flip from Qualcomm, 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 company's revenue and reinvest it into R and 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 a lawsuit.

• 1:44:20David Rosenthal?

  Value capture pioneers. That's a new, we should, that's another acquired T-shirt. Value capture pioneer.

• 1:44:26Ben Gilbert?

  Or what's the phrase that I use for Apple? Maximally extractive over their ecosystem. So Qualcomm loses a lawsuit with Broadcom in 2009, has to pay $900 million. In 2012, Paul Jacobs at the helm makes a really bad bet, maybe is a good bet, but bad outcome on a reflective display technology called Mirasol. They spun up a $2 billion fab to make it.

• 1:44:53David Rosenthal?

  Well, they actually made a fab?

• 1:44:54Ben Gilbert?

  Yeah, there's ultimately zero customers for this next gen. The promise was.

• 1:44:57David Rosenthal?

  Real companies don't have fabs.

• 1:44:59Ben Gilbert?

  It was supposed to be like a screen that looks like a magazine page, but they were never really able to reproduce the, the, the image quality.

• 1:45:06David Rosenthal?

  I was working at the Wall Street Journal at this time and like, oh, man.

• 1:45:10Ben Gilbert?

  That was the future. 2013.

• 1:45:12David Rosenthal?

  Turns out the iPad was the future.

• 1:45:13Ben Gilbert?

  Yes. Steve Mollinkoff comes in and becomes CEO, or I suppose gets promoted to become CEO. Very technical leader.

• 1:45:21David Rosenthal?

  He was COO before.

• 1:45:23Ben Gilbert?

  Was COO before. But the problems, problems. They keep growing revenue. They keep doing well as a company, but the ecosystem issues for them and ecosystem reputation continues. So in 2015, 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, John, a partners to try to split up the licensing and the chip business. That activist investor is kind of saying, why do these need to be the same company? The licensing business is printing cash.

• 1:45:56David Rosenthal?

  At this point in time, many semiconductor companies have split out the actual like chip operations and the IP. Like a lot of old semiconductor companies are basically just litigation companies at this point.

• 1:46:08Ben Gilbert?

  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 Avago, where the CEO of that basically made a bet and said, I think the semiconductor industry is no longer experiencing growth. I think that industry should be harvesting profits because I think, I think it's predicated on Moore's Law decelerating, but basically saying, I don't think that this industry should be reinvesting as much in R and D anymore because it's a, it's a settled frontier. And what should be happening is we should be rolling up these companies. So Avago buys Broadcom, takes Broadcom's name, buys some other stuff like LSI Logic.

• 1:46:52David Rosenthal?

  LSI Logic. Oh, big Sequoia win.

• 1:46:55Ben Gilbert?

  Don Valentine's.

• 1:46:56David Rosenthal?

  Yeah.

• 1:46:57Ben Gilbert?

  One of his first very few investments. And, and it really, the Broadcom strategy is to roll up the semiconductor industry, squeeze them.

• 1:47:09David Rosenthal?

  Well.

• 1:47:09Ben Gilbert?

  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 squeezing them for profitability. So.

• 1:47:23David Rosenthal?

  You've got my favorite piece of Broadcom history trivia that Avago, the sort of core of the, you know, what Broadcom is, actually started its life as Hewlett Packard's chip division. What a sad state of affairs.

• 1:47:39Ben Gilbert?

  Yep. 2015, 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 in playbook. But we were talking about Broadcom. 2018, Broadcom comes in and tries to do a hostile takeover at a $117 billion valuation. And interestingly, it was financed by $106 billion of debt. So that company, for the rest of its life, I mean, that would basically just be Qualcomm servicing the debt. So interestingly, the Trump administration got involved and said it would be a national security concern and block the deal. And while that may have been true for the reason

• 1:48:19Ben Gilbert?

  that the Singapore-based Broadcom was sort of joined at the hip with Huawei.

• 1:48:25David Rosenthal?

  It did a lot of business with Huawei.

• 1:48:27Ben Gilbert?

  This, I think, ends up being a big win for Qualcomm's lobbyists. I think they had great relationships with the US government and always have since the early days in being a government contractor. And a lot of people that we talked to viewed, or at least that I talked to, viewed this as Qualcomm being able to call in a favor and say, this is a national security concern, don't you think?

• 1:48:50David Rosenthal?

  We're calling in the favor now.

• 1:48:52Ben Gilbert?

  Yep.

• 1:48:53David Rosenthal?

  It's totally true. I mean, like, this deal was going to go through and Qualcomm was going to be everything you were just talking about with Broadcom, which would have been very, especially now, like, we know about, like, semiconductor, like, just like, this is one of the huge wins of the Trump administration, you know, for, like, America was keeping Qualcomm an independent American company. Like, whether it was Qualcomm calling in a favor or just what, like, I think we can all look back in 2022 and be like, This was an enormous win.

• 1:49:23Ben Gilbert?

  Yep. So in 2017, going back one previous year, both the US Federal Trade Commission and Apple sue Qualcomm for basically the same thing, saying that Qualcomm was using its market position as the dominant smartphone modem supplier to force manufacturers into paying excessive fees. And this is one that I want to sort of dive in on. We spent a bunch of time advancing through the timeline to really get to this particular point, which I think is a great place to zoom in on Qualcomm's strategic position today is this Apple lawsuit. So some background. Apple

• 1:50:04Ben Gilbert?

  has always used either Samsung processors in the first iPhones until they switched to their own, but they still had to pay Qualcomm patent royalties for whatever RF stuff they were using. So whether, you know, let's treat the CPU as its completely own world, transitioning from Samsung to the A-series processors. Apple probably has to buy stuff from Qualcomm. Maybe they could look somewhere else, but either way, they're paying Qualcomm the licensing for it. Today, Apple does use Qualcomm cellular modems, which started in 2011, and there was just one year where they used Intel, where they did not use Qualcomm. We're going to talk about that. So the way that I essentially

• 1:50:48Ben Gilbert?

  perceive this and why Apple eventually initiated the lawsuit is Qualcomm got greedy. They had patents on technologies that were part of standards that were set by industry consortiums all over the world, and they leveraged those patents in basically every way possible. And here's the economics as far as I can sort of suss it out. So they asked Apple for $7.50 per phone sold, which comes to about $2 billion a year. Plus an additional eight to 10 when they were going to raise prices later. And so you quickly get to a situation where Qualcomm was sort of expecting Apple to pay $17 just to license patents. Right. No chips. Which is on top of the price that they were paying for those baseband chips.

• 1:51:33Ben Gilbert?

  So rack rate for a baseband chip, and baseband chips are the same thing as cellular modems, is $30 a chip. And it's not actually $30, it's more like 5% of whatever the average selling phone price is. Oh, guess what phones have a really high average selling price? iPhones. And so if you think about 250 million phones a year, that is $7.5 billion a year that Apple would be paying Qualcomm. That would be 20% of the QCT revenue, 20% of all of the chip revenue that Qualcomm makes. And further, if you back out the 14 million a year from QCT, their chip segment, that

• 1:52:16Ben Gilbert?

  doesn't come from the chips for handsets specifically, but rather there's some other stuff they're working on, automotive, IoT, and this new thing that they're calling the RF front-end radios product line, which we'll also talk about. This is cool. Apple could make up up to 1/3 of Qualcomm's handset chip revenue. Now, analysts have estimated that Apple negotiated down from $30 to $10. Apple's general counsel during the lawsuit let the number $18 slip. So whether it's 10, 18, or 30 bucks a pop, that is an enormous amount of revenue that Apple pays Qualcomm. Again, not for a Snapdragon, not for the CPU, not for the system on a chip, just for the RF cellular modem.

• 1:53:01Ben Gilbert?

  Wild. So there's some other interesting things that came out in this lawsuit. Qualcomm asked Apple to speak out against YMAX, which is a competing technology. They were like, we need you to vocally speak out that our competitor is a 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 Qualcomm, they would owe Qualcomm $1 billion. So what Apple is basically doing is biding their time for there to be an actual credible competitor. And they had to wait all the way up until the 4G days, until they're like looking at Intel and they're like, especially if we work with you and we work closely with you, we think you can be a credible competitor to Qualcomm

• 1:53:47Ben Gilbert?

  right now. We think your cellular modems business is like close enough where our customers won't notice the difference and we can tell Qualcomm that we're going to use you and try to get a little.

• 1:53:57David Rosenthal?

  Give us enough leverage.

• 1:53:59Ben Gilbert?

  What Qualcomm interpret that as is, well, now you owe us $1 billion. Because look at our original deal we did. The, what this basically comes down to from a legal perspective is because Qualcomm owns patents that are a part of an industry standard, they have to charge a price that is fair, reasonable and non discriminatory, or FRAND is the industry terminology. And Apple's basically alleging, look, you're abusing the market because it's not fair, reasonable and you're highly, highly unreasonable in the way that you're charging us this. So around the time of the iPhone XS and XR, those phones actually did use Intel modems.

• 1:54:42Ben Gilbert?

  But what was basically happening is the Intel modems were falling further and further behind Qualcomm. Apple was realizing, oh crap, we're going to miss 5G because there's no chance that Intel catches up and can actually develop a credible 5G chip. And so they end up settling and sort of backing off the, their, their big lawsuit with Qualcomm.

• 1:55:01David Rosenthal?

  Well, this is where the, for, we're going to escape our technical level of competency quickly if we haven't already, but like 5G is like, it's pretty cool. This is where like, you were talking about patents. This all sounds so like icky, but like the amount of engineering and like IP and like work that has to go into like what we described originally back in like the World War II and they're like, it 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, what Moore's Law has had to come up the curve to enable something like 5G. Is unreal. Like, there's a dedicated processor in front now of the RF stack

• 1:55:39Ben Gilbert?

  Yep.

• 1:55:40David Rosenthal?

  To do all the crazy multiplexing that is required for 5G bandwidth to work, right?

• 1:55:46Ben Gilbert?

  Yes. So this RF front end, okay, so here's a fun little, um, so what is 5G?

• 1:55:54Ben Gilbert?

  It actually is an open question. Uh, when 5G was first proposed, the proposal was to use the millimeter wave spectrum, this super high frequency part of the spectrum that for years, people thought was basically impossible to work with because it was, it was, um, it just requires incredibly sophisticated electronics to make it work. Not only that, but when you have really high frequency, um, and again, we're right on the edge of our competency here, but when you have really high frequency radios, uh, they can't transmit through a lot of stuff. It doesn't handle concrete well. And so you end up needing a little base station on every street corner.

• 1:56:30Ben Gilbert?

  Now it can give you like 10 gig internet, like it's crazy, but it needs to be really close to you. And so as the, uh, the, um, telecoms were starting to build this out, of course, the initial review, they, they say we're, we now have 5G. In fact, they even rebranded a bunch of LTE stuff to be 5G. So it would show up as 5G on your phone.

• 1:56:49David Rosenthal?

  I remember AT&T did this, right? Like they were like, uh, all of a sudden, cause I was on AT&T at the time, it used to say 4G LTE and then all of a sudden it just said 5G on my phone.

• 1:56:57Ben Gilbert?

  Or 5GE, you're like, really? 5GE? Like that, no, no, that's exactly the same stuff I was using before, but now you've rebranded it. So occasionally you'd walk by something that actually had a millimeter wave tower and it would over, it'd be like, oh my God, this is the fastest internet I've ever experienced. And then you'd like walk across the street.

• 1:57:14David Rosenthal?

  Oh, I remember like Neily at the Burge doing like, um,

• 1:57:16Ben Gilbert?

  Yes. Neily is like the world's expert on it.

• 1:57:18David Rosenthal?

  Yeah, yeah, yeah. Like on a specific street corner in like New York City or San Francisco, getting like,

• 1:57:23Ben Gilbert?

  5G's at 10 out of 10.

• 1:57:24David Rosenthal?

  And then you take one step to the right and you're like,

• 1:57:26Ben Gilbert?

  Right.

• 1:57:26David Rosenthal?

  Back on 4G.

• 1:57:27Ben Gilbert?

  So here we are, 2022, five years after the initial hubbub about 5G started for consumers and, um,

• 1:57:37Ben Gilbert?

  What is 5G? Well, the industry has decided to allot two more areas of spectrum that are not millimeter wave and are easier to work with and are cheaper to build infrastructure for and are slower as 5G also. So now what that does to chipmakers is it says if you're building a cellular modem in your phone, you have to have a really complex RF front end, or what Qualcomm is calling their RFFE business. The RF front end basically needs to, at any given point, adjust in real time depending on what flavor of 5G

• 1:58:10David Rosenthal?

  You're accessing so many different windows of spectrum.

• 1:58:14Ben Gilbert?

  Yes.

• 1:58:14David Rosenthal?

  So far across the spectrum bands that like, yeah, there's, oh, man, think about like back to the original Hedy Lamarr in frequency hopping, like it was all within one band.

• 1:58:24Ben Gilbert?

  Yeah.

• 1:58:24David Rosenthal?

  Now we're talking about like

• 1:58:25Ben Gilbert?

  See what they have to do.

• 1:58:25David Rosenthal?

  A crazy number of bands.

• 1:58:27Ben Gilbert?

  So, Apple, going back to the Apple lawsuit, Apple sort of realizing, we're screwed here if we don't have Qualcomm as our customer. So they settle with Qualcomm. And this is in 2019. Apple says, we will continue using Qualcomm's radios for now. I think they negotiated some discount to the exorbitant fees that they were having to pay Qualcomm. They, Apple also paid $4 billion, now switching over to the licensing side of the house, to secure the patent licenses over the next six years. I think it was $4.5 billion for a six-year deal. It's actually unclear who really wins here. I think Qualcomm wins in the short

• 1:59:08Ben Gilbert?

  term because Apple's backup solution of Intel's modem fell 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 cellular modems in-house. We know, based on, I don't know if it was a slip of the tongue or an intentional thing, but we know from the most recent Qualcomm earnings call a week ago, that the next version of the iPhone that comes out in November of 2023 will continue to use Qualcomm's chips. Like, even though Apple has been Working on their own.

• 1:59:47David Rosenthal?

  So they're trying to do the P A semi on the modem.

• 1:59:50Ben Gilbert?

  Yes, it's ludicrously hard to build the stuff that Qualcomm has built. So even next year's iPhone will have Qualcomm.

• 1:59:58David Rosenthal?

  Wow.

• 1:59:58Ben Gilbert?

  R F front ends and I think they use R F front ends and cellular modems. But after that, Apple's definitely going to try and take this in house. But Cristiano, the CEO of Qualcomm, said on the most recent earnings call, after that, we do anticipate having almost zero dollars come from Apple in our chips business. So at least they're foreshadowing to their shareholders. Qualcomm is that they think Apple's going to succeed at this. It's just going to take a couple of years.

• 2:00:27David Rosenthal?

  Well, this feels like the perfect time to talk about the other strategic chess move that Qualcomm made here.

• 2:00:33Ben Gilbert?

  Yes, Nuvia.

• 2:00:34David Rosenthal?

  Nuvia.

• 2:00:35Ben Gilbert?

  So this is another 2021 move. So Qualcomm bought this company called Nuvia for 1.4 billion dollars. What is Nuvia? Well, Nuvia was founded by former Apple silicon people, including the chief architect of the A series chips. That seems like a good get.

• 2:00:53David Rosenthal?

  Yeah.

• 2:00:54Ben Gilbert?

  And so.

• 2:00:55David Rosenthal?

  Back to P A semi.

• 2:00:56Ben Gilbert?

  Yes, so this, one way to look at it is this is Qualcomm's ticket into the laptop CPU slash system on a chip market. They already make Snapdragons for the high end Android phones. And soon they'll be able to make a competitor to Apple's M series chips for laptops and desktops and maybe even servers.

• 2:01:13David Rosenthal?

  And phones too. I mean, like iPads, phones, tablets, like.

• 2:01:16Ben Gilbert?

  So.

• 2:01:16David Rosenthal?

  This is crazy.

• 2:01:17Ben Gilbert?

  This is where it gets interesting. So Snapdragons, for anyone who listened to our ARM episode, you'll remember the difference between ARM makes a instruction set architecture that you can license. Or you can go big with them and just buy one of the actual ARM design chips off the shelf.

• 2:01:35David Rosenthal?

  Like buying a solution, you might say.

• 2:01:37Ben Gilbert?

  Yes. Snapdragons use an 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.

• 2:01:48David Rosenthal?

  And that's why Apple silicon is so far ahead.

• 2:01:50Ben Gilbert?

  Yes.

• 2:01:51David Rosenthal?

  Of the competition.

• 2:01:52Ben Gilbert?

  The Nuvia team can just.

• 2:01:55Ben Gilbert?

  Do their own custom design of chips and actually be differentiated from stock ARM CPUs, just like Apple is doing. Unfortunately, Qualcomm, everything cool about the Snapdragon chip doesn't actually include the CPU. The CPU is just a standard issue.

• 2:02:11David Rosenthal?

  Yeah, the standard issue ARM.

• 2:02:12Ben Gilbert?

  ARM design.

• 2:02:14David Rosenthal?

  So this is cool. So this is the path for Snapdragon to get on par with Apple Silicon.

• 2:02:19Ben Gilbert?

  Yes, and for their CPUs to actually, exactly. So, but one caveat to this whole thing about, like, maybe they'll do laptops, maybe they'll do servers. Qualcomm actually doesn't really want to do any of that. Qualcomm historically has failed every time they've tried to do servers, or watches, or smart home, or displays. Like, every time they've strayed too far from their core competency, it hasn't been good.

• 2:02:42David Rosenthal?

  And probably what Qualcomm really wants is 20 bucks from Apple for every iPhone.

• 2:02:46Ben Gilbert?

  I think that's a reasonable path forward. The CEO is pitching a much broader story than that to shareholders these days. So what Qualcomm actually wants is for the Nuvia team to sort of like invest where they see the frontier going, where they see a much bigger TAM, where Qualcomm sees a multi-hundred-billion-dollar opportunity, and that is IoT, automotive, and the RF front-end. And so they sort of describe phone modems and phone systems on a chip as almost like a legacy business, and they're highlighting these other areas as sort of the growth business as the frontier.

• 2:03:29David Rosenthal?

  Interesting.

• 2:03:30Ben Gilbert?

  But either way, Nuvia seems to be the ticket. Because if you can custom-design chips using the ARM ISA, but be like the performance of Apple silicon, I don't care what you're putting those in, that's a really good, powerful thing.

• 2:03:44David Rosenthal?

  Well, just, I mean, even like for... Technology, the technology industry writ large to have, just like with Android, you had a, you know, iPhone rivaling operating system available off the shelf for any kind of application that let a million flowers bloom.

• 2:04:00Ben Gilbert?

  Yep.

• 2:04:00David Rosenthal?

  To have the same thing for Apple silicon, like, that's pretty cool.

• 2:04:05Ben Gilbert?

  All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:04:18David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:04:35Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:04:50David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:05:14Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:05:33David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:06:03Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you. There are two other small things that happened that I think let's just sort of skip. I'll mention them briefly, but let's get into analysis. Paul Jacobs got kicked off the board of Qualcomm in 2018. He tried to take the company private through a buyout when there was all this sort of tumult about is it going to be bought by Broadcom, all this stuff.

• 2:06:46Ben Gilbert?

  And the board said, if you're going to try and make a hostile takeover and LBO the company yourself, 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 in 2016 to 2018, Qualcomm tried to acquire NXP Semiconductors, but I think eventually China sort of just like dragged their feet enough to kill that.

• 2:07:04David Rosenthal?

  It got tied up in the whole Broadcom thing.

• 2:07:06Ben Gilbert?

  Yes. But, quick review of where they are today, and then we'll go into analysis. Qualcomm today has a $120 billion market cap, which, two things. One, that's astonishing. That's impressive. They're technological pioneers and they're amazing at value capture. Two, that is the same price that it was worth at the peak of the dot com bubble.

• 2:07:30David Rosenthal?

  Wow. And just about the same amount that Broadcom offered to buy it for, right?

• 2:07:35Ben Gilbert?

  Yep.

• 2:07:36David Rosenthal?

  Which is interesting. You know, by revenue, I think revenue and probably also a number of chips, they're the largest fabulous semiconductor company in the world, bigger than Nvidia.

• 2:07:44Ben Gilbert?

  Yep.

• 2:07:44David Rosenthal?

  But a way lower market cap than Nvidia.

• 2:07:46Ben Gilbert?

  Yep. I mean, are you going to make a bet? Like, here's my view on Qualcomm versus Nvidia. Do you bet on the intelligent connected edge, as the CEO Cristiano Man 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 buzzed.

• 2:08:07David Rosenthal?

  Although I do really have a genuine appreciation after doing this episode for like, the amount of... Engineering that goes into wireless technological advances, which almost at a Moore's Law, well, much slower than Moore's Law like pace, but a steady drumbeat have continued to improve. And I mean, now there's like no difference between 5G and like home broadband. Like, and that's like

• 2:08:34Ben Gilbert?

  If you're standing on the right street corner. Okay, they do 44 billion in revenue. Chips make up most of that at 37 billion. Licensing fees make up only 7 billion, but the licenses are a much higher margin business. It's a 69% margin. I think it's earnings before tax margin on licensing versus only 34% for the chips. So there's a super efficient business there in licensing. Revenues are growing 32%. Earnings are growing 47% year over year. This is an amazingly high growth rate company.

• 2:09:09David Rosenthal?

  Yeah, that's pretty awesome.

• 2:09:11Ben Gilbert?

  They almost doubled their revenue over the last couple of years, too. So that Cristiano is definitely

• 2:09:16David Rosenthal?

  Doing a good job.

• 2:09:17Ben Gilbert?

  Cristiano is the new CEO as of last year. I think he's been for been in for about a year. So into analysis, what power do you think that Qualcomm has?

• 2:09:27David Rosenthal?

  Patents.

• 2:09:29Ben Gilbert?

  Is that a cornered resource?

• 2:09:31David Rosenthal?

  I think that is a cornered resource. Oh, I think, yeah, Hamilton in seven powers. I think he does say patents are accorded. I think they're in the canonical description of a cornered resource. That for sure.

• 2:09:44David Rosenthal?

  They had at least, maybe still do have network economies in the infrastructure side of the telecom industry and the handset side.

• 2:09:57Ben Gilbert?

  Like, yeah, you have One locks in the other.

• 2:10:00David Rosenthal?

  One locks in the other. Like, if you control the infrastructure standard, all the handsets will have to use that.

• 2:10:06Ben Gilbert?

  Yep.

• 2:10:06David Rosenthal?

  If all the handsets use XYZ standard, then the infrastructure will have to. And so like being able to control both, like, I think there actually was a network effect there.

• 2:10:15Ben Gilbert?

  I also think there's scale economies. If you are a fabulous chip company, then

• 2:10:21David Rosenthal?

  Totally.

• 2:10:21Ben Gilbert?

  Is worth all the R and D.

• 2:10:23David Rosenthal?

  The amount of R and D.

• 2:10:24Ben Gilbert?

  Creating a Snapdragon, designing and creating a Snapdragon and realized across a huge number of customers. So like, it's really hard to start the next Qualcomm if the frontier you want to compete on is making a better Snapdragon. That's not going to happen.

• 2:10:38David Rosenthal?

  I've got a fun one here. That's both fun to talk about because it always is, but I think actually as a, I feel reasonably confident in. I think Qualcomm during the golden years that we told the history of had real process power. I think it was equivalent to the Pixar brain trust. Like that set of people working together under those set of circumstances were wholly unique in the industry and the world.

• 2:11:06Ben Gilbert?

  Yep.

• 2:11:06David Rosenthal?

  And actually, it's interesting, like I read, you know, besides the Qualcomm equation book from Dave Mock, which is amazing. There's a ton of history out there about Qualcomm, especially in like local San Diego, like, like the lots of local San Diego publications and history books and stuff.

• 2:11:21Ben Gilbert?

  Especially because the Jacobs has given hundreds of millions of dollars to support the company.

• 2:11:24David Rosenthal?

  We didn't talk about this, but Irwin is, Irwin is one of the great philanthropists of the past century, like undoubtedly. But to UCSD, the UC system, so many like so much of building infrastructure in San Diego comes from Qualcomm and the Jacobs family. So going and doing all the research, all these local San Diego publications and, you know, historical documents. They all talk about the like wealth, the wellspring of startups and other technology companies that came out of Qualcomm. And indeed there are like, you know, Lincoln and Qualcomm, there are like 100 plus in the San Diego area that came out of Qualcomm. But you compare that to like the Silicon Valley, like what came out of Intel, what came out of Fairchild, what came out of the Trader S8.

• 2:12:06David Rosenthal?

  There's not the same diaspora of success in Qualcomm, like plenty of success and, you know, Solana and Tully is part of the Qualcomm diaspora. So it's not like there's none, but not at the same scale. And I think that actually de facto shows there was process power. Like it was that unique group of people in that unique situation.

• 2:12:25Ben Gilbert?

  That's an interesting sort of like proof by example.

• 2:12:27David Rosenthal?

  Yeah.

• 2:12:28Ben Gilbert?

  Huh.

• 2:12:29David Rosenthal?

  Deductive proof.

• 2:12:31Ben Gilbert?

  Do you want to talk about the Baron Bull case for the company? I have a few. Okay, go for it. All right, so here's the bear case. Qualcomm has very real competition from the low end that we didn't talk about. An example is MediaTek, who not only makes the baseband modem chip, but also systems on a chip using the stock ARM CPU designs. So MediaTek's systems are way cheaper than Qualcomm. And I think they actually just surpassed Qualcomm in terms of number of units shipped. And so all the low and mid-end Android phones are using MediaTek. And so Qualcomm kind of needed to buy Nuvia in order to differentiate the CPU and not just be using the stock ARM design

• 2:13:14Ben Gilbert?

  that MediaTek and everyone else is using on much cheaper chips.

• 2:13:19Ben Gilbert?

  Historically, they failed that everything that was not a phone that we talked about before, and now they're sort of saying the future is IoT and automotive, these things that are not phones. We'll see. They're just constantly in lawsuits. I mean, we didn't talk about this, but like China, South Korea, EU, Taiwan, all these companies, all these nations have sued.

• 2:13:40David Rosenthal?

  So many law firms must just be making a fortune off of this industry.

• 2:13:45Ben Gilbert?

  And the last one for the bear case for me is I really think that they finally poked the bear, talking about their customers, enough to make them want to actually do something about it. 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 could either use in-house or competitors coming around at different angles, Qualcomm may lose their leverage to actually get a royalty out of each phone sold. Now, licensing business is going to continue to be a juggernaut, smaller in revenue but higher in margin.

• 2:14:30Ben Gilbert?

  But that is the sort of bear case on the current silicon business. Now, the bull case, like maybe the lawsuits thing is actually a bull case. They managed to keep making more and more money and have been reaffirmed over and over again in a bunch of jurisdictions that, you know, they settle their way out of these lawsuits or they whatever, but they're able to keep making tons of money. The big bull case is you believe that this shift to automotive, IoT and 5G RF front-end is real. And so for those keeping track at home, everything I'm about to say is a part of the chip segment that does that $37 billion in revenue. Automotive does $2

• 2:15:13Ben Gilbert?

  billion in revenue. That's a very real business. The RF front-end business that we were talking about, that does $4 billion a year in revenue.

• 2:15:20David Rosenthal?

  It's interesting. I mean, we rented a car here in Lisbon, and for the family. And of course, it has data built in, you know, 4G or 5G data right in, as does like just about every new car these days.

• 2:15:35Ben Gilbert?

  Yep. The IoT segment is now doing over $7 billion a year. Qualcomm thinks overall this is a $100 billion opportunity. There's a bigger narrative that Cristiano is trying to espouse around this intelligent, connected edge that they call a $700 billion opportunity.

• 2:15:52David Rosenthal?

  Getting into Masada numbers.

• 2:15:53Ben Gilbert?

  I know. It reminds me a lot of the Nvidia slide that talks about their trillion-dollar TAM. I mean, they're executing very well, but I think they're trying to sell a story in terms of addressable market that is hand-wavy.

• 2:16:09David Rosenthal?

  Yeah.

• 2:16:10Ben Gilbert?

  All right, playbook. So, in the early days, this is a thing that we didn't talk about. We talked 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 evangelize 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 eke out the absolute best performance from the innovations, they actually could still be the leader. So it was like, figure out how to get a bunch of other people just good enough, which is fascinating.

• 2:16:55David Rosenthal?

  It's such an amazing case study in bootstrapping an industry.

• 2:16:58Ben Gilbert?

  Yes. Yes. Similarly, they had a clever tactic in their IP strategy. So at Qualcomm, where I think they have something like 17,000 patents now, there's a decision every time there's a novel piece of technology about whether they should patent it or keep it a trade secret. And there's enough things patented so that you can't achieve any of these things, these magical things that we've been referring to all episode, these layers of magic, without paying Qualcomm. But they don't patent everything because they want to keep an advantage for like consulting revenue or implementation fees or signing big deals where they say, not only do you get access to our patents,

• 2:17:43Ben Gilbert?

  which may expire at some point, but if you work directly with us, you get access to the trade secrets and you can pay us to, you know, basically generate services revenue for you to work with our engineers.

• 2:17:53David Rosenthal?

  I was thinking about this for playbook as we were going to. There's this really interesting dynamic to this industry that lends itself well to the IP and patent monetization scheme that Qualcomm has adopted, which is that the successive generations of wireless network, you know, Gs, happen just fast enough that it's within the patent lifetime.

• 2:18:12Ben Gilbert?

  Yes.

• 2:18:13David Rosenthal?

  So that like, you know, all that core CDMA patent, like all those patents are expired now, but it doesn't matter because we're so many generations beyond that like those patents are now worthless.

• 2:18:23Ben Gilbert?

  Yep.

• 2:18:24David Rosenthal?

  So you get all the useful life during the protection period of the patent. And then when it's, you know, it's not like a generic drug where like, you know, Advil is still or Tylenol or whatever is still like, you know, useful.

• 2:18:36Ben Gilbert?

  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 90s of evangelizing the technology for 2G, they made out of survive long enough to catch the next window 10 years later for 3G. 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.

• 2:18:58David Rosenthal?

  Yep.

• 2:18:59Ben Gilbert?

  Another one that I thought was pretty interesting, because I mentioned I think the businesses actually make sense together. The licensing business offers Qualcomm predictable high-margin revenue that they can basically use to fund R and D. So because they know they're going to keep getting that, and because it's a big revenue stream, it lets them sort of take bets on new R and D. And when they do more R and D, that fuels the flywheel, where they both get new products and they get more IP that they can continue putting into the licensing flywheel. So there is, I think there is a credible argument of why you want to keep them together. There's also a-

• 2:19:36David Rosenthal?

  And Qualcomm makes that argument explicitly.

• 2:19:38Ben Gilbert?

  Totally. The not very credible argument is this thing's a cash cow, and we want to keep our rich uncle around to make this a nice place to work. And, you know, like, they have several, I think they have nine airplanes. Like, it's a relatively cushy company, from what I understand.

• 2:19:54David Rosenthal?

  Well, San Diego's a very nice place.

• 2:19:56Ben Gilbert?

  Yes. I do think the big picture is that the US government's patent system has granted Qualcomm a 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 US's regulatory system. They've basically said, and then reaffirmed in a lot of these rulings, you are allowed to capture a ton of value from this. And there's so many good debates about whether the patent system exists and serves its intended purpose of enabling people to spread the news about their innovation, so other people can add it. And the way we compensate you is

• 2:20:41Ben Gilbert?

  we give you a 20-year exclusivity window, or whether something like this is an abuse of the system. But there's no way to argue that this is anything but a perfect execution of the game on the field.

• 2:20:52David Rosenthal?

  Yeah. It strikes me, telling this whole story, that like, think about- Early-stage venture capital company building and like, you know, you said Ben, who you're telling the story. If you were to give a venture capitalist the Qualcomm pitch, and like, there's so many, there are like at least six or seven different hops where, you know, ex-Anti, it looks like, well, and then a miracle happens, and then we succeed at this, and then another miracle happens, and then we succeed at that. And like, usually, you know, my pattern matching as an investor in early-stage companies is like, anytime there's a single and then a miracle happens, automatic pass. Like, because if you're betting on a miracle, but, but sometimes, if you have a team, because this wasn't just like, and

• 2:21:34David Rosenthal?

  then a miracle happens, if you listened closely and like, really knew this team, they like, really knew, they had really high degree of confidence that all of these tight, you know, threading the needle moments were gonna happen.

• 2:21:46Ben Gilbert?

  Yep.

• 2:21:47David Rosenthal?

  And it really to a degree that just blows my mind. I've never heard anything like it.

• 2:21:51Ben Gilbert?

  Yeah.

• 2:21:53David Rosenthal?

  And it just makes me think that like, sometimes, like, to maybe just be a little more open to that, you know, that like, sometimes, like, if some, some person off the, walked in off the street and said, like, gave you the Qualcomm pitch, for sure, it would not work.

• 2:22:06Ben Gilbert?

  For sure. And, and the hardest thing about being a technology investor, or someone participating in this ecosystem in any way, is it's a power law dynamic. This is a business of exceptions.

• 2:22:15David Rosenthal?

  And I've seen, and I'm sure you have too, so many counterfactuals too, where incredibly credible teams walk in off the streets with miracle, like, then a miracle happens, and yeah, it still doesn't work. Like, you know, but sometimes.

• 2:22:26Ben Gilbert?

  But sometimes it does.

• 2:22:26David Rosenthal?

  But sometimes.

• 2:22:28Ben Gilbert?

  It never works, but sometimes it does.

• 2:22:29David Rosenthal?

  But sometimes it does. That's what makes our industry fun.

• 2:22:32Ben Gilbert?

  All right. So, we're gonna not do grading because we've decided to kill grading until we otherwise resurrect it. But I do think it's worth articulating a little bit of a takeaway. So my takeaway 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,

• 2:22:59Ben Gilbert?

  They need to be absolutely correct about their growth businesses around IOT, around automotive and around whatever the intelligent connected edge ends up describing. Because I think those are technologies that we don't quite know what they are yet.

• 2:23:14David Rosenthal?

  Yep.

• 2:23:14Ben Gilbert?

  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 on to their games a little bit and are gonna squeeze them from a bunch of different directions.

• 2:23:27David Rosenthal?

  Yep. Well, yes, totally agree. I think to paint the best version of the intelligent connected edge that I've heard Cristiano articulate is you're sort of put plainly like, hey, we all agree that like cloud is like a thing. Like we did the AWS episode. There's over $100 billion in like revenue backlog in the cloud.

• 2:23:46Ben Gilbert?

  Yeah.

• 2:23:47David Rosenthal?

  We talked about on the AWS episode, like snowball and snowmobile, like getting data to and from the cloud. It's like still like one of the major pieces of lock-in. And like you think about how data gets in and out of the cloud, most of it's not by snowmobiles.

• 2:24:02Ben Gilbert?

  Right.

• 2:24:03David Rosenthal?

  Most of it is wireless.

• 2:24:04Ben Gilbert?

  Yep.

• 2:24:05David Rosenthal?

  Connected on the edge. And so if you think about it like that, you're like, okay, yeah, I can buy that this is a trillion dollar market. But how do you capture value in that? And can they capture it in the same way that they have in the past? Like very much open questions. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:24:24Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:24:34David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:24:55Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:25:07David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:25:18Ben Gilbert?

  Oof, 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 you and I.

• 2:25:28David Rosenthal?

  Yes. And a professionally operated Boom Arm camera.

• 2:25:33Ben Gilbert?

  Yes. If you haven't watched the video version of this, just go check it out on YouTube or Spotify or anywhere just to see what that looked like. It was a very fun spectacle to get to do that. Our huge thank you to the Solana Foundation for hosting us at Breakpoint this year. It's a really great event and fun to be in Lisbon. When you finish this episode, come talk with us, acquired.fm/slash/Slack. 13,000 other smart, thoughtful, kind people. If you want some of that sweet Acquired merch everyone is talking about, go to acquired.fm/store. I know in the next few weeks, there's going to be a couple of new designs dropping inspired by catchphrases from episodes where I applied my graphic design skills, for better or for worse.

• 2:26:12David Rosenthal?

  It's the perfect time to sign up as a customer for Brex to get one of those.

• 2:26:16Ben Gilbert?

  Yes, that's right. If you don't want to pay for your t-shirt, brex.com/acquired, much cheaper way, you also get to be a Brex customer, so wins all around.

• 2:26:24David Rosenthal?

  Win-win.

• 2:26:25Ben Gilbert?

  If you want to listen to the LP show, we have had some awesome, awesome episodes recently. We just interviewed Jay Hoag, which is a super rare interview to get. Jay is the founder of the $21 billion firm TCV, formerly Technology Crossover Ventures, about their story and his personal philosophies. TCV was a major investor on much of the journey of companies you know, like Zillow, Spotify, and Netflix, which we spent a lot of time talking with Jay about. You can search Acquired LP Show for free publicly in the podcast player of your choice to catch that. But without listeners, we'll see you next time.

• 2:27:02David Rosenthal?

  We'll see you next time.