Due to the competition between Intel, Samsung and Qualcom it is not likely that Qualcom will start to producing wafers in other fabs beside TSMC's.
Even if they try to transfer production to some other foundaries, it will take more than 9 months to design, transfer, and qualify a new mask set at a new vendor. Only after the +9 months they will start going up the learning curve of yield.
From Qualcom CEO interview by Forbes:
"
Would you ever consider helping Intel keep their fabs full by building your chips in their factories?
Paul Jacobs: I don’t have illusion about it. It’s a very interesting thing. You have to create a level of trust to do this. I think it’s conceivable that that trust could be created, but it’s hard. As a hypothetical scenario, imagine if we were fabbing with Intel, and they were also trying to compete with us, and this shortage happened. You would immediately jump to the conclusion that it was malicious, not that it was just that things happen and some mistakes were made.
That is a hard thing to figure out. How do you deal with that situation? I guess you say, “OK, well you can manage that contractually.” We think about those kinds of things. It may even be that we need to manage our existing suppliers in a more contractual fashion. I think there are solutions to it, and certainly Intel’s spent a lot of effort on transistor design and manufacturing.
It’s not well known probably, but Intel was our fab in the early days. We actually originally used X86 and they actually built the chips for us. We tried hard in the early days to have that relationship work. It’s a little bit in the mists of time, and I probably won’t remember exactly what happened.
[laughter]
Paul Jacobs: In any case, there were some guys that were making certain decisions on their side, and it just somehow fell apart."
See below full interview of Qualcom CEO by Forbes
Ron
Q&A: Qualcomm Chief Executive Paul Jacobs
http://www.forbes.com/sites/briancaulfield/2012/07/18/qa-qualcomm-chief-executive-paul-jacobs/1/
7/18/2012
His father, Qualcomm founder Irwin Jacobs, was an engineer. Paul Jacobs is an engineer.
Qualcomm Chief Executive Paul Jacobs may run one of the world’s most valuable companies, but he’s a thoroughbred geek: he pals around on stage at Qualcomm’s developer conference with Brent Spiner — who played ‘data’ on ‘Star Trek: The Next Generation’ — and he has a Ph.D. in electrical engineering and computer science from UC Berkeley, with an emphasis on robotics.
Interview him and he can expound on everything making the energy grid more efficient to his plan to make people healthier by turning them into smartphones. Below, a transcript of my interview with Jacobs at Qualcomm’s Uplinq annual developer conference for “Qualcomm Is Dialed In,” a look at the wireless chip designer’s position at the intersection of computing and communications for the August 6 edition of FORBES magazine.
FORBES: I won’t ask you whether or not you’ve got parts in the next iPhone. Everyone tells me you do, but feel free to tell me if you don’t.
Paul Jacobs: You’ll get me in trouble. You notice we don’t even mention Apple when we get up there and talk about things at this conference.
FORBES: I did notice that.
Paul Jacobs: They run their own stuff, they do what they want, fine by us.
FORBES: I guess that’s a problem everyone should have, a customer like that. This is kind of a naive question, but it is a little baffling. Who are Qualcomm’s three biggest competitors? It depends on how I want to think about it.
Paul Jacobs: It depends what segment. There isn’t anybody really that competes well across all of it. Ours is a licensing business and not really a competitive situation, but in the chip business, you’ve got guys at the low end, the MediaTeks of the world, and that kind of group down there. You’ve obviously got Intel, who’s not really a competitor yet, but they’re trying to come in on the high end, and we’re trying to go up.
Then you’ve got sort of the guys in the middle. You’ve got Nvidia and Broadcom, STE and those companies that are trying to compete in the middle. It depends where you look. There’s always competitors out there, one way or another.
FORBES: Well, Apple’s designing their own application processor, Samsung is designing and building one. Does that hurt your long term prospects when you have device manufacturers designing their own silicon?
Paul Jacobs: We’ve been through some situations like this in the past where we’ve had customers who were building their own internal solutions. For us, the key thing is we just try and drive the technology as hard and as fast as we can. We have the ability to make the investments. We also have just a wonderful team of engineers who really understand, obviously communications well, computing. We have a team that’s doing our microprocessor designs, been doing microprocessors for a long time. They were the embedded PowerPC group at IBM for a long time. They came over to us.
Graphics was the ATI group. We have really strong people. Then obviously on the conductivity side, the Atheros guys were leaders, too. We’ve both grown organically, and we’ve assembled very strong teams.
That allows us to push the technology really hard in comparison to some of the internal efforts that some of our customers have, in some sense I guess some of them are our competitors, too. It’s very hard for somebody who does it for their own internal use to get traction with other companies, which is why we used to be in the handset business.
I ran that. We got out of that business, and one of the reasons was that our customers felt like we were competing with them. I think it’s just a scale issue. Yeah, if you have a lot of scale, then you can invest, but “Can you invest enough?” is the question.
I would argue that we’re in a strong position. You look at the performance of our various sub-components of the chip, we’re in a very strong position in each one of those areas.
FORBES: Yeah, $4 billion will go a long way in R&D.
Paul Jacobs: It goes a ways.
FORBES: You really outmaneuvered Intel with WiMAX. What do you know about doing wireless that Intel doesn’t? Because they really didn’t get anywhere.
Paul Jacobs: They started to get some traction. They really went out around the world and made a lot of claims about WiMAX that were not in the end true, and we actually knew they weren’t going to be true at the time. I think that made it a brittle ecosystem. Once you could demonstrate that the performance wasn’t there and the ecosystem wasn’t growing the way that they had said, because they were trying to be outsiders coming in also. They made claims about licensing and so forth. Once you could demonstrate those things were not accurate in the end, then it fell apart.
The final thing for us really was they had convinced the government of India to allocate spectrum for WiMAX. If you went to India, it was called the WiMAX Spectrum. People thought that was what was going to roll it out.
We worked at that and we said, “We have LTE TDD, it’s a better technology, it’s more widely supported, and if we can get one…”
There’s two chunks of spectrum that were being allocated. If we could get of the two to go to LTE TDD, the other guy can’t go WiMAX, because he’ll be at a huge competitive disadvantage. All we had to do was get one. In fact, we didn’t even need to get it nationwide, all we had to do was get the big cities.
We got Mumbai and Delhi, we bought those. We said, “We’re going to LTE TDD with this,” and then everybody had to go that way. That was a last straw I think for them. Then you saw people starting to defect and the ecosystem fell apart. Then even big components like Clearwire and Sprint said, “Hey, we’re going to LTE TDD.”
I think we understood the dynamics of it, and we understood the way that the wireless systems worked. We knew early on that some of the claims that they were making just were not going to turn out, they weren’t going to achieve those claims in practice.
FORBES: Interesting contrast with what you did with the CDMA and the GSM market, how you brought that, snuck that into the water supply.
Paul Jacobs: I’ll tell you, the thing there was people claimed that we were not telling the truth. There’s a famous story in the “Wall Street Journal” claiming my father — who is world renowned, he wrote the book on digital communications theory, literally –people were saying [he] was lying about how the system worked. These guys, the people that started Qualcomm had been at a previous company called Linkabit, and they actually bit the first CDMA system at Linkabit. These people knew what they were talking about.
Moore’s Law allowed you to do the computation that used to be so expensive you could only do it for military or space communications. Well, by the [time] Qualcomm came along, the cost had come down enough that you could do it for commercial and consumer applications.
People were saying things like, “Oh, it’s going to take a van full of equipment to build a CDMA device.” Then we show up in a portable phone, and people, their minds were blown.
I’m a Cal grad, so I always like telling this story, that there was a Stanford University professor who [said what Qualcomm was doing] violated that it violated the laws of physics. We just, we went through a lot of stuff. Those wars, they were pretty emotional, and they took a very, very long time to heal.
Even when I took over as CEO in ’05, we were surprised by Flarion, which was an OFDMA company, I was really surprised at the level of traction that they were getting simply because it wasn’t Qualcomm.
Our competitors had positioned us so badly as if we were bad guys somehow for having done all of this innovation. We had to spend a lot of time going around the world explaining to people that yes, we do licensing, but we take that money from the licensing and we put it into R&D. We keep driving the engine forward. By the way, you need us to keep driving the engine forward, because if your business stops innovating, if we stop innovating, you stop innovating. Then everybody gets commoditized. Now, there’s no value for anybody, but maybe a low cost provider or something that isn’t really going to give you new features or functionalities.
Once we went around the world and explained that, we really did a lot of work helping these companies out, get their systems up and running. Then that fixed our problem. Today now, there’s a multiplicity of companies that operators worry about, whether it’s the operating system vendors or some of these very powerful manufacturers.
We have receded from being a concern. I think we’re seen much, much more as a partner and an enabler, which is a much nicer place to be.
FORBES: You had an intriguing critique of the fab business and why you were very reluctant to get into it. Could you maybe tell me a bit more about why?
Paul Jacobs: When you have a fab, the key issue is the amortization of the cost of building that factory. The component cost is not that big. What happens is the pricing gets set by how full you can make the factory, or your costs. Your costs get set by how full you can make the factory. Essentially what happens, when you run a fab is you end up worrying all of the time about, “What am I doing to fill the fab?”
It’s such an overwhelming issue, because the dollars can scale so rapidly that it’s my belief that the management of a company with a fab spends their time overly focused on filling the fab, and less ability to focus on innovation. We really spent all of our time thinking about what the next thing we could do is, as opposed to do we have enough widgets running through the fab?
The other piece that’s important too is that you get the benefit of everybody’s scale in the fabless model. Right now, we’re at the leading edge of the 28 nanometer technology, but there are other companies coming behind that, [S]o if our demand fluctuates up and down, they take advantage of that. You get a statistical balancing, and that actually solves the problem for the fabless guy.
The fabless guy’s definitely obviously worried how many widgets go through their factory, but they don’t have to worry about any one industry. If there’s something that’s unique to an industry, maybe somebody else is going up at the same time somebody else is going down. If you run the fab yourself, you don’t have that benefit. You have you.
I’ve heard people saying, “Intel’s looking at doing some fabless model for other people.” The problem is it’s just a very hard thing to do. When you’re using to running your widgets down the line, it’s hard to go to a model like at TSMC.
If you go see their fab, it’s absolutely fascinating. You feel like you’re in “Star Wars” or something, because all along the ceiling, there’s these little cartridge things that are running around, going from machine to machine, putting a cartridge down, picking it back up after it’s been processed, put it over here.
It’s like this choreography of things just running around and doings lots and lots of different people’s stuff all at the same time. The software to run that and the whole mindset behind running this massively, massively parallel operation, that’s very non trivial to do that well.
FORBES: Does that become tougher when you’re maybe their biggest customer?
Paul Jacobs: No, I think you still have the benefit. They obviously can run one widget easily, it’s just the point is they can also a thousand widgets.
FORBES: Is it difficult though when the number of widgets you’re cranking out is an order of magnitude larger than some of your competitors?
Paul Jacobs: They underestimated how fast we would get the chip ready, because their experience with other companies was that when they went to a new node, they had a longer process to get it up and running. Our guys just really, really nailed this one. They really did a good job. They underestimated that. They underestimated the overall market demand. They really didn’t see that the smartphone market was growing the way that it was growing, and they judged the demand down a little bit. Then it just kept growing even faster than we had anticipated, too. There was stuff on both sides.
When you’re the main person driving that leading edge, yeah, that’s hard, because somebody can make a decision just based off of our demand as opposed to the sum of a whole bunch of other people. You lose a little bit of that statistical averaging that goes on when there’s a lot of people.
We just need to be smarter about that in the future. We made some mistakes in this; they made some mistakes. If you want to point a finger, there’s blame to go around. At the end of the day, that’s not very valuable. We’ve just got to learn from it and do it better next time, and we will. This really was the first time we were on the leading edge.
FORBES: Would you ever consider helping Intel keep their fabs full by building your chips in their factories?
Paul Jacobs: I don’t have illusion about it. It’s a very interesting thing. You have to create a level of trust to do this. I think it’s conceivable that that trust could be created, but it’s hard. As a hypothetical scenario, imagine if we were fabbing with Intel, and they were also trying to compete with us, and this shortage happened. You would immediately jump to the conclusion that it was malicious, not that it was just that things happen and some mistakes were made.
That is a hard thing to figure out. How do you deal with that situation? I guess you say, “OK, well you can manage that contractually.” We think about those kinds of things. It may even be that we need to manage our existing suppliers in a more contractual fashion. I think there are solutions to it, and certainly Intel’s spent a lot of effort on transistor design and manufacturing.
It’s not well known probably, but Intel was our fab in the early days. We actually originally used X86 and they actually built the chips for us. We tried hard in the early days to have that relationship work. It’s a little bit in the mists of time, and I probably won’t remember exactly what happened.
[laughter]
Paul Jacobs: In any case, there were some guys that were making certain decisions on their side, and it just somehow fell apart. I don’t really remember all of the details exactly how it played out. That was unfortunate, I think. I have a ton of respect for those guys. They are an important part of the technology ecosystem in the world. It’s good. We hope that they continue to be able to invest, but we’re going to compete hard with them.
FORBES: How worried would you be if your most profitable product costs $1,000 — as Intel’s does — and you’re looking a potential competitor, in Qualcomm, whose most expensive application processor costs what, $100? Less?
Paul Jacobs: Way less.
FORBES: Would you be a little concerned?
Paul Jacobs: Yeah. We always looked at the margin structure in the PC business. We thought that there was real opportunity for mobile to come in, both from the pricing standpoint and from the power, and the architectural standpoint…. I used to go up to Silicon Valley and give these talks about phones, and how a phone was going to have all of this stuff in it. People were like, “Oh no, you’re wrong. The phone isn’t going to disrupt the PC, WiFi is going to take over and kill cellular.”
We used to have like these battles back and forth. They, actually, in certain times, tried to portray us as like we were anti WiFi, which we never were. I was never anti-computers either. I just said, “Look, the thing’s going to change over time. We’re coming up from below as a disruptor.”
There were definitely companies. You’ve seen companies who made that jump well already. Obviously, Apple is a clear example of somebody who made the transition well.
Google, I’m not even sure they were around at the time we first started talking about this stuff, maybe early days. They’ve obviously made a good transition, pivoting to mobile.
Microsoft’s working on it right now, Intel’s working on it right now. I think Microsoft from my perspective is ahead, because Windows RT, we feel, they did a really nice job on that.
I think it’s what often happens when you get too successful in your own industry. It’s the thing I tell people at Qualcomm, “Don’t get complacent, don’t believe you win just because you show up. We have to work every single day, and people are coming after us from every different direction.”
I think you have to have that fear always. I have the fear even given the position I’m in. People say, “Well, you’re charging, you’re getting extra margin, somebody else will come in underneath you.”
Clearly, at the low end of the market, we’re having to fight it out on price. I think that’s the biggest thing that I worry about just for us is that issue. Do you get complacent? Do you believe that the world should go in your direction and you can almost do anything and still win? That’s not true.
It took a long time really, but when the ramp comes, it goes steeply. That ramp has actually turned, [it was] not that long that this company has gone from being a massive, massive underdog to be the leading fabless company and wireless chipset supplier and that, that transition, that can happen quick.
FORBES: You have wonderful margins, better than your customers, better than most manufacturers. How long can you triangulate above — out of manufacturing either devices or chips? Is that something that can go on indefinitely?
Paul Jacobs: The key is differentiation and not getting commoditized. The fortunate thing for us is that consumer demand for wireless data is so strong. I think it’s not going to end. This isn’t a CB Radio. This is part of people’s lives now. People want more and more and more stuff coming down to their device, and faster and faster. That gives us a ton of opportunity. We have a vision for how to solve this issue. Right now, the networks can’t give people enough data to satisfy their demand. Instead, they price it to get price elasticity so people only take so much versus what they really want, because the network can’t support what they really want.
We have a vision for how we’re going to solve that problem and allow the operator to give people what they really want. That’s going to give us a five to 10-year roadmap of technologies. There are very fundamental things that you have to do to enable this.
It’s stuff that we started working on a decade ago at least. I had a team build us, at the time it was a cell site that was the size of a laptop computer, which at that time was radical. How could you do that? When we tried to deploy that, we realized that it had problems.
If you put these out, they would interfere with each other. We spent the last at least decade working on managing the interference between what we call small cells.
Back then, and in fact until relatively recently, we thought about that just like people have femtocells today. Get me a little bit more coverage in my house, a little more data rate in my house, that kind of stuff.
Then we had DoCoMo come in to us and say, “We want not 10 times more data, we want 1,000 times more data.” Then we sat back and we’re like, “Wow, that’s a pretty big goal. What are we going to do?” We realized that if you thought about this femtocell idea differently, and said that’s the main way that you’re going to deliver bandwidth, and it has a lot of other implications to it, we can do that.
The other key issue is that when you get 1,000 times more data demand, you’re not getting 1,000 times more revenue to cover it. The bits are decreasing in value. Video bits are worth far less than text bits, as an extreme example.
We had to address the cost side, too. It all came back to this idea of building a cell site that was more built along the lines of a phone, with the architecture of a phone, than it was with a traditional cell site. For us, that means a very, very highly integrated chip and power levels that are similar to a phone. In fact, we actually built it even less than phone, if you can imagine that.
The cost now is like a phone, but it doesn’t have a screen, it doesn’t have a big battery, doesn’t have a ton of memory in it. Actually, the cell site is going to be the cheaper thing than the phone, which is a radical shift.
It used to be cell sites were in the old days they were like a million bucks. Now, all in, they’re in the hundred thousand range when you talk about the hardware plus the real estate, plus the backhaul, plus all the provisioning of stuff. Now, I’m talking about a thing that’s cheaper than a phone,[something that costs] tens of dollars that I plug into the wall. That’s going to create my network.
Not only that, because the device and the network are closer to each other, this thing transmits less power, or it can have much, much higher data rates. I actually can spend some of the capacity that I’m getting for people who are passing by, and offload the bigger macro system. All of this stuff really works incredibly, incredibly well.
One of the things that we were really excited to see was the [U.S. Federal Communications Commission] actually coming out and saying they’re going to allocate spectrum specifically for small cell deployments in the 3.5 GHz band. That’s great. There’s a lot of spectrum out there. People haven’t known how to use it before.
Now, you use it with small cells, all of a sudden boom, now we can give more data to people. People are going to be really happy with that.
That is a long winded answer to how we’re going to keep the margins up, because we have special sauce that we figured out how to do these things. It bolts [together] stuff that’ll end up in the mobile chips and stuff that’ll end on the small cell side. That’s going to help drive the train for years to come.
FORBES: That’s almost the state of the technology industry in a few paragraphs. A few decades ago answer to falling prices and increasing demand was to make everything like a personal computer. Now, you’re saying the answer to every technology problem is to make it like a phone.
Paul Jacobs: Yeah, that’s it.
FORBES: I’ve got to ask about health care. What do you know how to do that Intel, which has been talking about health care for a long time, doesn’t know how to do? How can you solve [some of these health problems] by making things maybe a bit more like a phone?
Paul Jacobs: We have a pretty long history in this. The first product of Qualcomm was this messaging — our big product — for long haul trucks. As part of that, we built a guaranteed message delivery system in the middle of it.
FORBES: Yeah, that’s a fascinating story right there.
Paul Jacobs: Then we had a company CardioNet come to us, and their idea was they were going to do cardiac arrhythmia monitoring when people are out and about walking around. That required guaranteed message delivery, because obviously if somebody has an issue, you want to make sure that the monitoring center gets that. We worked with those guys early on and realized, among other things, that this was a big opportunity. The other thing that happened was I had a friend who works for us now named Don Jones.
He had been at an ambulance company. He then did a little start up way back when where they were doing house calls again, using nurse practitioners and outfitting a van with the mobile technology as it existed back then, which wasn’t very mobile.
We were talking about it, “OK, this is the future.” Then that start up didn’t work, so he came to work to Qualcomm. Back then, we started strategizing together. The stuff you had back then didn’t really work right, and we have this other piece, this guaranteed message delivery stuff, and how do we pull all of this stuff together?
I will tell you, it’s far harder than you expect. We have been at it a long, long time. In fact, the product that we have right now, this 2Net Platform that we have right now, that came from listening very carefully to the medical device manufacturers. Naturally, our first idea is we’re going to turn every medical device into a phone.
The problem is that the medical device manufacturers don’t really know the phone business. You’ve got now FCC clearance and [U.S. Food & Drug Administration] clearance. If anything changes one way or another, then it has to go back and be re certified by one or the other. There’s just this long litany of things that create friction in getting that done.
These medical device manufacturers said to us, “Look, I have some connectivity. I don’t want to change it. Just give me connectivity. I have a local connectivity, give me broad area connectivity.”
We said, “If we build this device which just talks with whatever radio they have, and that they’ve already gotten certified, and then we backhaul it using cellular and we make it pair up so easily that your grandma can take it home, plug it into the wall and it will just work, that solves a lot of the problems.”
When we got the idea and we started talking to the other medical device manufacturers, all of a sudden, boom, everybody came in, and they’re like, “You have solved the problem. This is a huge issue.”
We’re going to see some good stuff out of them. There’s really interesting projects underway that will make, in my mind, a big difference in people’s quality of health care, the cost effectiveness of it, the ability to continually monitor. All of these really good things happen out of just getting the connectivity.
There already is today a study that the [University of Southern California] did on pacemakers where they showed that. It was a relatively large number, I think maybe even 200,000 cases. Some of the people had a pacemaker, which could be remotely interrogated over wireless, and some of the people you had to go into the clinic to get it talked to. There was a 50 percent improvement in mortality rates by just having remote monitoring.
FORBES: Wow.
Paul Jacobs: It’s incredible. That’s a huge, huge result. Everybody notices that stuff. I think the reason is because you can catch things quicker, and human beings being who they are, put stuff off. “That’s probably not an issue, I’m not going to go in.” Then something happens. Then you take that idea and you go fast forward a few years from now. We have researchers today that are building a sensor that will sit in your bloodstream and lodge in your wrist, I think is the idea right now. It will monitor. It looks for certain stuff that ends up in your bloodstream when you’re about ready to have a heart attack.
What happens is, as I understand it, the cells die. Some cells start to die and slough off. As they die, they release some chemicals, whether it’s RNA, DNA fragments or things like that into the bloodstream.
If you detect those, you may get as much as a two week notice that you’re going to have a heart attack. Imagine your phone rings and says, “Go to the doctor now, because you need to manage your heart.” That’s unbelievable, those kinds of things.
FORBES: [So] the solution to some of my health care problems might be to make me a little bit more like a mobile phone with the right sensors.
Paul Jacobs: Yeah, you’ll be a mobile phone, too.
FORBES: This all circles back to your degree in robotics.
Paul Jacobs: Exactly. [laughs]
FORBES: What one thing, does everyone know about wireless that’s wrong?
Paul Jacobs: I would say a lot of people in the industry believe that the capacity problem is unsolvable or that we’re always going to be in this scarcity mode. They haven’t started really to think through what it means to have abundance in bandwidth, to use one of our friend George Gilder’s themes of that. I think we, and me personally, fell victim to some of those things. I was always trying to deal with how do I get around this scarcity issue? We built this network media flow where we were going to go around the cellular network and broadcast data to the device. That was how we were going to solve the problem.
In the end, now that we’ve had this shift in our mindset for solving the 1000X problem, I fundamentally believe it’s solvable. Getting massive amounts of video on your phone, that’s going to happen. TV, I think, will fundamentally change.
I watch ESPN on my tablet over the network. When I’m some place where other people are using the network significantly, it doesn’t work that well. But in the future, it’s going to work well because we’re going to be able to deliver that bandwidth.
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What is that? The whole long tail thing is going to be even more than it is today. It’s going to be more mobile and I think it’s going to end up being the fundamental way that people actually have access to news, entertainment and all those things, which is already happening.
Maybe it’s a matter of emphasis that people don’t get. The emphasis is even stronger than they think it is today. We talk about all these other issues, all the places where mobile can be an enabling technology in other industries.
People always doubt that stuff. They always tell us that we’re crazy. How can mobile really impact health care? It takes doctors 18 years to do adopt new technologies. You’ve got all this regulatory burden.
Well, you know what? Tell that to the music industry, because they got massively changed by the advent of mobile technology.
How are you going to change the energy grid? Is it fundamentally going to shift because of smart grid technologies? Is the grid more…?
I went to a thing where I think people were advocating that the energy grid should be more like the Internet, and that information goes with the energy, and there’s storage all over the place. Yeah, maybe, I don’t know. That may be true, too, but the fundamental thing that enables that is communication.
Do people believe that communication, that the bits that will go with the electrons in the grid, that’s how we’re going to save the planet? I don’t know. Maybe it is.
I don’t think people necessarily believe that the communications is the fundamental component of it, which if you have that kind of decentralized generation and storage, it is. Information is as important as the storage of the electric power and the generation of electric power.
I’m not going to go on about that. I could be on that route for a long time.
FORBES: No, I’ve got more time than you do.
Paul Jacobs: OK, so it goes back to I’m on the board of this company A123 Systems also. One of the things that they make are these grid storage batteries, which are there to soak up the variations in load. Today, the way that it works is that you build a generating station and it’s not running at full power. It’s actually running at less so that it can surge up and down with the demand. Instead of doing that now, they say, “Run the power plant at full, and have the battery actually soak up the difference between those things.”
This notion that you can put this flexibility into the system, it actually is happening already. Then you say, “Well, what other places are you going to get the power from?” You get alternative energy sources. Wind, solar, these things are too variable to actually be attached directly to the grid.
Communications is actually going to be the key issue there. What will happen is whether it’s battery storage or actually pairing an alternative energy source with a traditional power plant, communication of, “Who is it that can supply the power at that given time?” is the critical component.
Again, I think communications are going to change. I think the grid probably is going to be, again, more like a phone, to go along this theme that we’ve been talking about. It is going to be smaller, or decentralized, more local computation. Communications is going to be a critical thing to cause the coordination between the different elements of the grid.
The other thing that’s going to have to happen too is the whole grid is just very archaic in its cyber security aspects. While phones are not perfect today for sure, there is a huge amount of R&D going into making them better. They turn over faster.
I think building a network, a power grid that can turn over its components faster and improve rapidly, that’s going to be an important aspect of it, too.
FORBES: You sound a lot like a PC guy 30, 40 years ago.
Paul Jacobs: I probably do.
FORBES: You mentioned you’re constantly scanning the low end for possible threats. Anything you will think that could disrupt Qualcomm in a decade or two?
Paul Jacobs: I think the thing that is happening at the low end that could have been very disruptive had we not seen it coming was this rise of the small manufacturers, for example in China. There’s this whole story, Media Tech, and all these others spread. All these other companies down there that are building almost a complete phone that then some company comes along and makes relatively small modifications to and brings it to market quickly.
That’s the story of how Nokia got hurt in China. It lost a lot of share to those companies.
We were fortunate. We saw that coming because it happened in GSM, which wasn’t our market, so we were ready for it when it came into CDMA. We’re still working on our products, and support and all those things there, but I think we’re doing a pretty good job of managing that.
That was a business model change in a way that you wouldn’t have expected, because the traditional thought pattern was the big guys; you had to be big to win. In fact, in this case, it was the small guys who had some distribution advantage, some brand advantage, some manufacturing, something that they brought to the table that was giving them some advantage in a very small niche.
It’s this “nichefication,” if I can make up a word, of the manufacturing at the low end that is a potentially disruptive force. Now, for us…
FORBES: How did you get your chips in their hands?
Paul Jacobs: We’ve got people all over. A lot of them are in Shenzhen and Guangzhou. They’re not as distributed as you might think, but I think over time they will become more distributed. Then the key is for them to know to come to you. In fact, that’s also happened on the licensing side. Everybody said, “Your licensing business is going to be disrupted by this because these little guys aren’t going to take licensing.”
In fact, they do, because they’re under pressure. They want to export, they want to grow their business, and if they’re outlaws, that’s very tough for them to do. They actually want to be part of the system and be legitimate, and be able to export and grow.
A lot of those people come to us. It’s very fascinating. They know the reputation. The brand is not such a consumer brand, but in the industry, it’s incredibly strong. People know they want to work with Qualcomm.
FORBES: I imagine if you could have made your Windows RT OEM at this point you would have, but sounds like you can’t.
Paul Jacobs: Right, yeah.
FORBES: I just wanted to make sure I didn’t miss that somewhere.
Paul Jacobs: No. Yeah, we can’t say who they are yet. I think you’ll like the products when they come out.
