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I am starting a research paper that looks at the next generation networks “core” in relation to the principals of the Gorilla Game. Thank you Bruce for giving me a head start breaking this sector down! This has caused me to start reading the book for the second time. I just reread the passage discussing the differences of gorilla gaming compared to concept investing and it made me think about QCOM. I know that there has been a lot of discussion on this board and Rat's board questioning if the huge run up of QCOM late last year and early this year was indeed a true tornado. My question is would that have actually been a false tornado since, as I understand it, the 3G tornado has not currently begun? If this were true, wouldn't that have been a false tornado since it appeared to be based on the prospect of what was to come when 3G wireless comes to fruition?

Robert
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Robert,

My question is would that have actually been a false tornado since, as I understand it, the 3G tornado has not currently begun? If this were true, wouldn't that have been a false tornado since it appeared to be based on the prospect of what was to come when 3G wireless comes to fruition?

If you believe that the only CDMA tornado is 3G, then the tornado we've been watching for the past year isn't a false tornado. It isn't a tornado at all.

Instead, if you believe as I do that the tornado we've been watching for the past year is the initial application of CDMA for transmitting voice, and that HDR and 3G present opportuntities for at least two more tornados, that complete perspective makes sense.

--Mike Buckley
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Mike Buckley wrote:

Instead, if you believe as I do that the tornado we've been watching for the past year is the initial application of CDMA for transmitting voice, and that HDR and 3G present opportuntities for at least two more tornados, that complete perspective makes sense.

Mike could you expand on this, please.

Thanks.

CE
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I don't even know that I'd call what CDMA has seen a "tornado". It's certainly grown quite a bit, but I don't know if it qualifies as tornado growth. In my own personal opinion, I believe that the tornado was timed poorly. I think the market believed the tornado was approaching quickly, not another year or two off.

It didn't help that it was "the company that couldn't be stopped." I have no doubt that QCOM will rise well above the levels it once attained within the next year or two. I also had no question back when it was in the $160s that it would pull back...I just didn't know how far it would pull.

That's the basic reason behind why I'm nervouse about BRCD. I love the company and think there's enormous potential there. I also question if there will be an impending pull-back in the next six months that will allow me to double the amount I pick up if I wait.

Chris
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CE,

Ever since my initial study of Qualcomm at the time that Ericsson capitulated in 1999, I've always believed that Qualcomm has a reasonable shot of enjoying the benefits of many tornados just as Cisco did. (In their book, Moore and gang documented the history of Cisco's many tornados and a fellow investor who lived through those tornados corroborated the information.)

If I'm right about that, the first tornado Qualcomm experienced is still ongoing. It's the tornado based on CDMA-based transmission of voice. By my account, the tornado began in April, 1998. It's year-over-year growth was 276% that each quarter lessened to the most recent rate of 96%. I was prepared for calling an end to that tornado in March of this year, but was pleasantly surprised to see that the most recent decline was so small (from 101% to 96%) that I still consider it in progress.

I should mention that I'm defining the tornado based the number of world-wide CDMA subscribers. That's not as good as using revenue as the metric, but it's the best we've got in the case of CDMA.

Because Qualcomm's HDR (high data rate) product is all about transmitting data. It's a proprietary, open architecture. It's also a disruptive technology requiring a new value chain. As a result, for me it has all the markings of a separate (though related) gorilla game that if we're lucky will also have a tornado. By the way, we alread know to expect that there will be two versions of HDR that will likely fuel that tornado when and if it happens. They are commonly referred to as 1x to be followed later by 1xEVR.)

A couple years after HDR goes into tornado I hope we will then have what most people refer to as the upcoming 3G tornado. That one will accomodate transmission of both voice and data.

Because of the huge bandwidth needed for transmission of streaming video, I think there is also a reasonable possibility of a fourth and later tornado that I think of as the media-based tornado involving transmission of movies, etc.

Hope this clarifies the post you asked about!

--Mike Buckley
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<< I know that there has been a lot of discussion on this board and Rat's board questioning if the huge run up of QCOM late last year and early this year was indeed a true tornado. My question is would that have actually been a false tornado since, as I understand it, the 3G tornado has not currently begun? If this were true, wouldn't that have been a false tornado since it appeared to be based on the prospect of what was to come when 3G wireless comes to fruition? >>


I think a lot of people confuse growth in stock price with growth in revenue...the colossal run-up in Qualcomm's stock price last year did not in itself represent any sort of tornado; in fact, it was the growth in CDMA that signaled a tornado.


Business before pleasure, eh?


rex

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I have no doubt that QCOM will rise well above the levels it once attained within the next year or two. I also had no question back when it was in the $160s that it would pull back...I just didn't know how far it would pull. That's the basic reason behind why I'm nervouse about BRCD.....

In spite of the valuation of Brocade as a comparison to Qualcomm, we need to evaluate the hypergrowth that is taking place within the FC/SAN/NAS industry. Let's take the last 4 quarters of Brocade Communications revenue growth to see how it compares to the 460% share price appreciation from the 52 week low:

10/99 - 456% y/y 50% sequential growth
01/00 - 434% y/y 42% sequential growth
04/00 - 489% y/y 45% sequential growth
07/00 - 360% y/y 48% sequential growth

By any stretch of the imagination, we would have to qualify the above has a clear cut tornado in a market space that is poised to continue some pretty impressive growth going forward. The last three quarters have seen sequential growth pick up each quarter. Does that justify Brocade's share price in the FC fabric switching market? The company certainly has been on a flawless execution path which has attracted a large institutional following. There is a small float on the number of shares and this squeezes the available shares for trading. Not too many have been willing to part with their shares, hence the price remains pretty well supported and has proven to be a dangerous shorting stock.

Compare that to Qualcomm's revenue growth - which really isn't fair due to the trimming down of the business model and we are left with the last three quarters of what on the surface appears to be declining revenue growth as they've rearranged themselves as the IPR toll gate to future generations of broadband wireless. You'll see quite healhty revenue growth back in 1997 and 1998 for Qualcomm which, when coupled with the unit growth, is where one looks for the first generation hypergrowth phase.

http://quote.fool.com/Snapshot/financials.asp?symbols=QCOM&currticker=QCOM

The number of shares outstanding as well as the obvious daily trading volume due to that dwarfs the volume of Brocade. What's interesting is that Brocade's market cap is $26 Billion and Qualcomm's is $54 Billion even though Qualcomm had 7.7 times the amount of revenue last quarter as Brocade did. We might as well sandwich Siebel between the two with a $48 Billion market cap and half the revenue last quarter of Qualcomm. No need to address the issue that Brocade and Siebel have been awarded CAPs that extends the entire talents of the FC haberdashery row. Yet, both are clearly in the tornado growth phase of their technology adoption life cycles.

BB



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Sorry, I meant to say that extends the entire talents of the FC and CRM haberdashery row.

So much for jokes...

BB
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Mike, you said

- "Because Qualcomm's HDR (high data rate) product is all about transmitting data. It's a proprietary, open architecture. It's also a disruptive technology requiring a new value chain"

I'm having trouble in understanding "disruptive tehnology" when applying it to "software applications" and I thought maybe you could lend a hand or post a link if you've discussed it already. Until I fully understand the criteria of a GG I feel reluctant to start a basket of SoftApp for the CRM and virtual exchange marketplace. A few tickers on a radar is about all I can follow. With Software Applications, my understanding of "disruption" implies immense switching costs. I can't make the link in any other way. The propietary open architecure is the building design as you pointed out in your post, but then my problem is when the "disruptive" becomes positive. Is disruption good from the outset or does it occur during a game? Sorry if this sounds dumb but what's getting disrupted? This surely can't mean the challenge of a gorilla by a chimp ..... or maybe 'doch' ... from another Blickwinkel.

Rob



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Rob,

Good questions about the nature of disruption!

But before I get to that it might be helpful if I correct a mistake I made. I wrote: "Because Qualcomm's HDR (high data rate) product is all about transmitting data." Omit the first word of that sentence and it, ummm, actually becomes a sentence.

Okay, now that that's out of the way ...

I need to clarify that I use the terms, "disruptive" and "discontinuous" interchangeably. The first is used heavily by Clayton Christensen in "The Innovator's Dilemma" and the other term is used extensively by Moore and gang. They're used in the same context by both.

The easiest way to think of how disruption applies to software apps might be to think of two of the most popular types -- word processing and spreadsheet apps. Prior to using them, we used pencil and paper or typewriters.

When word processing apps came along we already knew how to spell the words and many of us knew how to type them. But when the software first appeared on the scene we didn't know how to format the paragraphs, copy and paste the phrases, move phrases around, underline a key phrase, or even change the color of the font. Those things we didn't know how to do were the discontinuity (the disruption) we had to cope with.

Similarly, when thinking of spreadsheets, we knew how to add, subtract, multiply and divide. But we didn't know how to create columns and rows or how to create the formulas that are at the core of utilizing a spreadsheet. All the things that we had to learn in order to use a spreadsheet app are the discontinuous (disruptive) aspects of that type of software app.

And in the case of both spreadsheet and word processing apps, the single biggest element of discontinuity was that both required a computer! A pencil, paper and typewriter were absolutely useless, making the need for a computer an example of extreme discontinuity if we didn't already own one.

If I've done a good enough job of explaining that, you now realize that disruption becomes apparent when a product category is first developed. As you noted, disruption is a good thing but it's important to appreciate that it's good only when it is thought of by enough adopters as a solution to a problem. In the case of word processing apps, it solved two primary problems: the problem of not being able to edit text easily and flexibly and the problem of having to print the text on paper to communicate its content to others. In the case of spreadsheets, it solved that latter problem and of course, made it possible to do multiple calculations almost simultaneously eliminating the slow, tedious and thus expense method of using pencil and paper.

With Software Applications, my understanding of "disruption" implies immense switching costs.

That is often the case. For the owner of the proprietary technology, its investors and all the members of the value chain, high switching costs desired. But it's not a given that all switching costs are high, regardless of the product category. In fact, one of the reasons so many word processing and spreadsheet apps remain viable competitors on the market today is because the cost of switching from one brand to another is relatively low. When all the brands developed a way to export and import files regardless of what brand the file was created on or is going to be susequently used on, the cost of switching became even lower. Maybe the best example of low switching costs in a disruptive software app is the example of e-mail where there is almost no cost of switching.

Now that I've challenged even Bruce :) when it comes to the length of my message, perhaps I should be more succinct by simply referring you back to page 23 of the revised book where it is explained that users of a discontinuous product "had to adopt new techonologies and put in place new infrastructures that were incompatible with what was prevalent at the time. That meaans, not only did they have to go through a whole learning curve on their own, they also had to wait for all the providers of complimentary products and services to get their part of the overall system up and running. Who wants a car with no highways ... [or a } fax if no one else owns one too?"

Hope this helps. Don't hesitate to pursue the discussion if the cobwebs persist. :)

--Mike Buckley

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The same post with corrected fonts. Sorry about that.

Rob,

Good questions about the nature of disruption!

But before I get to that it might be helpful if I correct a mistake I made. I wrote: "Because Qualcomm's HDR (high data rate) product is all about transmitting data." Omit the first word of that sentence and it, ummm, actually becomes a sentence.

Okay, now that that's out of the way ...

I need to clarify that I use the terms, "disruptive" and "discontinuous" interchangeably. The first is used heavily by Clayton Christensen in "The Innovator's Dilemma" and the other term is used extensively by Moore and gang. They're used in the same context by both.

The easiest way to think of how disruption applies to software apps might be to think of two of the most popular types -- word processing and spreadsheet apps. Prior to using them, we used pencil and paper or typewriters.

When word processing apps came along we already knew how to spell the words and many of us knew how to type them. But when the software first appeared on the scene we didn't know how to format the paragraphs, copy and paste the phrases, move phrases around, underline a key phrase, or even change the color of the font. Those things we didn't know how to do were the discontinuity (the disruption) we had to cope with.

Similarly, when thinking of spreadsheets, we knew how to add, subtract, multiply and divide. But we didn't know how to create columns and rows or how to create the formulas that are at the core of utilizing a spreadsheet. All the things that we had to learn in order to use a spreadsheet app are the discontinuous (disruptive) aspects of that type of software app.

And in the case of both spreadsheet and word processing apps, the single biggest element of discontinuity was that both required a computer! A pencil, paper and typewriter were absolutely useless, making the need for a computer an example of extreme discontinuity if we didn't already own one.

If I've done a good enough job of explaining that, you now realize that disruption becomes apparent when a product category is first developed. As you noted, disruption is a good thing but it's important to appreciate that it's good only when it is thought of by enough adopters as a solution to a problem. In the case of word processing apps, it solved two primary problems: the problem of not being able to edit text easily and flexibly and the problem of having to print the text on paper to communicate its content to others. In the case of spreadsheets, it solved that latter problem and of course, made it possible to do multiple calculations almost simultaneously eliminating the slow, tedious and thus expense method of using pencil and paper.

With Software Applications, my understanding of "disruption" implies immense switching costs.

That is often the case. For the owner of the proprietary technology, its investors and all the members of the value chain, high switching costs desired. But it's not a given that all switching costs are high, regardless of the product category. In fact, one of the reasons so many word processing and spreadsheet apps remain viable competitors on the market today is because the cost of switching from one brand to another is relatively low. When all the brands developed a way to export and import files regardless of what brand the file was created on or is going to be susequently used on, the cost of switching became even lower. Maybe the best example of low switching costs in a disruptive software app is the example of e-mail where there is almost no cost of switching.

Now that I've challenged even Bruce :) when it comes to the length of my message, perhaps I should be more succinct by simply referring you back to page 23 of the revised book where it is explained that users of a discontinuous product "had to adopt new techonologies and put in place new infrastructures that were incompatible with what was prevalent at the time. That meaans, not only did they have to go through a whole learning curve on their own, they also had to wait for all the providers of complimentary products and services to get their part of the overall system up and running. Who wants a car with no highways ... [or a] fax if no one else owns one too?"

Hope this helps. Don't hesitate to pursue the discussion if the cobwebs persist. :)

--Mike Buckley

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