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<< For additional confirmation that Qualcomm is not playing a royalty game, think about what it would look like if they were. Many competitors would be successfully producing CDMA chip sets that would soon become commoditized. That isn't happening. In fact, predictions by Qualcomm's management about the expected significant drop in marketshare of CDMA chip sets is way behind their anticipated timeframe. >>

Mike- I don't think QCOM's 90% share, or "110% share" or whatever in CDMA chipsets confirms that they are not playing a Royalty Game in chipsets, for several reasons. I think market share can be consistent with a Gorilla Game, or lack of it can certainly smack you over the head/ confirm the absence of a Gorilla position in an enabling technology, but I don't think it can be used positively to "confirm" a Gorilla Game, though maybe that's just semantics. I would guess you don't think this either. I can't see why overwhelming market share can't hypothetically IN THE SHORT RUN be maintained in a Royalty game, due to some combination of first mover advantage, overwhelming technical expertise and high capital expenditures required acting as high barriers to entry, in the absence of control of a proprietary open architecture with high switching costs, with commoditization occurring much further down the road, as some of the "brains" leave to competitors, plants become cheaper to start up, and competitors close the gap etc... Can't think of a real world example off hand, but can't theoretically see why not either. I am not sure that you've given enough time for CDMA chipsets to become commoditized and if that may still not happen. The fact that it hasn't happened so far is encouraging. The fact that I think Intel recently gave up on CDMA chipset development for example, is encouraging too, but not conclusive or confirmatory of a Gorilla game won. Further I think you are choosing to define the terrain as CDMA chipsets rather than all chipsets. If you look at all digital chipsets, QCOM's share is far from dominant (of course it chooses not to make GSM chips for example). But the converse of QCOM's lack of interest in say GSM chips, why I suggest this expanded field, is that the market for non-CDMA chips is much larger than the CDMA market. So as a potential manufacturer, it would look more lucrative and be more of a priority for me for the time being to try and make GSM chips (larger markets) and this may in the short run encourage these markets to be more competitive and commoditized earlier than CDMA chips. I may forego the CDMA market for the time being having larger tastier fish to fry. When the day comes that all chips are some flavor of CDMA, such as at 3G adoption, then I would have a greater incentive to develop/assemble a team with CDMA expertise. I would then absolutely be forced to. It may turn out like an exam-cram and I fail the next morning, but the need to succeed would then be overwhelming.

For the far future, the eventual 3G chips may require the incorporation of GSM ip that QCOM would need to master, and that may trip them up. The other worry I would have about QCOM obtaining a Gorilla position in 3G chips, is the fact of the Spinco spin-off itself. It strikes me as odd that a winning "Gorilla" would have to contort itself by spinning off its chip business to be able to fit into and zip up the 3G Gorilla suit, the next upgrade, that several on this thread have preannounced it will wear. This doesn't exactly strike me as a strong starting position. If you really had a Gorilla hold on 3G, control of a proprietary open architecture for 3G chips, of all flavors, why would you be forced to spinoff at all, why would you need to negotiate for GSM patents etc... Though it is another issue, I don't know how the remaining pure ip company can be properly thought of as a true Gorilla under any circumstances, in that I can't understand how you can effectively control a value chain to your long term advantage when all you do is collect royalties and licenses, you're just a toll-booth. I don't see how you can design out value chain members to take over yummy high margin portions of the offering if you have no manufacturing/marketing base. I don't see how you can leverage your position to enter nearby markets as they arise either, if you don't have existing manufacturing and marketing relationships in your home base. I have difficulty in seeing how any of Intel, Microsoft, Cisco or Oracle could have ended up where they are today if a decade ago they had decided to become "pure ip " companies and simply license and collect royalties on their existing ip/ patents.

<<And it was reported that Nokia's CDMA-based phones were pulled by Sprint and Vorizon because they didn't work properly. That's because Nokia doesn't have the proprietary expertise that Qualcomm has.

It's my thinking that Qualcomm is definitely playing a gorilla game.>>

Whenever I see a phrase like "proprietary expertise" I cringe, in that strikes me at least by the "expertise" part as a definitive Royalty game, possibly a higher form of Royalty game than just the plain execution/efficiency based one, but still a Royalty game. I've seen the expertise bit been used most recently to argue that JDSU/SDLI is a Gorilla in fibreoptic components, in that it supposedly has such a lead in the number of PhDs it's hired, and R+D budget available, and years of product development, and and and ... I had trouble buying it there. Expertise can be lost, it can even out in an industry. It can cross the street to competitors, or leave for its own start ups. Microsoft isn't a Gorilla because of the expertise of its software developers and I think the converse is true.

Nokia's failures are encouraging, like Intel's bowing out, but I still don't think they confirm the essence of QCOM's position, confirm it is a "Gorilla". I can't play violin, but I am told that it is possible for the instrument to be played. Maybe Nokia has a bad teacher, or Nokia just isn't practicing hard enough on its own, or maybe they've been skipping classes, maybe they just signed up "cause chicks dig violinists", in which case they probably should have gone for guitar. I would feel alot better if instead of stories of competitor CDMA stumbles, somebody could convince me that QCOM has control of a proprietary open architecture with high switching costs, that allows it to exert control of a value chain for a product that has passed through a tornado and emerged with the dominant market share of all competing architecture offerings. I haven't seen this so far.
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I'm certainly not as bright nor as knowledgable as many of the denizens of this board, but as a QCOM bull and as someone who has placed a sizable bet on the Q's fortunes, vis-a-vis 3G, I have spent a lot of time listening to and reading the comments of Irwin Jacobs. What has always struck me as most meaningful are his repeated references to adding features to their CDMA chips...more specifically, integrating those new, value-added features into their chips. I take this to mean that QCOM would then have proprietary control of what may become the "killer app" that precipitates a 3G tornado. I have no idea what that killer app might turn out to be, but it's my belief that Q's current technological lead in the development of CDMA chips makes it the leading candidate to develop, patent and incorporate into their chipsets many new 3G applications, any one of which could represent a new paradigm in 3G communications. Were Q to develop and incorporate such a killer app into their chipset, would not this change the nature of the game?


rex
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"I take this to mean that QCOM would then have proprietary control of what may become the "killer app" that precipitates a 3G tornado. I have no idea what that killer app might turn out to be, but it's my belief that Q's current technological lead in the development of CDMA chips makes it the leading candidate to develop, patent and incorporate into their chipsets many new 3G applications, any one of which could represent a new paradigm in 3G communications. Were Q to develop and incorporate such a killer app into their chipset, would not this change the nature of the game?"

rex,

I agree with your reasoning, but the question that immediately strikes me is: if there was such a killer app/advantage, why wouldn't QCOM come out with it now?

I regard the current period as crucial for determining which flavour - CDMA2000 or W-CDMA - will gain the biggest market share, since it is now that most of the Providers make their investment decisions.

There has been a lot of speculation as to how the Providers will ever recoup the huge investment in equipment and license fees and make a decent margin. Hence if QCOM could offer a CDMA flavour to come with a killer app I guess that would make for a 'killer sale'.

If QCOM come out with even one year from now, I guess a lot of people would say 'great, and why didn't you tell us at the time when we had to make our investment decisions?

On the other hand, QCOM might use their new features to ensure they gain dominant market share when it comes to selling the chipset (of either flavour) later on, and this could give them an opportunity to re-take control over standards development through the back door. That would still be great news - only I still can't understand why you wouldn't use that advantage to kill W-CDMA before it becomes a real threat. Now we could assume that QCOM on purpose nurtures a rival standard in order to make it look like they don't have a monopoly when in fact they do. But experience tells me that such far-reaching speculation is usually the furthest from the truth...

Eckhard
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<< I agree with your reasoning, but the question that immediately strikes me is: if there was such a killer app/advantage, why wouldn't QCOM come out with it now? >>


Well, 3G isn't here yet, and the infrastructure that would allow those services isn't in place today...so perhaps we'll have to wait? Really, I look for Q's development of 3G CDMA and/or W-CDMA chipsets to be an on-going process...I can just foresee Q locking-in members of the value chain by adding proprietary applications to its chipsets that they just gotta' have to be competitive in their respective businesses. This sort of cutting edge product differentiation is what can logically be foreseen from the leader in any particular space, and QCOM is clearly the leader in CDMA chip design.

Regarding W-CDMA, again, there is no evidence to my mind that anyone owns or controls it, other than QCOM itself, by virtue of its "ownership" of CDMA. So, I don't feel that QCOM is competing with anyone in that respect. From the action in the Market of late, the message that CDMA2000 is the fastest and most effective path to take to 3G may be starting to gain traction. How nice to have Q keeping my portfolio afloat on days like this! ;)



rex

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lookool,

I was with you (for the most part) until you got to the really meaty stuff at the end about not seeing the proprietary open architecture, the switching costs, the tornado, etc., etc., and especially the need to see a "dominant market share of all competing architecture offerings." I do see everything except the last item. That last one is one that, for me, isn't necessary to label a gorilla. The fact that a disruptive innovation is new (that's why it's called an innovation) precludes its owner from having to dominate all the previous forms of competition that are being disrupted.

—Mike Buckley

P. S. Sorry that the respsone is so late.
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http://boards.fool.com/Message.asp?mid=13327965&sort=postdate

<<I was with you (for the most part) until you got to the really meaty stuff at the end about not seeing the proprietary open architecture, the switching costs,
the tornado, etc., etc., and especially the need to see a "dominant market share of all competing architecture offerings." I do see everything except the last item. That last one is one that, for me, isn't necessary to label a gorilla. The fact that a disruptive innovation is new (that's why it's called an innovation) precludes its owner from having to dominate all the previous forms of competition that are being disrupted.>>

Mike- I do see some of the components/prerequisites of a "Gorilla" in QCOM- I just don't see all of them, which is why I can't bring myself to call it a "Gorilla".

At this point in time, as far as the ongoing 2G digital cellular tornado, I see the tornado (it may even be slowing), the control of a proprietary open architecture by QCOM in its 2G CDMA based offerings, high switching costs at the carrier level though not at the consumer level. The one I have a problem with is the one I described as "dominant market share of all competing architecture offerings", which I could have worded more simply as "QCOM won in the tornado and so emerged as the Gorilla". I didn't mean to suggest that QCOM needs to have a dominant market share of all the technology offerings taken as a whole, even including the ones that they are disrupting, just the relevant ones that they are competing against. But I think we probably disagree on what QCOM's 2G CDMA technology as a discontinuous innovation is disrupting. I would tend to think that it is disrupting landlines and pagers, and maybe even analog cellular access. (I don't know how inferior analog really is to digital, how much of a compelling cost advantage there would be to a carrier to rip-out and switch from 1G to a 2G network, or how much better service a customer could expect, and consequently switch cellular providers). I don't see 2G CDMA as currently disrupting 2G TDMA/GSM in the 2G digital voice only tornado. I tend to think of 2G CDMA, TDMA, and GSM as competing architectures in the 2G digital tornado. I tend to think of them as a DOS versus a Mac OS in the PC tornado. Maybe I'm wrong about this. But if I view 2G CDMA as competing in the same digital cellular tornado with 2G TDMA and GSM, then I think QCOM "lost" in this tornado, doesn't have a dominant market presence in digital handsets sold for example, and so is not the "Gorilla" crowned by this tornado. I don't think this tornado crowned any Gorilla. The handset and supporting infrastructure to me are an Enabling technology, not Application Software, and so a resulting "Gorilla" should have a dominant 60%, 70%+ market share, not the 25-30% share expected of Application Software Gorillas, and certainly not the present 10-15% of world wide handset sales that CDMA accounts for. By the fact that GSM ip is owned by several companies, isn't controlled by one company, and so it isn't singularly proprietary, there can be no competing GSM "Gorilla" even though GSM based handsets are the clear present market winner worldwide. The best I can come up with is that QCOM is a "Chimp" in a overall Gorillaless tornado, so that it is in a stable position as a Chimp eventhough it is in an Enabling technology. Or maybe it is sort of a local weak "Gorilla" imprisoned in the 2G CDMA "niche" market, with no hope of really moving its cage bars further out into the GSM territory. I don't really know what zoo creature metaphor to best describe it as. Maybe its strength is on par with that of an Application Software Chimp, in a tornado that happens to only produce nearly equal software "Chimps".

QCOM isn't about to be snuffed out, but it doesn't have anywhere close to the power it would have today, if it had emerged as an Enabling technology Gorilla from the 2G tornado, had fought and won, producing a world which was predominantly 2G CDMA, instead of 2G GSM. If QCOM were the true 2G enabling "Gorilla", it is unlikely that 3G W-CDMA would have been designed without their participation, and unlikely that it would achieve much market acceptance without their support. The world would wait and look to QCOM for the next CDMA upgrade, much like we look to Redmond for the next Windows release. If it were the true "Gorilla", I don't think it would be forced to undergo the Spinco contortions.

Since QCOM doesn't control the 3G W-CDMA standard, which seems likely to be the dominant standard worldwide for 3G, I have trouble seeing how they can successfully take another stab at things, in the 3G tornado to come, and emerge as a Gorilla out of that one either. Others have tried to distinguish between "standard" as in the "W-CDMA standard" and "architecture" as in " control of an open proprietary architecture", needed by a Gorilla, to suggest that eventhough QCOM doesn't control the W-CDMA standard, they may still have contol of an open proprietary architecture, and still may become the 3G "Gorilla", but I haven't been able to discern the subtle (I hope its subtle and not that I am dense) distinction they are making.

I also worry about their ability to control their value chain to their advantage, design out high margin partners, if they go the route of a pure ip company, with no in house manufacturing or marketing ability and relationships. I think it is difficult for a pure ip company to successfully tornado hop, or enter nearby lush markets, and the "surfing" of multiple tornados is the story behing the King-Kong successes at Microsoft, Cisco, and Intel. I also am disturbed by their complete lack of brand and disinterest in establishing one, as others have mentioned. Successfully communicating to consumers that QCOM developed CDMA and that CDMA "is better" (even if at the moment that isn't quite true) and that the consumer should seek out cellular providers that use CDMA, would give them alot of leverage with their value chain. All I've seen so far are some now and then poorly placed cell stickers (?"Digital by Qualcomm") I've recently seen a few Sprint ads that have a "Solutions by Nortel Networks" logo on them, and I can't think of a company that is further removed from individual consumers than Nortel, so this may look like a complete waste of money at first. I'm not advocating a monkey-see-monkey-do, mindlessly follow the herd, but I wonder whether Nortel (and Cisco with their ads about 99% of the world's internet traffic travelling over their systems) are on to something here, that notwithstanding Dr. J's vision thus far, QCOM seems to have missed out on. But then again, my only claim to fame over Dr. J. so far is that at least I've never lost / had my laptop stolen. But that's kind of easy, I've never been able to afford one.

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But then again, my only claim to fame over Dr. J. so far is that at least I've never lost / had my laptop stolen. But that's kind of easy, I've never been able to afford one.

That's too bad. Surely the prices and times have changed enough in the past few years to make laptops affordable and offer an excellent substitution of every having to own a desktop again. (That's my opinion and choice of course.)

Let's hope that the goon who walked off with Dr. J's book will end up paying a higher price for his laptop selection than he would have paid down at CompUSA!!!!!


Back to laptop shopping issues that have "affordability" stamped all over them. Let's do a little PC technology adoption life cycle value chain search now that the cycle is 20 years old and laptops are an extension of the PC cycle.


Gorilla value chain camp (includes either Microsoft, Intel or both elements):


They start here at $999:

http://athome.compaq.com/default.asp?ProductLineId=440&page=families


Dr. J's lost in space book was an IBM and they start at $1099:

http://www.pc.ibm.com/us/thinkpad/moreabout.html


They start here at $1199:

http://www.gateway.com/prod/hm_ptb_Category.shtml


They start here at $1399:

http://www.dell.com/us/en/dhs/products/series_inspn_notebooks.htm


We can't overlook the gorilla camp of the PC cycle to pick out the 'Cool' offering:

http://vaio.sonystyle.com/vaio_direct/75.main.vaio.html


Chimp time:

If you're like me, you'll want the wireless Cool ones that the chimp musters up for the world starting at $1499:

http://www.apple.com/ibook/

http://store.apple.com/1-800-MY-APPLE/WebObjects/AppleStore?family=iBook


Now, if you want a real 'bargain' from the Chimp, I've got a PowerBook 3400 sitting in the closet that works perfectly. <ggg> The 'Cool' factor of two wireless iBooks in our house was simply too tempting and the 3400's were usurped. <gulp>

BB


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lookool,

You do a good job of expalaing your thinking. However, I think you might be missing an important point missed by others whose thoughts are similar to yours about the issue of whether or not Qualcomm emerged as a gorilla from the tornado.

In my mind, Qualcomm clearly emerged as the gorilla though not because of anything having to do with GSM or TDMA. You're right that we'll have to agree to disagree about my contention that CDMA is a disruptive innovation compared to the other two. Understanding my perception about that, you can appreciate that Qualcomm emerged as the gorilla because no other competitors come close to Qualcomm's marketshare. That isn't easily perceived because most people apparently don't realize that there are a lot of competitors in CDMA. That they have been able to capture so little marketshare is evidence for me that Qualcomm is the gorilla. The irony is that there is so little "viable" competition to Qualcomm for CDMA marketshare that most people think as you do, that the competition CDMA should be compared to is GSM and TDMA.

—Mike Buckley
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The irony is that there is so little "viable" competition to Qualcomm for CDMA marketshare that most people think as you do, that the competition CDMA should be compared to is GSM and TDMA

Mike, I'm not sure if lack of viable competition alone is enough to move a game over to Gorilla. I can put CREE in the same category with SiC. 90% or more world wide share. Its only "viable" competition appears to be sapphire alternative (ie, GSM, TDMA) and yet to be developed technologies which are still in the lab (ie, 4 or 5G).

Because of this I more and more have to think of CREE as a blossoming Gorilla. SiC is disruptive to sapphire and to silicon (CDMA to TDMA). Yet I also know that it is far too early to make this call on CREE. They are certainly more than a shiny pebble...but I can't call them a Gorilla either....probably not for a few more years.

Hmmmm, still debating this as I write. Another factor which moves me to thinking in the Gorilla direction, although I know it is far too early, is not only market share, but their finances. CREE, in the midst of a near tsunami for SiC LEDS has lowered their flow ratio to 1.16 from well over 2.0 the prior year. They are approaching INTC like numbers in operating cash flow and efficiency. The only way I can see them doing this so early in their existence and at this stage of a very intensive and logistical nightmare of approaching hyper-growth (and I'm sure just damn good management must also be another reason) is that maybe they are in a Gorilla game. 90% market share, and building business momentum and cash-flow efficiency normally reserved for Gorillas (And a few other fortunate and very amazing companies like DELL). CREE is getting paid earlier and earlier by their customers and paying their suppliers later and later. Exhibiting cash flow power normally held only by Gorillas or the few abberrant and very rare Royalty companies like DELL.

On the other hand QCOM's finances on the balance sheet have been heading south and are not demonstrating Gorilla power at all. Their flow ratio has climbed from an unstellar 1.6 or so to over 2.0 this year. They are obviously having problems collecting money quickly from their customers and problems holding off their suppliers for payment. In fact the amount of short-term notes they keep piling up does not give me confidence.

Still I bought a ton of QCOM a week or two ago. I'm still debating if this deteriorating financial power is a symptom of post-Tornado (and/or chasm hitting(a minority interpretation)) status. Financial analysis is just not a central part of gorilla gaming. But I can't help myself.

Well, shoot. Not quite sure what conclusion to make here. But I got a nice CREE plug in;) And yes I do consider QCOM to be a Gorilla. One of the few young enabling Gorillas around. Another young Gorilla (or just about there) has also been giving me fits with their cash flow management. GMST's quarterly cash flow have diminished to an alarming degree as well as the fundamentals on their balance sheet. Much of this is due to large receivables from the GI court victory, but it does not explain the entire situation.

So as not to belabor the point too much I'll make one here. I am trying to start discussion of what part financial analysis should play in assessing the power of a Gorilla.

CREE has some obvious financial muscle where you might not expect to find it. GMST seemingly does not in a position of power where you would expect to find it; similiarly QCOM's power, via financial analysis, has diminished recently. Whereas a young up and comer gorilla candidate in the same industry, PHCM, is demonstrating enormous power, if its incredible balance sheet is to be believed. To what extent should we consider this financial evidence in assessing Gorilla power?

Tinker

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Tinker,

I can't keep track of the number of times you change your mind. :) You've gone in about two weeks from saying Qualcomm hasn't crossed the chasm to saying it's a gorilla. Make up your mind, fella!

I'm not sure if lack of viable competition alone is enough to move a game over to Gorilla.

If you read my post again you'll realize that I never came close to implying that. I also referred to a tornado, a disruptive innovation, and switching costs, all of which when ADDED to market share are the criteria of a gorilla.

I can put CREE in the same category with SiC.

I don't follow CREE so I'll ask: Has the tornado formed? Are there high switching costs? Is there a disruptive technology that CREE uses? If the answer is "no" to any of those questions, you don't need to look at market share to determine if CREE is a gorilla.

I am trying to start discussion of what part financial analysis should play in assessing the power of a Gorilla.

In my mind, financial analysis addresses the symptoms of a gorilla much more than its power. Almost all of the power lies in the qualitiative issues, not the quantitative ones. I do think assessing the financial conditions of two gorillas to decide which one to invest in might have merit, but I suspect that if an investor compares the qualitative issues of the two gorillas such an understanding will explain the quantitative differences that show up in the financial statement. I firmly believe the financial issues regarding gorillas are symptoms more often than causes.

—Mike Buckley
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This is a re-posting of my previous message with the italics done properly this time.

Tinker,

I can't keep track of the number of times you change your mind. :) You've gone in about two weeks from saying Qualcomm hasn't crossed the chasm to saying it's a gorilla. Make up your mind, fella!

I'm not sure if lack of viable competition alone is enough to move a game over to Gorilla.

If you read my post again you'll realize that I never came close to implying that. I also referred to a tornado, a disruptive innovation, and switching costs, all of which when ADDED to market share are the criteria of a gorilla.

I can put CREE in the same category with SiC.

I don't follow CREE so I'll ask: Has the tornado formed? Are there high switching costs? Is there a disruptive technology that CREE uses? If the answer is "no" to any of those questions, you don't need to look at market share to determine if CREE is a gorilla.

I am trying to start discussion of what part financial analysis should play in assessing the power of a Gorilla.

In my mind, financial analysis addresses the symptoms of a gorilla much more than its power. Almost all of the power lies in the qualitiative issues, not the quantitative ones.

I do think assessing the financial conditions of two gorillas to decide which one to invest in might have merit, but I suspect that if an investor compares the qualitative issues of the two gorillas such an understanding will explain the quantitative differences that show up in the financial statement. I firmly believe the financial issues regarding gorillas are symptoms more often than causes.

—Mike Buckley
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I can't keep track of the number of times you change your mind. :) You've gone in about two weeks from saying Qualcomm hasn't crossed the chasm to saying it's a gorilla. Make up your mind, fella!

Just the lawyer in me. I can argue anything from any side and it helps my analytical processes. So I like to get informed or even charged responses to these queries. It helps bring out the truth and gets my subconscious rolling into make correct decisions. It also peeves quite a few opposing parties;) but that was my job at the time.

I do think assessing the financial conditions of two gorillas to decide which one to invest in might have merit, but I suspect that if an investor compares the qualitative issues of the two gorillas such an understanding will explain the quantitative differences that show up in the financial statement. I firmly believe the financial issues regarding gorillas are symptoms more often than causes.

I agree. Financial analysis is a symptom generally of some underlying circumstances. In regards to QCOM and GMST, I've been trying to unravel what is causing these symptoms. I have a hard time fathoming how QCOM with its royalty and chip manufacturing businesses can have a flow ratio this high. It smacks of some sort of recent business trouble. Then again, Gorillas can run into hard times now and then. Just that Gorilla power is there to pull them back on track. So assessing a Gorilla's financial metrics is less valuable of an indicator of future performance than is assessing a royalty play's financials is. There I do concur.

Nevertheless, I am still unsettled by the balance sheet. I've heard theories that it is due mostly to recognizing Globalstar receivables. Now this may very well be the case. Not putting the screws on Globalstar. If this is the case, I am satisfied completely. Anyone have the footnotes to the latest balance sheet release who can answer this question? This is then just a very shrewd long-term investment dressed up as receivables and not a cash flow problem to worry about.

In the same light, with GMST. Whats up with that? The lightest and meanest, greatest cash-flow generating business model on the planet, and over the last 5 quarters the flow ratio has gone from around .2, to .5 .8, 1.2, to over 2! {this is rough estimate as I forget the exact figures although these are close). For a non-Gorilla (non near-Gorilla) numbers like this should be flashing red alerts. Anyone have an explanation for these GMST numbers?

Does GMST have $90 million in judgments to collect? Their receivables use to be nil.

Thanks.

Tinker




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In regard to CREE:

Has the tornado formed?

The tornado in LEDS has formed. LEDS appear to be at a bowling alley stage. They are finding usage in outdoor signs, convention signs (like the huge electronic displays in the Democrat and Republican Conventions and the NASDAQ building dispaly), in Audi, BMW and Ford's as headlights, dash lights and other lights, as well as led indicators like in the Sony Playstation, backlighting in Nokia and Panasonic phines, and are being used in stop lights in the southeast U.S., in China, and elsewhere. So they are hitting many bowling alleys with their LEDS.

The other uses such as in wireless communication and microwave stations are pre-chasm and are starting their first commercial sampling. Expect some ramp-up in the next 6 months.

Power semiconductors and powerchips are still a few years away and really pre-chasm.

The blue laser, expected middle of next year. Still pre-chasm. But if they get it, it will ramp across the chasm faster than DVDs did.

So at least one application is across the chasm. CREEs revenues this year were 100% growth yoy.

Are there high switching costs?

Yes and no. It goes to the disruptive nature of SiC for LEDS. They are much more cost-effective for the LED purpose, as well as much better standardized for the manufacturing processes. Thus SiC lighting almost always defeats sapphier lighting head to head. However, if economics were not the issue, sapphire can substitute for LEDS in most applications. But if someone else were to be able to produce SiC LEDS of similar quality the switching costs would be nil.

So I guess, no, no high switching costs in LEDS. The barrier to entry is CREE's mastery over the production process and their patents on this process.

So LEDS does not look like a Gorilla game.

CREE's other future products, not the RF or Microwave, but power chips and blue laser (still very pre-chasm) have Gorilla potential however.

Is there a disruptive technology that CREE uses? Yes, indeed. SiC is disruptive in economics and performances on many, many, many, valuable uses. Particularly in power electronics, but even with LEDS in regard to economics and compactness.

So conclusion. CREE's current business is a Royalty game; but like JDSU, it is a Royalty game with some nice size barriers to entry. With future gorillaness still undecided but far too early to buy from an enabling technology point of view.

Tinker

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Nevertheless, I am still unsettled by the balance sheet. I've heard theories that it is due mostly to recognizing Globalstar receivables. Now this may very well be the case. Not putting the screws on Globalstar. If this is the case, I am satisfied completely. Anyone have the footnotes to the latest balance sheet release who can answer this question? This is then just a very shrewd long-term investment dressed up as receivables and not a cash flow problem to worry about.

No need for theories, the last quarterly report had $614 Million in A/R and other financing for Globalstar.

BB
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Tinker,

The flow ratio is ebst used with large, established companies, not the likes of Gemstar.

—Mike Buckley
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No. of Recommendations: 4
Tinker,

I really don't want to appear rude, but I'll risk appearing that way by pointing out yet another blatant contradiction in your thinking.

The tornado in LEDS has formed. LEDS appear to be at a bowling alley stage.

I really do believe you know that that those statements can not be simultaneously accurate because the tornado stage follows the bowling alley. Please take the time to be more accurate in your writing.

—Mike Buckley
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No. of Recommendations: 2
The flow ratio is ebst used with large, established companies, not the likes of Gemstar.

I fervently disagree here. It is useful for just about any company that has established a viable and steady business. An example is Citrix. Analysis of Citrix's flow ratio over time told a big story leading to its crash. Combine this with its other declining metrics and the Citrix crash was foreseeable (most of us just chose to keep our faith in management and ignore it).

Gemstar's business is also solid and growing. Absent extraordinary circumstances, following the direction of its flowie should be very informative. Its flow ratio has risen over 1000% in the last 5 quarters. Nothing going on in Gemstar's business that I am aware of that should have brought this about. If you remove the GI receivables you still get more than a 500% rise in the flowie.

I have found that the flowie works very well in judging business momentum for most companies that are mature enough to be considered gorilla candidates. These include such companies as RBAK, SEBL (note how SEBL's continues to drop the more dominant it becomes), BVSN, CTXS, etc. The flowie does not always tell the entire story. But when you combine it with the deteriorating operating cash flows that GMST is also experiencing, it does cause one to want to investigate what is going on.

This said, yes, it should not be universally applied to fast growing young companies. INSP for example is one where it might be unfair (although PHCM in contrast, and in a similar competitive position and position in its growth, has a beautiful balance sheet). But Gemstar is not such a company. Its business is more mature and steady. Something is going on with GMST. Either its business is being affected or something unusual is happening which is skewing the balance sheet.

Tinker
Don't usually "fervently" disagree with you Mike:) but I think it was worth it on this point. I've followed too many up and coming gorilla candidates.

I will admit that having a low flow ratio is not as important at this early stage. But that the direction of the flow ratio is still very informative, even at this early stage and gives a very good peak into the companies business momentum. As I stated earlier as an example, CREE's flowie has fallen in one year from over 2 to 1.16 and its operating cash flow (although not yet FCF positive) exceeds the operating cash flow put out by companies like AMCC who have much larger revenues. This says something big about CREE's current business momentum and the quality of management. Whatever is happening with GMST it is worthwhile to find out.


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No. of Recommendations: 5
I think the Flow Ratio is worth a peek for any company. It is the only Foolish developed metric that I believe really captures a lot of information (not all) in a metric, and I use it extensively.

Most people (e.g. financial analysts) are guilty of focusing their time and effort on the income statement. But, I would argue that the balance sheet and cash flow statement are far more important in creating value since I think the market follows cash and not earnings.

For a growing company, I would back it up with day's sales outstanding. Using Siebel as an example, yes the Flow was not below 1.25 at certain points in time, but the receivables as measured by DSO, which makes up the bulk of their operating cash flow (b/c they have no inventory and payables are negligible) have been declining. This means to me that receivables are under control and that the Flow could drop below 1.25. That happened in the recent quarter. I like the Flow below 1, and I know that Siebel can get there.

I recently spent some time looking over 10-K's and 10-Q's of a software company that developed a leading edge technology in the storage space and was acquired by a much larger software firm. I wanted to try and analyze the performance of the company and rationale behind the merger (and its price). The income statement looked very solid if you backed out their one-time acquisition costs. Revenues for years leading up to the merger were Tornado-like. Growth subsided somewhat to the 35%-50% range at the end. The cash flow statement didn't look to bad either.

But, the balance sheet looked like a horror film. No debt. No inventory. But, terrible working capital management. Despite the reasonably good performance on the income statement, the company created no shareholder value over its best years of dominance in storage. That's until it was acquired, and shareholders did well. But, I thought that the balance sheet told a pretty good part of the story. DSO's were going up and over 20% of receivables came from one customer.

The rising DSO and Flow ratio told me that the company was very back-end loaded. They were cutting deals at the last second to make their quarter. And, it is no surprise that they had negative earnings announcements as well.

The balance sheet looked great from an accountant's perspective. They had a ton of assets, but they were "bad" assets. And using the Flow ratio helped to clarify the picture. This was a $150 million company which I would classify as not being too big.

So, the Flow helps...a lot, for me anyway.

Best,

John
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No. of Recommendations: 1
Tinker,

Don't usually "fervently" disagree with you Mike:) ... I will admit that having a low flow ratio is not as important at this early stage.

You apparently don't fervently disagree with me about this either. I stand by my point about when the flow ratio is "best" used (my exact word though misspelled)and appreciate your agreement.

the deteriorating operating cash flows that GMST is also experiencing,

For those who haven't disected the SEC filings of the operating cash flow statements, the five most recent quarters are as follows in order of most recent:

$10,250,000
-$24,740,000
$12,190,000
$16,390,000
$48,762,000

For the four most recent fiscal years also in order of most recent:
$77,340,000
$65,132,000
$56,520,000
$14,380,000

Everyone should do their own due diligence, but I interpret the above numbers to suggest that the quarterly decline in operating cash flow may have turned the corner, noting that operating cash flow was almost as much as two quarters ago. The situation needs to be monitored according to one's criteria of importance. However, ...

For the bigger picture long-term investors consider (and I think management too in this case), operating cash flow has grown at an average annual rate of 75% in the four most recent fiscal years ending in March.

Just my way of looking at it, especially since I believe the flow ratio is less applicable to companies fitting Gemstar's profile than to the companies as I understand for which it was intended to be most critically used.

--Mike Buckley





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No. of Recommendations: 1
I will admit that having a low flow ratio is not as important at this early stage.

Having a low flow ratio is not that important with a start-up like company. But the direction of that flow ratio is important. When I see an anomoly in regard it is time to start checking around. Could be just that, an anomoly. Or it could be indicative of declining business momentum like with the textbook example of Citrix.

I will caution, however, a rising flow ratio, in and of itself, seems in my experience to be somewhat unimportant with gorilla candidate companies. It is when the rising flow ratio is combined with other deteriorating metrics that one should worry. With GMST we have the rising flow and reduction in cash flow. With Citrix we had 3 consecutive quarters of rising flow, rising receivables vs. revenues, lowering gross margins, slowing revenue growth rate, and a few others which I have probably forgotten. Definite danger signs. It was not necessarily the level of the flow ratio, but the direction it was going that was the warning sign combined with other deteriorating metrics.

I have found them invaluable in getting hold of a gorilla candidates momentum and strength. There can of course be disagreement. But this has been my personal experience.

Tinker
I can't remember for sure, but I believe LHSP has similiar detiorating metrics at the time it was being lauded on the boards. I think I ignored them at the time. I'll have to double check. But if so, another example of perhaps finding warning signs for gorilla candidates on the financial statements.
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No. of Recommendations: 7
Tinker,

It is when the rising flow ratio is combined with other deteriorating metrics that one should worry.

On the one hand, surely an investor of your experience realizes that if there are a number of deteroriating metrics one doesn't need the flow ratio to sound the alarm. That's partly my point, that in the case of Gemstar there are more important metrics to use than the flow ratio.

On the other hand, since this is a folder dedicated to the discussion of gorilla gaming, it is a very long-term proposition we speak of. A deteriorating flow ratio or improving flow ratio that isn't addressed over a long period of time is inconsistent with the long-term basis of gorilla gaming. Using Gemstar as an example (one that you brought up, not I), I don't believe a clear and compelling case can be made for a long-term deteriorating flow ratio, especially since the company is now merged with TV Guide and we haven't seen the combined numbers.

The other point is that you cite the flow ratio of so-called gorilla candidates you mentioned as having been a huge warning sign. Perhaps the biggest warning sign is found by looking no further than Rule #2 (out of ten simple gorilla-gaming rules) to appreciate the risk of investing in your examples of Citrix and LHSP and maybe others you mentioned. The flow ratio need not have been looked at to appreciate what I am convinced was and is inordinate risk.

If you believe as I do that part of Gemstar's EPG product is applications technolgy, you might be able to justify a position as I have done prior to the beginning of the tornado by referring to Rule #1. If you disagree with me as most apparently do, thinking that Gemstar's EPG is totally an enabling product, you can again refer to Rule #2 without ever running a flow ratio to appreciate the enormous risk of buying the stock before the tornado has been identified.

I would perhaps be more open-minded to the case you are making about the flow ratio if one week you didn't state emphatically that Qualcomm's product hadn't crossed the chasm while just two weeks later you wrote that it not only was across, but was past the bowling alley and already in the tornado. And on the heels of that inconsistency, you wrote that a product was in the bowling alley and the tornado at the same time, an impossibility by definition. Yet you choose not to respond to those blatant inconsistencies when they are pointed out to you. That's not Foolish nor polite, and it doesn't lend credibility to the other stuff you write which I'm sure has tremendous value.

--Mike Buckley

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No. of Recommendations: 5
I would perhaps be more open-minded to the case you are making about the flow ratio if one week you didn't state emphatically that Qualcomm's product hadn't crossed the chasm while just two weeks later you wrote that it not only was across, but was past the bowling alley and already in the tornado

It is called debate. When thinking about CDMA it occurred to me that this may be the case with the back drop of the entire industry. It was also consistent with who the adopters of the technology are and the behavior of QCOM's business. In the debate I was convinced otherwise.

Sheesh. If one cannot put out an idea. Debate it, whether or not it is correct, but has some rationale merit, one gets locked into rigid thinking. I refuse to do so.

And on the heels of that inconsistency, you wrote that a product was in the bowling alley and the tornado at the same time, an impossibility by definition

Mike, as I have stated several times, and my atrocious grammar and sometimes spelling indicates, I post very quickly for most posts. I don't have time to run it through my word processor. Nearly everything I post is off the top of my head. As such terminology will get switched around.

I try to contribute to debate on this thread and elsewhere. I enjoy it. I learn from it. And from the feedback I get so do others.

However, if what I do is considered unFoolish and impolite, I apologize and I will proceed to selfishly not participate in this forum and just take from it insights others may have "lurking" as they say.

In regards to a flow ratio: it is applicable to a gorilla as anyone else. When one is in a market condition as exists today, one does not want to buy into the top of a company only to see it crash 70%+ and having to wait over a year or more for it to recover. Such is the case with Qualcomm. Check out Qualcomm's financial record over the last several quarters. Even Gorillas have bad times. One does better to to buy after these financial aspects have hit the stock to invest more money into that particular gorilla than one does just blindly throwing money evenly into all of their gorillas.

Whether or not you find any merit in such things, is up to you. But I do not need to stick around and be called unFoolish, or impolite.

Regards.

Tinker

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No. of Recommendations: 18
At what phase in the Technology Adoption Life Cycle is QCOM and the wireless industry.? Here are some of my thoughts I recently posted on the Gilder technology forum.

I would classify it as the Tornado. Due to the instability caused by installing a new paradigm, wireless communication protocol, the tornado is characterized by a push for new standards such as the 3G standards. The tornado is where the battle for market share is played out. Whoever gains the biggest market share here will be able to dictate to the market, they will be the Gorilla (until a new discontinuous technological innovation disrupts). Why? By virtue of having the greatest market share, the whole supply chain rallies around the Gorilla's standards. Making the Gorilla's standards the industries standards. One sign that QCOM is locally and will be the Gorilla globally is that CDMA will be the basis for the 3G wireless standards for every major wireless provider, even in Europe. In addition QCOM 's patents create a tremendous barrier to any that may challenge that status. Still QCOM and CDMA have only about 20% of the global market which prevents investors from confidently crowning QCOM as the Gorilla, at least not yet. (Especially investors who are technologically challenged. But also because valuations will be determined by how analysts predict QCOM's market penetration and therefore future earnings.)
The tornado stage is also characterized by the very rapid switchover to the new paradigm. It is the time when the installers of the infrastructure decide to dismantle the old paradigm, TDMA or GSM protocls, and install the new, CDMA. These installers will move all at once causing a rapid increase market share for the new paradigm. Why? The installers of the new paradigm do not want to incur the massive switching costs involved in such a changeover unless the new paradigm is clearly worthwhile. So they wait until a clear advantage is defined and then all move virtually at once because the new paradigm offers such a competitive price advantage that no one wants to be left behind. They move all at once because rallying behind a new dominant standard re-stabilizes the market allowing the supply chains to focus on the new standard. In the USA the infrastructure installers rallied behind QCOM and we witnessed a “regional tornado” that sent QCOM stocks to great heights. This was easier in the USA because the old telephone system served the whole country so well there was not a well entrenched wireless infrastructure. In the rest of the world old wireless paradigm, GSM, was a more powerful force. To be the Gorilla one needs to be positioned as the global standard. This is where the battle is now focused and why many investors are leery about QCOM. Talks of losing out to “new versions” of CDMA in China or Korea fuel investors fears.
In the tornado, the name of the game is to capture as large a customer base as possible. All future revenues and profits depend on this installed customer based. The high cost of paradigm switch over will mean the customers won during the tornado will be “loyal” for the life of the new paradigm. Thus it is in the tornado where all the Gorilla candidates will have their future earnings determined. The unsuccessful candidates become the chimps, who are also fighting among themselves to maintain a customer base. This inevitably leads to the strategy of attack your competitor. It is a time of ruthlessness and deception depending on the character of the organization. All sorts of challenges to the new paradigm will be launched. It may not depose the gorilla, but it buys time for the chimps to align themselves with the paradigm and protect their customer base. This is what is happening now and has been happening for a while to QCOM. How do we evaluate QCOM's execution in the battle to capture the global market?

Moore, in “Inside the Tornado” listed 7 important strategies need to win this battle.

1) Sell to the infrastructure buyer
2) Timely deployment of reliable infrastructure
3) Distribute through low cost high volume channels
4) Drive prices lower to maximize market share
5) Attack the competition
6) Position yourself to become the Global standard.
7) Commoditize product for universal deployment

QCOMs technological achievements with CDMA provide them with the ability to lower prices. The advantage of much more efficient use of scarce bandwidth as the use of internet causes demand for more bandwidth to increase is what allowed CDMA to become the new 3G standard thus positioning QCOM as the Global standard. It soon to be released HDR will further stake their claim to superiority.

In the wireless market the key component to maximize customer contact with and to promote installation of CDMA in the infrastructure would be selling the chips, in the handsets and the base stations. QCOM management showed excellent execution and the right market strategy by selling the phone business to Kyocera and focused on chips. This is the product that will install their dominance in the CDMA paradigm. Anyone can assemble an attractive handset. QCOM dominates (about 90%) in CDMA chips provided. The revenues will grow even more as the wireless market continues to grow. Only Nokia uses their own chips but with the new 3G standards they may succumb soon to QCOM. Reports have also surfaced that their chips are not so reliable. Intel has dropped out of the market as well. Designing CDMA technology is not easy. CDMA software is also a vital component that makes the most out of QCOM's chips. QCOM talk about outsourcing their chip making will separate their two core competencies, software and chips, to evolve independently but with a unified purpose. I applaud this move as a way to allow these each of these two components focus on their realm and thus enhance productivity. It also allows QCOM to make more inroads with their chips, without also simultaneously battling for CDMA technology patents.
The “chimp” talk about WCDMA and other CDMA flavors is good temporary stalling tactic, but these other CDMA chimp chips ( can you say Chimp Chips 3 times fast) are not yet available and won't be for at lest 2 years by the chimps own admissions. With the great universal demand for chips as the infrastructure switches over to 3G CDMA standards the one who can ship the most chips and the most reliable chips complemneted by superior software(wins the execution battle QCOM inside?). This seems to be a clear advantage for QCOM.
How can QCOM fend off Chimp delaying tactics? Is QCOM attacking the competition? They don't seem to use the same deceptive tactics of some wireless competitors, but they are attacking with superior technology. They offer a more efficient technology so they can drive prices down. They are commoditizing their product for universal deployment. The development of HDR will extend their advantage in the voice field to the data transmission market. Not only is HDR compatible with the new 3G standards it is compatible with 2G standards so QCOM's previously installed customer base is not disrupted. As the use of data transmission for web browsing increases, the advantage of CDMA over all other protocols will become most apparent to all installers of the infrastructure.
Right now I understand that GSM provides a short messaging service that has been adequate for it's customers. GSM has had no compelling need to switch. Wireless use of the internet will prompt the compelling need to change. The release of HDR if it meets all expectations and is free of bugs, will provide a data transmission service for internet users that GSM can't. That is already uspectedd as the European standards body has annointed CDMA as the 3G standard based on CDMA's superiority handling data. CDMA is a very disruptive technology for GSM infrastructure (as well as TDMA) Once such a clear advantage is demonstrated the infrastructure installers will not be able to delay. CDMA will clearly be the more universally useful protocol. The switch will go quickly from GSM to CDMA. There are currently whispers that some major service providers will soonannounce their switch to QCOM's CDMA

GSTRF has not yet reached the tornado yet and has languished for years, raising many doubts on several forums and by many analysts. It has been stuck in the chasm until it satellites were all in orbit and the gateways were up and running, but now it is ready to move. One prong in the QCOM attack to commoditize CDMA for universal deployment is GSTRF. I disagree with those who think that G* might be dragging QCOM down. On the contrary when G* shows that CDMA is a profitable way for satellite voice and internet communication. G*'s trimodal phones provided by the giant European service provider Vodaphone, allows QCOM to establish a presence in GSM European strongholds. CDMA will become the universal protocol for all wireless transmission and G* will be the last piece to insure CDMA will rule the new wireless landscape. The supply chain are rallying around QCOM and GSTRF to produce a universal CDMA product that allows voice and internet services wherever you are in the world. New announcements by IFN in the airline sector and Wingcast by Ford in the automotive telmematics, and the HAndspring (Visor)QCOM alliance in the PDA sector signal this growing value chain.

So why is QCOM's price down?
Share price is based on future expectations, partly technological advantage and partly fantasies of the future, and the common fantasy was that QCOM would take over the world. The other competitors could not match QCOM's technological advantages but no one would wants to become a chimp. To add insult to injury the chimp has to pay royalties too. Every competitor knows must not let a gorilla get entrenched.
There was only one place to attack and that was the fantasy value by generating popular delusions. In the tornado of the wireless market this strategy is always used to buy time. Promise the public, promise tech-ignorant government officials and promise the installers of the infrastructure anything and everything (a common tactic of MSOFT and Oracle). This delays the next cycle of buying. The next cycle that would have installed QCOM's cdma and lose a customer base for ever. They know that once that buy cycle begins they, the competition, lose because the switching costs are tremendous. With extra time perhaps the competitors, even if not technologically superior, can at least close the gap and prevent the perception that QCOM is a compelling competitive advantage. This is the season of false claims and wary installers of the infrastructure are hesitating to buy. This hesitation is seen by analysts who interpret the hesitation as a slow down in the wireless build out. The confused investors hesitate because they also think the growth is slowing and QCOM can not conquer the world. Government officials are swayed by promises of a better deal. Even the more tech savvy public that subscribe to the GTR are uncertain. But this is just the lull before the storm. Once the choice gets clearer, with HDR and G*, the switch over to QCOM's CDMA will be far greater than last year's local "mini tornado". If HDR plays out as promised, the QCOM competitive advantage will once again regain its full global fantasy value.
Imagine the earnings generated when the majority of the infrastructure that supports GSM and ATT's TDMA must turn to QCOM's CDMA.

To insure that QCOM stays year's ahead of the competition, QCOM has rightfully chosen to separate their chip makers from their technology developers. Two different cultures that will thrive better on their own. QCOM's global fantasy value seems rooted in good science and execution. George Gilder has touted QCOM because of its technological superiority. He didn't jump on a bandwagon to look good, or because of keen hindsight. He touted QCOM because he had great vision and understanding of the technology and the paradigm. The new 3G standards agree, CDMA is superior and it is only a matter of time before QCOM captures the majority of the global market share.

Sincerely, Jim Steele
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