Stocks were mixed yesterday dominated by weakness in the healthcare sector. As Democratic Presidential candidates start barnstorming the country and talk about radical overhauls of healthcare, investors have become spooked. While few believe we are headed for a single payer, Medicare for all solution anytime soon, significant changes could have major impact. What are the odds of change? That is obviously the key question, one that no one can answer yet. Investors, hating uncertainty, have a tendency to overreact and that is probably what is happening today. But we have seen major changes in our healthcare system many times over recent decades, from Medicare to Obamacare and there is no question of the need to contain at least what the government has to pay in the future for healthcare services. Healthcare was the big campaign issue of 2018 and it promises to be so again in 2020. While controlling costs is important, one doesn’t want to stifle innovation that could not only extend lives but could also help to bring down the cost of care.
But, if you look at the front page of today’s Wall Street Journal, there isn’t a mention about healthcare. Today’s top three stories, a patent licensing settlement between Qualcomm# and Apple#, possible Justice Department resistance to a merger between T-Mobile and Sprint, and the revival of Nokia at the expense of Huawei, all center on one issue, the evolution of wireless technology from 4G to 5G.
Why is this so important that virtually the entire front page of The Wall Street Journal is consumed with this issue? 4G is today’s backbone for cellular communications. It is the highway the data travels upon over the airwaves. The technological advances to date in cellular and WiFi technology allow us to stream video on our phones, to respond rapidly to our emails, and to shop from anywhere. But 4G won’t meet tomorrow’s needs. That will be satisfied by the next generation, 5G. 5G will be 20-100 times faster than 4G. With 5G, autonomous vehicles can operate. Factories will be able to operate autonomously. Wireless systems will compete with today’s broadband networks, although wired speeds will probably also be faster than wireless. When broadband first came into our homes, we used it to watch television. With the evolution of the Internet, our PCs could communicate everywhere. Today, our doorbells, appliances, and thermostats are connected so that we can respond, direct, or make changes from anywhere on the planet. Technological disruption happens rapidly as both costs and speeds are reduced radically. When the first smartphones appeared, few knew they would be doing their banking online or making restaurant reservations. One can only imagine the breakthroughs to come when 5G is fully implemented.
The evolution to 4G was dominated by U.S. companies. Remember the days when there were two competing cellphone technologies, TDMA and CDMA? 4G brought them together, and no company was more key in doing that than Qualcomm. Qualcomm licensed its technology to others. The core of the struggle between Apple and Qualcomm was over the royalties paid. Without getting into the weeds discussing those details, what ultimately led to a settlement was Apple’s need to get 5G phones ready by 2020. The only two major suppliers of 5G chips were Qualcomm and Huawei, the huge Chinese company with close ties to the Chinese government. China has been stealing intellectual property for many years, trying to shorten the technological gap between it and the rest of the world. Today, Huawei technology is considered competitive, but the U.S. government and others are concerned that any device with a Huawei modem chipset would be a device the Chinese government could, at least in theory, invade and steal data or information. President Trump, in choosing to disallow the takeover of Qualcomm by Broadcom, expressed concern that the merger could reduce money and time spent advancing leadership technology and risk ceding next generation leadership to the Chinese. Clearly, this is a “war” over world dominance of future information flows. The settlement between Apple and Qualcomm certainly helps to clear that path. There remains one more obstacle, a suit lodged by the FTC against Qualcomm over unfair practices relative to the licensing of its patent portfolio. But the agreement with Apple, the threat imposed by Huawei, and settlements between Qualcomm, South Korea and China suggests that the FTC is not likely to come down in an overly heavy-handed way at this juncture. But the decision is in the hands of one judge so anything is possible.
That brings me to the T-Mobile/Sprint merger. Back in the late 1990s, the Justice Department stopped the planned merger of WorldCom and Sprint on the grounds that it would lessen competition in the long distance phone marketplace. Ultimately, the long distance market disappeared; no one charged for long distance calls anymore. WorldCom went bankrupt and Sprint almost followed. Government has an ugly habit of looking backwards while making forward looking decisions. That can lead to wrong outcomes, especially within the fast moving technology arena. Just a few years ago, Justice disallowed a merger between AT&T# and T-Mobile on the grounds that moving from 4 major cellular companies to just 3 would serve to raise prices. T-Mobile proceeded to start a price war but that has long ended. T-Mobile and Sprint argue that, separately, they won’t be able to compete effectively in a 5G world. They need scale and spectrum to be major factors. Thus, their argument against any effort to prevent a merger is that while it will reduce the number of major voice carriers from 4 to 3, it also may limit the companies with the dollars and spectrum to compete in a 5G world to just 2. It is quite possible that Justice thinks T-Mobile, at least, will find a way to compete, although maybe not on the same scale and, therefore, will disallow the merger. But if its judgment is based on looking backwards again and concentrating on the threat of reduced competition in voice communications, then it will be repeating past mistakes once again.
The Nokia/Huawei story is another twist on the Qualcomm/Huawei fight. In a capitalist society, no one should stifle competition as long as it is fair. But Huawei is not an arm’s length free enterprise corporation. It is clearly connected at the hip to the state. Businesses that choose to deal with Huawei because they like the combination of leading edge technology and price must do so knowing that the Chinese government could be able to spy on anything running through their devices, computers or data centers. Just as Internet advertisers know what sites you visit and proceed to bombard you with pop up ads, and just as your phone (or your Tesla) gets updated overnight while you sleep, recognize that data can flow in two directions.
It looks likely that much of the developed world sees the Chinese threat and can work to retain Western dominance in the next generation of cellular technology. But clearly that lead is now very narrow. As individuals, most of us care about the quality of our phones or related devices, paying very little attention to who makes the chips inside. As we will see in the Mueller report to be released tomorrow, foreign interference in our elections and the related war on our democracy isn’t about hacking or stealing data as much as it is an attempt to subtly influence our behavior and reactions. This is a dangerous world because we don’t really know where it is headed. Future “wars” will be much more cyber and much less military. That changes the threat but doesn’t lessen it. The settlement between Apple and Qualcomm is an important and positive step for both companies and the nation. Having robust competition in the fight to win 5G customers is a good thing. If suppressing a merger between Sprint and T-Mobile lessens that competition, it would be a bad thing. Having more companies capable of competing against Huawei is also a good thing. How 5G evolves will be critical to our lives over the next decade.
Today, Jennifer Garner is 47.
James M. Meyer, CFA 610-260-2220