Apple’s $1 Billion Lawsuit Against Qualcomm Is ‘Direct Assault’ On Chipmaker’s Business Model
This might not be important to every single person out there, but it does hold a great deal of significance for the mobile phone industry due to the sheer dominance of Qualcomm in the mobile space. You might not even know who the heck Qualcomm is, but just know that their work and technology is likely inside of just about every major mobile device in the world. Forbes has a story on the lawsuit that Apple has brought against Qualcomm.
Qualcomm’s stock tanked more than 12% on Monday. The San Diego-based chipmaker took a beating after Apple filed a lawsuit against the company on Friday, suing the company for $1 billion and accusing it of unfairly charging royalties for technology “it has nothing to do with.” What’s more, the United States Federal Trade Commission sued Qualcomm for antitrust violations just a few days earlier.
Wall Street analysts are still coming to terms with what this means for Qualcomm, and things aren’t looking good at this point.
On Monday, Bernstein Research published a research note detailing the severity of the case against Qualcomm. Apple’s $1 billion demand is only a sideshow to the real issue at hand, analysts Stacy Rasgon and Tony Sacconaghi wrote. Rather, what Apple is really trying to accomplish is “a direct assault on Qualcomm’s basic licensing business model,” the report said.
Qualcomm is the dominant supplier of modem chips that enable phones to connect to cellular networks, but the company also extracts licensing fees for nearly every modern phone in the world. Qualcomm charges phone makers for the entire device, regardless of how much Qualcomm technology is actually in the device. It’s a nice business: While selling the chips makes up the majority of Qualcomm’s revenue ($23.5 billion in 2016), licensing is the dominant source of its profits.
This model began back in 1990s when a much-smaller Qualcomm pioneered CDMA (or code division multiple access) that became the industry standard in cellular. Since then, the amount of technology and components that companies like Apple pack into phone has grown by leaps and bounds, but Apple still has to pay out the same percentage to Qualcomm.
Bernstein estimated that Apple has to pay 3% to 4% of the iPhone’s bill of materials cost (or $15 per phone). It appears Apple is tired of paying this fee. In the lawsuit, Apple said it was paying between four and nine times the royalty rates that Kyocera, Japanese maker of Android phones, has to pay for a $100 phone.
Apple claimed Qualcomm hides behind a “thicket” of more than 30,000 patents to “extort” royalties. Apple’s lawsuit reads: “By leveraging the ‘thicket,’ Qualcomm attempts to avoid the patent-by-patent analysis that is ordinarily required for any licensing demand, instead hiding behind the sheer volume of its patent portfolio to extort royalties from potential licensees.”
Qualcomm plans to fight Apple’s claims in court. ”Apple has intentionally mischaracterized our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing program,” Qualcomm general counsel Don Rosenberg said in a statement issued Friday.
Qualcomm accused Apple of being behind various regulatory “attacks” against the company, including the FTC suit. Last month, South Korea fined Qualcomm $890 million for what it described as monopolistic tactics. Regulators at the European Union and in Taiwan are also investigating the company.
The Bernstein report also reads that Qualcomm’s business of providing the actual modem chips to Apple is likely at stake now. Apple said that Qualcomm had worked out an exclusivity arrangement between 2011 and 2016 where Apple would only use modem chips from Qualcomm in exchange for billions in rebates. This cut out any potential competition, Apple alleged. Late last year, however, Qualcomm rival Intel became a modem provider for some versions of the iPhone 7. The Bernstein report speculated that Qualcomm could end up losing even more share in future Apple devices.
Qualcomm will report earnings on Wednesday this week and any results and guidance the company shares with investors will be “virtually irrelevant,” the report warned.
Bernstein downgraded Qualcomm’s stock from $80 a share to $65. “Expect the overhang from what appears to be an all-out attack on the business model from both regulators and largest customers will remain for quite some time,” the report said.
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