Who’s greedier: Apple or Qualcomm?
TWO BATTLE OVER PATENTS THAT GOVERN CELLPHONE TECHNOLOGIES EXTENDING FROM 2G ERA RIGHT UP TO LTE
ou can choose to view Qualcomm as a little guy being picked on by bullies.
In just the last 10 months, after all, the San Diego semiconductor company has been fined $853 million (Dh3.13 billion) by South Korean antitrust regulators, sued by the Federal Trade Commission for allegedly monopolising a key cellphone technology, and sued for $1 billion by Apple, its largest customer, for allegedly squeezing excessive royalties out of its ageing patents.
Or you can choose to view Qualcomm as the biggest bully of all. That’s how its adversaries paint the company in court — as a ruthless profiteer from its patents, some of which date back more than a decade. Those patents are becoming less relevant with every new generation of smartphones. But they’re a long, long way from becoming totally irrelevant, and until that point is reached, it’s almost impossible to do without them.
The patents at issue govern cellphone technologies extending from the so-called 2G era, which began in the 1990s, right up to the LTE, or “Long-Term Evolution,” fourth-generation networks being rolled out today worldwide. Qualcomm isn’t wrong when it asserts, as it does in a countersuit against Apple, that its inventions are “necessary for the entire cellular network to function.” Without its technologies, Qualcomm says, you wouldn’t have such apps and services as “Uber, Snapchat, Spotify, Apple Music, Skype, Google Maps, and Pokemon GO.”
No one disputes that Qualcomm should earn pots of money from its patents. The question is whether the company has been grasping at so much money that its own customers finally got fed up. The cases filed over the last year maintain that Qualcomm’s fees are so excessive they’re interfering with innovation and the free market. One way Qualcomm keeps the fees elevated, the plaintiffs say, is by refusing to license its technology to competing chip manufacturers, effectively barring its rivals from the marketplace.
The lawsuits have weighed on Qualcomm, which makes most of its profit from licensing its technology. The company’s stock fell 15 per cent in the days after the Apple lawsuit was filed and hasn’t recovered; it’s down more than 20 per cent year-todate, and its battle with Apple has been topic A in management’s meetings with Wall Street investors all year.
Qualcomm argues that Apple may be aiming to preserve the stupendous profitability of the iPhone, which by some measures accounts for more than 90 per cent of all smartphone profits. “They’re looking ... to squeeze out from their suppliers each drop of profit,” Don Rosenberg, Qualcomm’s general counsel, told me. “We’ve always been at the top of their list ... as one of the few companies that was very difficult for Apple to challenge.” With sentiment in patent law shifting toward users from inventors, and the FTC temporarily composed of a Democratic majority, “this is an opportunity to sweeten their profits at our expense.”
Days numbered
Qualcomm’s critics say its patent-licensing methods suggest that it knows its days as the undisputed king of cellular network technologies may have passed. They say Qualcomm’s cellular modem chips play an ever-shrinking role in smartphones, which are also cameras, video and music players, data-storage devices and personal companions of the future.
Qualcomm’s view is exactly the reverse. The more functions get packed into your hand-held device, it asserts, the more valuable the connectivity its chips enable. “You take pictures,” Rosenberg says, “and you immediately want to ... upload them, download them, you want to do all kinds of things with those photos that you couldn’t do without our technology.”
That’s why Qualcomm sells only “device-level” patent licences, rather than licences for its individual chips. Apple, like other phone makers, effectively pays Qualcomm a single royalty covering all the technologies that might go into the phone, even for functions Apple isn’t using or that it acquires from non-Qualcomm suppliers. The royalties are set at 5 per cent of the net selling price of the phone, which is the price Apple pays its contract manufacturers, such as Taiwan-based Foxconn, not the list price at the Apple Store. (The net price could be as little as 40 per cent of the list price, which means even if Apple wins, you won’t save much on your iPhone.)
What may be most intriguing about this battle is how the two chief adversaries have chosen to portray themselves. Qualcomm calls itself the “R&D arm” of the cellphone industry, and suggests that the assault on its patent licensing will jeopardise innovation in the field possibly for decades. In its lawsuit, Apple calls itself the victim of Qualcomm’s “scheme of relentless extortion,” as though it’s a violin-toting youth cornered by a schoolyard tough. With a market capitalisation of more than $833 billion, Apple is about 11 times as valuable as Qualcomm — its cash hoard of $261.5 billion would be enough to buy Qualcomm three times over. Who’s the David, who’s the Goliath?
The FTC and Apple cases turn on Qualcomm’s obligations as a cellular network innovator. When companies participate in the creation of universal standards that happen to rely on their own inventions, those patents are designated “standard-essential patents.” That’s good for the companies, because it means that everyone in the market will have to license their technologies. But the international organisations that set those standards impose limitations on the companies in return, including requiring them to license their patents to all comers on “fair, reasonable, and non-discriminatory” terms, known by the acronym “FRAND.”
One problem with FRAND is that no one defines it in advance. “The work of the standard-setting bodies is to figure out the technology,” says Jack Lerner, an expert in patent law at UC Irvine law school. “It’s not within their expertise to figure out what it’s worth.”
That task is kicked down the road to negotiations between patent owners and licensees or, when they can’t come to an agreement, to the courts. And that’s where Qualcomm, after years of squeezing its essential patents for all they were worth — and arguably more — has landed.
Qualcomm official