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Will a Licensing Dispute Challenge Qualcomm’s Business Model?

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Part 2
Will a Licensing Dispute Challenge Qualcomm’s Business Model? PART 2 OF 18

An Update on the Apple-Qualcomm Dispute

Apple-Qualcomm dispute

Qualcomm’s (QCOM) licensing model of charging royalty fees on the selling price of its end devices is being challenged by several regulators and some of its biggest customers.

In January 2017, Apple (AAPL) filed a suit against Qualcomm with the US FTC (Federal Trade Commission) for charging five times the royalty fee it charges other modem suppliers, even though the chip supplier’s technology has nothing to do with the premium price of iPhones. Apple further accused Qualcomm of withholding a payment of ~$1 billion in retaliation for responding to the United States’ and Korea’s antitrust investigations.

An Update on the Apple-Qualcomm Dispute

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Qualcomm countered, saying that Apple’s statements were misleading, and it accused the handset maker of ganging up with regulators and other handset makers to pull out a large-scale regulatory attack against it. Both companies are cash-rich, and neither is willing to back down.

All this saw Qualcomm’s stock price fall as much as 20% between January and April 2017.

Apple pauses payment to Qualcomm

Things got uglier in April 2017 when Apple withheld royalty payments from Qualcomm to the tune of $1 billion pending the release of the court’s ruling. Apple doesn’t pay Qualcomm directly. The handset maker pays its contract manufacturers in Asia, who then pay royalties to Qualcomm.

Apple’s CEO, Tim Cook, stated that the company would suspend the payment until the court determined the applicable amount. He stated that the payment had been suspended because the amount was under dispute. According to Cook, Apple isn’t denying Qualcomm’s right to profit from its patents, but the dispute is about what’s deemed fair.

Qualcomm’s counter

The fight is intensifying. A Bloomberg report stated that Qualcomm was looking to approach the ITC (International Trade Commission) to ask them to block the import of iPhones manufactured in Asia into the United States. The ITC processes cases faster than federal district courts and has the right to ban the import of goods into the United States.

Qualcomm is likely to take such a step to stop other companies or countries from following Apple’s footsteps and suspending royalty payments, according to Stifel, Nicolaus & Company analyst Kevin Cassidy.

This isn’t the first time an import ban has been applied. In 2008, Qualcomm’s chips were banned from the United States for a brief period as part of a patent lawsuit with Broadcom (AVGO), one the few cases Qualcomm lost. Even Apple’s iPhones faced a similar threat during its fight with Samsung (SSNLF).

Next, let’s look at the arguments of both the parties and understand whose side is stronger.

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