In the previous part of this series, we saw that Apple (AAPL) has accused Qualcomm (QCOM) of misusing its monopolistic position to charge unfair royalty rates and prevent competition. Qualcomm’s general counsel, Don Rosenberg, termed these allegations as “baseless.”
Qualcomm has yet to study the details of these lawsuits. However, Rosenberg accused Apple of “misrepresenting facts and withholding information” in order to encourage regulators of various countries to file lawsuits against Qualcomm.
Wireless industry’s methodology for pricing royalties
In its presentation to the US FTC (Federal Trade Commission), Qualcomm explained that the wireless industry calculates royalties on the price of the “compliant device.” This methodology has been in place for more than two decades.
Qualcomm spends a huge amount toward R&D (research and development) to develop advanced technologies. In fiscal 2016, Qualcomm (QCOM) spent $5.1 billion on R&D and licenses this technology to manufacturers in return for a fee. It also sells chips based on this technology.
However, QCOM earns more than 80% of its profits from licensing and invests this money in further innovations. If the company cannot profit from its own patents, it would be left with no incentive to innovate.
Qualcomm’s 3G and 4G LTE cellular technologies enable smartphones to link to the Internet from almost anywhere. Qualcomm’s management believe that the company’s royalty rates are reasonable and that the FTC cases are anti-competitive.
Apple’s lawsuit could create a domino effect
Apple (AAPL) has already succeeded in utilizing the US FTC and Korea’s Federal Trade Commission to attack Qualcomm. Investigations are ongoing in Europe, Taiwan, and Japan. Apple may also ignite a fire to these investigations and encourage them to wage a legal attack on Qualcomm.
Several regulators have trained their sights on Qualcomm for the same reason. Qualcomm is likely to face several billions of dollars in fines over the next several months.
Bernstein Research’s analyst Stacy Rasgon stated that the lawsuit with Apple could put a rift in Qualcomm’s relations with its largest customer, Apple. This may also encourage Qualcomm’s other customers such as Samsung (SSNLF) to resort to legal proceedings and force the chipmaker to change its licensing terms.
Can Qualcomm handle the domino effect?
If this domino effect materializes and Qualcomm is forced to change its licensing terms for Apple, Samsung, and other handset makers, the chip giant could take a big hit to its profits. Although Qualcomm’s chipset business is witnessing strong growth, that growth may not be able to offset licensing losses.
Moreover, this domino effect could also impact the Qualcomm–NXP Semiconductors (NXPI) deal, which requires regulatory approval. However, analysts bring a fresh perspective to the case, which we’ll examine in the next article.